Select Committee on Foreign Affairs Minutes of Evidence

Foreign and Commonwealth Office/BBC Financial Memorandum

  Relating to the application and administration of the Grant-in-Aid and additional income of the BBC World Service and agreement on related matters.


  1.1  The relationship and responsibilities of the Government and the British Broadcasting Corporation (BBC) are set out in the Royal Charter (CM 3248) and Agreement (CM 3152) with particular reference, concerning the application and administration of the Grant-in-Aid, to Charter Article 3 sub-paragraphs (u), (w), (i) and (x), Charter Article 7 sub-paragraph (1)(b) and paragraphs 16(1), and 18(2) and 18 (4) and the Agreement sub-clauses 10.3, 10.7 and 10.8.

  1.2  The BBC World Service (World Service) is a constituent part of the BBC. It is funded by Grant-in-Aid provided from the Request for Resources of its sponsoring Department, the Foreign and Commonwealth Office (FCO), and from other income streams. The relationship between the FCO and the World Service is defined in the Joint FCO/BBC World Service Broadcasting Agreement (Broadcasting Agreement).

  1.3  This Memorandum sets out the details of financial management and audit requirements essential to the provision of Grant-in-Aid to the World Service. It also applies to all other sources of World Service income and the use to which such income is put. It replaces all previous Financial Memorandum and their amendments.

  1.4  The relationship between the FCO and BBC Monitoring (BBCM) is covered by this Memorandum except where alternative arrangements have been agreed ie the Service Level Agreement and Concordat between BBCM and the FCO.


  2.1  The aims and objectives of the World Service and provisions for performance assessment are set out in the Broadcasting Agreement. This provides the framework for the preparation of the World Service's strategic Three Year Plan.


  3.1  The Role of the BBC Board (The Board)

  3.1.1  management of the World Service is vested in the BBC Board of Governors appointed under the Royal Charter. The Board is responsible, among other things, for ensuring that the financial and management controls which apply within the Corporation, including the World Service, are appropriate and sufficient to safeguard public funds, and more generally that these controls conform with the requirements both of propriety and good financial management. One Governor on the Board has a special responsibility for the World Service.

  3.2  The Role of the Secretary of State for Foreign and Commonwealth Affairs (The Secretary of State).

  3.2.1  The Secretary of State for Foreign and Commonwealth Affairs is responsible to Parliament for the Government's relationship with the World Service. There will be an annual Ministerial meeting with the Chairman of the BBC, the BBC Governor with special responsibility for the World Service and the Direct World Service and Global News to review performance against agreed objectives and targets and to consider future audience and strategic priorities. These discussions will inform the strategic Three Year Plan.

  3.3  The Role of the Departmental Accounting Officer

  3.3.1  The Permanent Under Secretary of State for Foreign and Commonwealth Affairs (Permanent Under Secretary), as Accounting Officer for the FCO, is responsible for ensuring that:

    —  the financial relationship between the FCO and the BBC is properly defined (in the Financial Memorandum) and is regularly reviewed.

    —  the uses made of the Grant-in-Aid fall within the scope of the FCO's Request for Resources (RFR).

    —  the financial and management controls, including internal audit, are appropriate and adequate for the requirements of propriety and good financial management.

  3.3.2  The Permanent Under Secretary will appoint the World Service Accounting Officer in accordance with the requirements set out in Government Accounting.

  3.4  The Role and Responsibilities of the World Service Accounting Officer

  3.4.1  The Accounting Officer for the World Service will:

    —  ensure the World Service meets the relevant requirements of Government Accounting 2000, ISBN 0 11 560090 6 (including subsequent amendments and new editions), particularly the conditions set out in the Accounting Memorandum issued by the FCO.

    —  ensure that the applicable requirements of Resource Accounting and Budgeting are implemented.

    —  ensure the World Service implements any relevant guidance issued by the Cabinet Office, HM Treasury, the FCO, the Public Accounts Committee, or other Parliamentary Select Committees or Authorities.

    —  ensure that full attention is paid to regularity, propriety and value for money as Grant-in Aid and aditional income is used, and for arrangments to safeguard it from loss of misappropriation.

    —  ensure that grant-in-aid and additional income is used for the purposes for which it is intended, maintaining transparent financial separation from activities and assets funded from the the Licence and commerical income.

    —  advise the BBC properly on matters of financial propriety and regularity and of prudent and economical administration, efficiency and effectiveness as they affect the responsibilities of the World Service and the FCO and ensure that BBC internal procedures and/or guidance are not allowed to prevent these criteria being met.

    —  inform the Permanent Under Secretary if the BBC is contemplating action which would infringe these requirements.

  3.5  Public Accounts Committee and Parliamentary Select Committees

  3.5.1  The Committee of Public Accounts and Parliamentary Select Committees have wide powers to send for persons, papers and records in the conduct of their enquiries. The Accounting Officers of the FCO and the World Service and other officials may be called before the Committee of Public Accounts to give evidence on questions arising from the accounts or reports to Parliament by the Controller and Auditor General.


  4.1  Grant-in-Aid Medium Term Planning Assumptions.

  4.1.1.  Government Spending Reviews (SRs) are held at two-yearly intervals to establish Departmental Expenditure Limits (DELs) for the following three years, the third year of one SR period being the first year of the next SR period. In each Spending Review the FCO will bid for the World Service Grant-in-Aid. The World Service will provide the FCO with such information as it requires for the preparation of the bid. This information will need to demonstrate the efficiency and effectiveness of the World Service in supporting the achievement of FCO objectives.

  4.1.2  When the Treasury announces Spending Review Settlements, the BBCWS will be given a distinct Grant-in-Aid allocation within the FCO Vote.

  4.1.3  The FCO will write to the Director World Service and Global News following the announcement of Spending Review outcomes setting out the level of Grant-in-Aid for the three years of the Spending Review period. Each year the FCO will confirm:

    —  the levels of Grant-in-Aid approved by Parliament;

    —  targets for expected additional income and efficiency savings.

  4.2  Strategic Planning.

  4.2.1  The World Service's main policy and strategic planning document is its strategic Three Year Plan which is reviewed each year and agreed with the FCO. The World Service will base this plan on the three-year allocation announced in the outcome of the Spending Review.

  4.2.2  In the preparation of the strategic Three Year Plan the World Service will maintain regular dialogue with the FCO to ensure that the FCO's priorities and objectives for Grant-in-Aid-funded work are reflected in the policies and priorities, including geographical priorities of the World Service.

  4.2.3  The Strategic Three Year Plan will include:

    —  the World Service's aim, objectives, priorities and performance targets and measures for the three years of the plan;

    —  plans for each year of the Spending Review period;

    —  analysis of the operating context, including planning assumptions;

    —  operational priorities and the options for achieving them;

    —  the management strategy including plans to achieve efficiency gains and other actions to control costs;

    —  the financial plan, covering forecasts of income and expenditure including plans for additional revenue streams.

  4.2.4  The World Service will ensure that a system exists to measure the efficiency and effectiveness of its Grant-in-Aid related activities, including output and performance targets and measures in a form decided in consultation with the FCO. This will include data required for the FCO's annual Resource Budget and Resource Accounts and the Public Service Agreement (PSA).

  4.3  In-Year Management of the Grant-in-Aid and Additional Income

  4.3.1  Amounts specifically issued by the FCO for the Grant-in-Aid shall not exceed those provided for in the FCO's Public Expenditure programmes and approved by Parliament in the Supply Estimates. In the event that capital charges in DEL shall apply to the BBCWS from 1 April 2003 under the provisions of 3.4.1 and 4.3.1 above, this Financial Memorandum will be revised accordingly.

  4.3.2  In order that the FCO may make appropriate provision in the Main Estimates presented to HM Treasury, and in due course to Parliament, the World Service will provide to the FCO, by whatever date the FCO may reasonably decide, estimates of income and expenditure within the agreed public expenditure provisions for the forthcoming year and forecasts of future balance sheet positions. The estimates may need to be revised if the public expenditure provision is changed, for example as a result of Spending Reviews.

  4.3.3  At the same time as submitting the estimates for Grant-in-Aid the World Service will provide estimates of all other income for the year in question.

  4.3.4  Forecasts of expenditure, whether they be funded from Grant-in-Aid or additional income, should be provided under the following headings:

    —  Production costs;

    —  Staff costs;

    —  Transmission costs;

    —  Other costs;

    —  Capital costs.

  4.4  Virement between Current and Capital Provision.

  4.4.1  In 2002-03 and 2003-04 the World Service may, with the FCO's prior agreement, adjust in-year allocations between current and capital provisions to meet changed priorities, within the scope allowed by the Treasury's SR2000 rules on virement.

  4.4.2  In 2004-05 and subsequent financial years, the Treasury's SR2002 rules on virement will apply: there will be no ability to spend capital provision on current expenditure, with the sole exception of PFI payments as approved by the FCO and HM Treasury. However, subject to the FCO's prior agreement, spending of current provision on capital expenditure will be allowed in 2004-05 and subsequent years.

  4.5  Forecasts and Outturn.

  4.5.1  Throughout the financial year, the World Service will provide quarterly statements of actual income and expenditure and forecasts of end-year outturn on Grant-in-Aid and other income. The level of debtors, creditors and stock will be taken into account in reconciling to the cash balance shown on the Statement of Need. The statement will include a separate schedule showing expenditure on capital projects over £1,000,000.

  4.6  Drawn-down of the Grant-in-Aid and Working Capital Provision.

  4.6.1  No advance issue of the Grant-in-Aid will be made in any financial year against commitments which properly fall for payment in the following year.

  4.6.2  If draw-down of the Grant-in-Aid is less than the amount approved by Parliament, the FCO will require the World Service to provide a satisfactory explanation.

  4.6.3  The World Service will request issues of Grant-in-Aid by submitting monthly to the FCO a written Statement of Need in a form agreed with the FCO. Issues will normally be made monthly. The timing and amount of each instalment must reflect the need for funds for Grant-in-Aid activities and must not result in any accumulation of Grant-in-Aid or other income in excess of immediate requirements. Cash balances at the end of each month of a financial year should be geared only to funding requirements until the next tranche of the Grant-in-Aid is due.

  4.6.4  At the end of each financial year the World Service may retain a cash balance, of a maximum amount agreed with the FCO, from the Grant-in-Aid received. Any balance held at year-end will not be liable to surrender to the Consolidated Fund. Any balance in excess of the agreed amount will be taken into account in the payment of the following year's Grant-in-Aid.

  4.6.5  The World Service may, with the FCO's prior approval, retain additional income in excess of budgeted amounts provided it is to be used for Grant-in-Aid activities.

  4.7  End Year Flexibility.

  4.7.1  End Year Flexibility (EYF) is the ability to carry forward unspent funds from one year to future years. The World Service is allowed 100 per cent EYF from each financial year to the next within the three year SR period subject to the following conditions:

    —  EYF is qualified by the requirement that the World Service funds from its EYF any Reserve claims made on its behalf.

    —  Any EYF is subject to an override should the core FCO not be able to fund all of any Reserve claims:

    —  HM Treasury's "taut and realistic" condition (Government Accounting 11.3.30 and 11.3.31) could also limit full EYF in the event that the Treasury invoked it, or prompt the FCO to take pre-emptive action if the Treasury threatened to confiscate unconsumed provision.


  5.1  The World Service will:

    —  maintain management accounting systems which clearly identify income and expenditure related to the agreed Grant-in-Aid activities on a Resource basis

    —  seek to maximise its additional income in line with performance targets (including financial targets) agreed each year with the FCO, and stated in the strategic Three Year Plan and spend such income in furtherance of its objectives.

    —  seek the prior approval of the FCO before incurring expenditure on any significant activities of a kind any of which

    have not previously been undertaken

    have not previously been funded by the Grant-in-Aid

    are novel or contentious or

    may have long term financial implications.

    —  seek the prior approval of the FCO before incurring expenditure on any major departure from the agreed strategic Three Year Plan.

  5.2  The World Service, in consultation with the FCO will ensure that adequate financial and management arrangements, including internal financial and management information systems, exist for the economic, efficient and effective planning, management and control of all its resources

  5.3  These must include:

    —  compliance with Generally Accepted Accounting Practice in the United Kingdom

    —  compliance with any relevant HM Treasury practices, including Resource Accounting and Budgeting, procedures or recommendations (including recommendations made by the Public Accounts Committee and accepted by HMG) applicable to expenditure of government grants.

    —  observance of all relevant guidance a set out in Government Accounting and other official guidance as appropriate

    —  the proper planning and deployment of all resources to ensure that best value for money is obtained

    —  systems and controls dealing with income and expenditure and resource consumption relating to the Grant-in-Aid and other income

    —  all reasonable measures to safeguard against fraud and theft of the funds and assets held by the World Service

    —  procurement guidelines.


  6.1  The BBC's external auditors will review annually a summary of transactions between the World Service and BBC supplier divisions.

  6.2  The BBC's Annual Report and Accounts will include reference to the fact that the BBC's external auditors have reported to the Governors that, in their opinion, the information contained in the summary of transactions for the year in question has been properly extracted from the books and records of the supplier divisions; has been properly prepared on the bases of cost allocation and of apportionment methods set out in the agreements between the World Service and the supplier divisions; and that, on this basis, there has been no material cross-subsidy between the Grant-in-Aid and the Licence Fee.

  6.3  The BBC's Annual Report and Accounts will also contain a statement from the BBC Governors confirming that the Governors are satisfied that there has been no material cross-subsidy between Grant-in-Aid or related additional income and Licence Fee or commercial income.


  7.1  The World Service will publish its Annual Review separately from the consolidated BBC Annual Report and Accounts. The World Service Annual Review will include the full set of accounts relating to World Service operations and a comprehensive analysis of its financial and operational performance. The World Service Accounts and Annual Review will cover the financial year ending 31 March. The Accounts shall be properly prepared in accordance with the provisions of the BBC Charter and of the Agreement and with the provisions of the Companies Act as if these provisions applied to these accounts. The consolidated BBC Annual Report and Accounts will continue to carry a separate section describing the performance of the World Service and will refer readers to the additional information available in the World Service Annual Review. Copies of the World Service Annual Review and the consolidated BBC Annual Report and Accounts will be sent to the FCO by 31 July each year.

  7.2  The World Service Annual Review will include a report on the previous year's performance against the strategic Three Year Plan, including performance targets and measures.

  7.3  The Director World Service and Global News and the Finance Director of the World Service will be signatories of the audited accounts published in the World Service Annual Review. The World Service's accounts will be incorporated into the consolidated BBC Annual Report and Accounts. It is not necessary for the names of the Director World Service and Global News and the Finance Director of the World Service to appear as signatories to the BBC's consolidated accounts; for this purpose the signatories are currently the Chairman, Director General and Director of Finance, Property and Business Affairs of the BBC.

  7.4  The FCO will need to be satisfied that the World Service's banking arrangements protect public finds. The Director is responsible for ensuring that the banking arrangements are in accordance with the requirements of Government Accounting and are carried out efficiently, economically and effectively. The World Service should therefore ensure that these arrangements are suitably structured and represent value for money; the interest earned on credit balances should be as close as possible to bank Base Rate. The arrangements should be reviewed at least every two years, with a fundamental review of the market at least every three to five years. The World Service is responsible for informing the FCO when such reviews have taken place. The Director is responsible for providing such information and banking arrangements as is required to enable the FCO to provide the FCO Accounting Officer with the necessary assurances about their adequacy. The World Service should ensure that banking services overseas are employed judiciously and therefore that wherever possible overseas accounts are only with organisations with high credit ratings.

  7.5  In order to provide assurance to the FCO Accounting Officer that the financial and management controls employed by the World Service are appropriate and conform with the requirements of propriety and good financial management, the following internal audit conditions will apply:

    —  Auditing the Grant-in-Aid and other related World Service income and activity will be a discrete function within both the internal and external BBC audit programmes; and the programmes of the two sets of auditors shall be arranged accordingly.

    —  In order to obtain assurance on the comprehensiveness of the World Service internal audit coverage, the FCO Head of Internal Audit will be provided annually with the World Service's Audit Needs Assessment and audit plans. By the end of June each year, the World Service shall provide the FCO Head of Internal Audit with a summary of assurances on internal control and key points arising from the BBC Internal Audit reports, covering World Service matters, which were issued in the preceding financial year.

    —  FCO Internal Auditors shall have rights of access to specific World Service internal audit reports where they require more information than is included in the World's Service's annual summary of key findings.

  7.6  For the purpose of discharging his responsibilities to Parliament, the Comptroller and Auditor General has the right, at all reasonable times, to inspect such documents and to make such enquiries as may relate to the provision of World Service activities.

  7.7  Any such inspection may include an examination of the accounts and records relating to the Grant-in-Aid and other income and receipts used for the provision of World Service activities. It may also include, under Section 6 of the National Audit Act 1983, enquiries into the economy, efficiency and effectiveness with which those resources have been used.


  8.1  Management and Disposal of Assets.[5]

  8.1.1  Sales, net of the costs of sale, by the BBC of Grant-in-Aid funded assets are subject to claw-back. Any money coming back to the World Service under the claw-back arrangements in excess of £1 million will be transferred to the FCO; below £1 million, it is for FCO and HM Treasury to decide whether or not to allow the World Service to keep the receipts, with or without an offsetting reduction in its Grant-in-Aid. Accordingly, the World Service will inform the FCO at an early stage if it proposes to dispose of any asset or group of related assets which is expected to realise more than £100,000.

  8.1.2  For sales by the World Service or the Home Services of any Grant-in-Aid funded asset or group of related assets which realise less than £100,000, the World Service has authority to re-invest or use the proceeds of disposal to purchase replacement assets or for any other capital purpose appropriate for the expenditure of government Grant-in-Aid. The World Service will report such disposals and reinvestments, if involving values in excess of £10,000 to the FCO.

  8.1.3  Surplus assets will be sold at the best price obtainable after taking professional advice where the sale includes land or buildings. The proceeds shall be shown as receipts in the BBC's returns and accounts but, if the total in any year exceeds the amount allowed for in the estimates in this category, the excess may not be used to cover increased payments or expenditure without the concurrence of the FCO.

  8.1.4  The World Service will regularly review its assets funded from government Grant-in-Aid and will dispose of surplus assets in line with the advice in Government Accounting:

    —  The World Service will maintain registers covering all items purchased out of the capital Grant-in-Aid detailing a description of the asset, the original cost, depreciation charge to date and the written down value. Items recorded must be checked systematically so that the World Service can readily demonstrate the accuracy of the figures in the register.

    —  In addition the World Service will provide an annual statement if requested by the FCO showing:

    —  the value ie cost less depreciation, of all assets at the beginning and at the end of the financial year;

    —  additions to fixed assets during the year;

    —  revaluations of fixed assets during the year;

    —  impairments of fixed assets during the year;

    —  the cost of assets transferred to or from the Home Services Group;

    —  the cost of other assets taken out of service or written off;

    —  receipts from the sales of World Service assets; and

    —  receipts or credits from the sales of World Service assets managed by the Home Services which were previously funded from the Grant-in-Aid.

  8.1.5  Within the UK the World Service will seek the advice of the Property Advisers to the Civil Estate (PACE) whenever significant property transactions are being considered. The FCO and the World Service will hold regular liaison meetings to discuss the planned capital programme.

  8.1.6  Provided there is no resulting increase in the current or capital totals as shown in the approved Grant-in-Aid, the World Service may sanction all new expenditure subject only to seeking the FCO's prior approval for any individual capital project where the gross cost is expected to be in excess of £2 million in the case of real property assets or £1 million in the case of Information Technology or other assets or when the aggregate cost of all projects, both above and below those values, would lead to the approved capital element of the Grant-in-Aid being exceeded.

  8.1.7  FCO approval for capital projects must be sought on the basis of business case, constructed inline with the requirements for Investment Appraisal outlined in the "Green Book" and describing why the project is necessary, the options which have been considered (including the "do nothing" option) and assessments of them on the basis of Discounted Cash Flow (DCF) financial appraisal and risk analysis.

  8.1.8  Purchasing should be in line with the general principles of value for money outlined in Government Accounting. Goods and services should be acquired by competition. Contracts which are above certain thresholds are normally required to be advertised and awarded in accordance with EC and World Trade Organisation (WTO) rules on public procurement. For transactions over £1 million the World Service will consider the use of Public Private Partnerships (PPP) in its option appraisals.

  8.2  Losses and Special Payments.

  8.2.1  The World Service may, in accordance with Government Accounting, and without prior reference to the FCO, write off certain losses, make gifts of surplus stores, make special payments, and waive claims, subject to no single item exceeding £50,000. Where the World Service is contemplating the write-off of a sum exceeding £2 million or more it will be necessary to seek prior Parliamentary approval. The World Service will report to the FCO at the end of each financial year the amounts written off etc in each of the categories detailed in Government Accounting and will include a summary in the published accounts.

  8.3  Gifts.

  8.3.1  The World Service may, in accordance with the guidelines contained in Government Accounting, make gifts of equipment and services without prior reference to the FCO subject to the value of any one gift not exceeding £10,000. Gifts of cash, whatever value, cannot be made without the prior agreement of the FCO. Where the World Service is contemplating a gift valued at £1 million or more it will be necessary to seek prior Parliamentary approval. The World Service will include in the annual return and the summary for the published accounts, as required in paragraph 8.2.1, a statement of the total value of gifts made.

  8.4  Insurance.

  8.4.1  The World Service may arrange insurance in the following limited cases:

    —  where it is a statutory or contractual requirement, eg motor insurance

    —  where it is necessary to protect staff, eg personal accident insurance, employer's liability

    —  where third party liability policies are considered necessary

    —  where there is an obligation to arrange insurance for shared premises and/or facilities

    —  where there is agreement between the FCO, the BBC and HM Treasury that there should be special arrangements.


  9.1  Not less than once every three years the World Service will carry out a full financial risk assessment of its operations. On the basis of the findings of such assessments, which are to be agreed between the World Service and the FCO, it will apply reasonable and cost-effective countermeasures including appropriate insurance arrangements to manage the risks so as to minimise the contingent liabilities on the FCO.

  9.2  In those cases where the World Service's total contingent liability on the FCO would exceed £500,000, the World Service is obliged to seek specific FCO approval prior to the liability being incurred. Where the World Service is contemplating action which would create an individual contingent liability on the FCO over £2 million it will be necessary to obtain Parliamentary authority before the liability is incurred.

  9.3  The World Service will seek the approval of the FCO before borrowing money on the commercial market, making loans, offering any assets as security, giving guarantees, indemnities, letters of comfort or incurring any other contingent liability.

  9.4  For the purposes of compiling the FCO's Resource Account, the World Service will provide year-end assessments of actual and contingent liabilities, along with any firm contractual commitments.


  10.1  The arrangements in this Memorandum take effect from the date of signature.

  10.2  The FCO, in consultation with the World Service, will review the terms of this Memorandum as necessary but at least every three years. Any material revisions will be agreed with HM Treasury.

The Secretary of State for Foreign and Commonwealth Affairs and The British Broadcasting Corporation

June 2002

5   Certain capital assets may from time to time be purchased by BBC Home Services and either leased to the World Service under operating leases or used to assist in the supply of a service to the World Service. In either case, subject to Generally Accepted Accounting Practice, it is not expected that the assets will appear on the World Service's balance sheet, nor count against the overall spending limit; except in respect of operating lease payments and periodic service charges. Assets purchased by the World Service and managed by BBC Resources remain in the ownership of the World Service. The World Service pays a monthly charge for use of these assets, but a monthly credit is received in recognition that the World Service made the initial purchase of the assets from Grant-in-Aid funds. Back

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