Examination of Witnesses (Questions 20
- 39)
THURSDAY 18 NOVEMBER 1999
MR GRAHAM
STEGMANN AND
MR COLIN
RAYNOR
Mr Worthington
20. Plumbers!
(Mr Raynor) They are. They are not there giving us
advice, but they are there doing a particular task for us. They
are contractors that are installing the software.
Ann Clwyd
21. What about the total costs so far?
(Mr Raynor) Those are £4.2 million.
22. The total costs?
(Mr Raynor) Yes, and I was going to say that apart
from the £½ million on training, there is £½
million on internal staff costs which has been our own IT people
and our own developers. All of that has gone to capital under
the new regime of course and then that will be written off over
a period of years. So that is a living example of where resource
accounting comes in. Such expenditure would not go through the
operating account but through the capital account and appear in
the balance sheet. So the cost of resource accounting and budgeting,
at £4.2 million, will be written off at £800,000 a year
or whatever as we will not have to change the system again for,
say, five years.
23. Has that come out of your existing budget?
(Mr Raynor) No, it is new money we have negotiated
with the Treasury, so it has not affected the aid programme.
Chairman
24. So it comes out of the contingency reserve
then?
(Mr Raynor) No, it came out when we negotiated with
the Treasury before the Comprehensive Spending Review.
(Mr Stegmann) It came out in the annual negotiations
with the Treasury which took place under the previous practice
whereby we looked hard at our administration and other costs on
a yearly basis and adjustments were made, so it was not a change
within a financial year, but it was a change agreed before the
financial year in question began.
Mr Rowe: It is good to know that the
new motor fuel tax is being well used!
Chairman
25. So this is £7.7 million you are going
to have in your balance sheet, so to speak?
(Mr Raynor) No, £4.2 million.
26. But I am adding £4.2 million to £3
million to £0.5 million.
(Mr Raynor) No, I am sorry, but the total costs are
£4.2 million of which £3.2 million was hardware, software
and installation costs, £½ million was staff training
and £½ million was internal staff costs.
Chairman: Thank you. Now, Mr Rowe is
going to try and disentangle current expenditure.
Mr Rowe
27. As we understand it, under resource accounting
and budgeting, income and expenditure will be recorded according
to the date to which it relates instead of the date that an invoice
or payment is received, which I think is called an accruals basis
rather than a cash basis. This is intended to give a more accurate
account of the expenditure over time. Given the large numbers
of projects funded by DFID, how can accruals-based accounting
methods be applied in a meaningful way and without disproportionate
cost? Will information have to be collected for all projects in
order to satisfy Treasury and NAO requirements or will DFID be
allowed to rely on samples or estimates?
(Mr Stegmann) I think the answer to that is essentially
the one that Mr Raynor gave just now. What we have to do obviously
is to match expenditure to the period to which it relates. The
easiest example would be, for instance, payments, say, to UNDP
which cover a calendar year. Now, we will have to separate out
that part of our contribution to UNDP for 1999 which relates to
the two financial years covered by the calendar year 1999. It
is more difficult when it comes down to projects because in effect
we are paying bills at a period over some months and to date we
have used the prior year period of two months that Mr Raynor referred
to to cover that under cash accounting. The debate, as he has
described, has been with NAO as to what do you do and how do you
handle those bills which are paid after that date, but which actually
relate to work undertaken in the previous year, and they have
agreed a degree of sampling.
28. Can I look at this from the other end, from
the project end. If you are running a project, are you going to
have to have double the amount of paperwork? At the moment you
operate on the basis of an invoice being sent in or whatever,
but how do you know before an invoice comes in that the money
is going to be properly spent? Are they going to have to put in
another piece of paper, so in a sense you are doubling their bureaucracy?
(Mr Stegmann) No, I do not think it is going to impact
in a sense of causing additional work. I think what it does though
is to give additional emphasis to frankly better financial management
on behalf of all our programme managers, whereas at the moment
they have a cash budget against which they work. We anticipate
that at some point in the future they will have to estimate also
on an accruals basis. What happens at the moment is that a number
of payments are made, as it were, from suspense, so monies are
held in suspense and taken out of that as bills are drawn in.
There is no doubt that resource accounting will ensure that programme
managers will have to look rather more carefully at clearing those
suspense accounts and when they are cleared.
(Mr Raynor) We introduce from the end of this month
new forecasting software which is basically an Excel spreadsheet
which is collated centrally. A forecast is given for each project
on a quarterly basis, so it looks forward in that financial year
on a quarterly basis at how much expenditure they plan to incur
on their projects. This software is available to them on a daily
basis and it is their prime means of monitoring and controlling.
This is available on our Intranet via the Internet and this will
be available to all our main overseas offices bar one, I think,
by the end of this coming year. The other one will come on stream
at the beginning of the next financial year. The difference between
forecasts is they will now be kept up to date with cash expenditure
and the accruals element. This gives us a means to check accruals.
In answer to your initial question as to whether there will be
a separate piece of paper, no, there is not going to be a separate
piece of paper, the software caters for it. As to whether we can
sample so that we do not have too much bureaucracy, the answer
to that one is yes. I should also add to what Mr Stegmann said
that we already catch the vast totality of our accruals anyway
by keeping the books open for two months on the bilateral side.
The multilateral side is easy anyway because when we make the
payment, if we have got a payment that refers to a future financial
year or part of which refers to a future financial year, all we
do is debit that part which relates the current financial year
to the books and put the remainder in suspense. That is then charged
off at the beginning of the next financial year. This is one reason
why we had to have new software to cater for that because we had
an accounting system which would not cater for that sort of accounting.
29. Now, perfectly understandably, you have
looked at this from the financial managers' point of view, but
what about the people actually running the project? For example,
when they put in a bid, or, let us say, the Children Fund puts
in a bid, is the bid going to appear in a different form? Is it
a different shape of bid?
(Mr Stegmann) No, we certainly have not gone down
that track at the moment and there is no current intention to
do so. Clearly when bids are called for, we would hope that they
are against terms of reference which clearly specify the nature
of the services or goods to be provided and the period over which
they are to be provided, so the onus will rest on our own programme
managers to make a judgment as to where and against which financial
year these costs will fall.
30. I was rather disturbed to hear a report
the other day that using partly the excuse of the change in the
system, DFID has now said that the lower limit for projects has
been raised sharply so that it is no longer cost-effective to
give money out in small packets, but given that DFID has told
us more often than I can think of that they are actually interested
in the poorest of the poor and small-scale projects which work
and so on and so forth, who is going to pick up the very small-scale
expenditures, the kind of things that happen when a very successful
project has taken very slightly longer to finish than you would
expect, say, where another three months of a key worker is required?
Now, it has been reported to me that DFID now finds that difficult
to fund on the basis that, I suppose, the accounting system has
changed or merely that they have taken the decision that they
are not going to put money into packets below a certain size,
in which case I come back to the question of who will in fact
fund those projects now if DFID is not going to do it because
it seems to me it is a cost-effective way very often of actually
delivering your targets in other ways and financially it is slightly
expensive?
(Mr Stegmann) There is certainly no prescription from
the centre on the limits for any particular project and the case
you instance of a project with continuing costs which need to
be funded in a following financial year, we would expect that
to be dealt with through the normal programme management cycle.
What you may be hearing is perhaps the debate which is going on
about the nature of small "projectised" activities and
how effective these are in influencing change, in promoting reform,
whether they are in all cases strategic, or whether there is a
danger of having enclave projects which address a particular issue,
but do not make a significant difference to the larger picture.
There are costs to DFID itself in operating a great number of
small projects because if you look at it from just purely the
corporate point of view, a small project properly specified with
terms of reference which are then drawn up, negotiated and discussed,
those terms of reference are then passed to our procurement department
to invite tenders, tenders are then evaluated, contracts are let.
It is a fairly labour-intensive activity, and I think there is
an undoubted view which I think the Secretary of State feels quite
strongly that we must look very hard to ensure that anything that
we do which is financially of that small scale is strategic in
its nature and can be seen to be making a change.
31. This is a debate for another time, but I
would just say that in the medical world, progress is made by
evaluating research and in the DFID field, almost by definition,
the majority of research monies are much, much smaller than they
are in epidemiological studies of medicine and so on so that whereas
medicine is collecting £40 million, other people are collecting
£40,000. Now, I just want to put on record that I think there
is a serious danger of eroding the research base on which DFID
can evaluate its future policy if it actually becomes too financially
concerned about the costs of small projects, but that is a debate
for another time, and I think it is an important debate. How will
contributions to multilateral institutions be presented under
the new accruals-based system, including, for example, the European
Development Fund, budgetised EU aid and contributions to UN agencies
and treaty bodies? I think you have tangentially mentioned this
as an example with UNDP, but it would be quite useful if you could
elaborate on that.
(Mr Stegmann) I am looking at an illustrative estimate
and I am not sure whether all Members of the Committee have it.[10]
Chairman
32. It is paper RAB4 amongst our papers which
you gave us.
(Mr Stegmann) When we look at the multilaterals,[11]
one of the key changes for us is that certain of our contributions
are now classed as in effect capital. Those contributions are
going to the international financial institutions and that has
been an area of debate between us, the Treasury and others as
to whether these are actually akin to capital. They are treated
separately and will form part of the capital departmental expenditure
limit.
33. Where are they shown in this paper?
(Mr Stegmann) I am not sure.
34. I have got financing from the consolidated
fund and then we get international development, but that does
not seem to be it.
(Mr Stegmann) There is one headed "Estimate illustration
from 1998/99".
(Mr Raynor) If I can go back to the original question.
With the exception of payments to the international financial
institutions, multilateral organisations will be treated exactly
as they are at the moment. Apart from that, payments will be matched
to the periods to which they relate. So, for example, if we are
making a contribution that is for a calendar year, then part will
be matched to one financial year and part will be matched to another.
This is very simple to do. When you make the payment, it is a
straightforward mechanical job and it is a straightforward job
to estimate that because you know that the payments relate to
a particular period when you are making them. So for the vast
majority of multilaterals, no change. On the IFI side, they are
designated by the Treasury in their economic categorisation as
a financial transaction. They describe them as financial transactions,
and financial transactions, as you will see from the illustrative
estimate, fall on the capital side. When we have described the
new regime about separating capital and in-year expenditure, that
falls on the capital side. The presumption of the Treasury in
doing that is that these payments go in some way towards the creation
of an asset and they are akin to a capital investment. Now, we
know that not all of that expenditure is akin to capital investment,
but for the time being that rests there. I said to you earlier
that we have got one issue which we are still discussing with
the National Audit Office and the Treasury and this is that issue.
This is an issue because it does seem a bit of an anomaly that
we have got £300 million, say, of which only a part goes
to capital replenishments and which you could construe as contributing
to the creation of an asset. The rest is more akin to operating
expenditure, in-year expenditure, but because it is categorised
at the moment by the Treasury as a financial transaction, it falls
there. We will resolve that over the next few weeks, I am sure.
It is only when it is put down in this way that it hits you and
it comes out and you say, "Oh, that can't be right surely",
but that is the one issue we have outstanding.
35. As I understand it, at the moment when the
EDF wants to draw down on the amount of money you have promised,
it sends you an invoice.
(Mr Raynor) Yes.
36. I do not know how long you spend before
you pay that invoice, but that is something which is very difficult
for you to forecast because of course in a number of the Lomé
agreements, for example, they have been way behind spending the
amount of money voted for the, is it, four-year period for the
EDF?
(Mr Stegmann) Five.
37. Therefore, you might have expected that
during that five years they draw down a fifth, a fifth, a fifth,
but we know from experience that that does not happen, so how
are we going to handle that?
(Mr Raynor) On the EDF side, that does not score as
a financial transaction, but that is charged in year. However,
you are right, it poses a difficulty when we are trying to estimate,
when we are trying to produce the forward estimates and that is
going to be a soft area, is it not? That is a problem that the
rest of Whitehall are facing as well. We have never had to estimate
in this way before on an accruals basis.
(Mr Stegmann) I think, as Colin has said, it is always
difficult to forecast EDF expenditure and indeed EC budget expenditure,
and we are very much reliant on the Commission for those forecasts.
Where those forecasts have, as I am sure the Committee will recall,
changed in year we have had to adjust and we will have to adjust
on this basis as well.
38. It has involved you in some very fancy footwork
at the year end, as I understand it.
(Mr Stegmann) I think that would be fair. The only
point of detail I would say is that in any one year we are paying
down calls which are made against a series of EDFs. The replenishments
do not immediately finish one before the other, and, as I am sure
you will be aware, it is a very live issue with the current renegotiation
of EDF9 where there is a very considerable overhang of commitments
as yet unspent from previous development funds.
39. Because this can have a big effect since
it is 30 per cent of your spending or your forecast spending.
(Mr Stegmann) Indeed, it makes life rather difficult
for us, yes.
10 See Evidence pp. 20-21. Back
11
See Evidence p. 21. Back
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