House of Commons - Foreign Affairs

Select Committee on Foreign Affairs Twelfth Report

FINANCE

49. We now turn to the FCO's plans for managing its assets and meeting the financial targets set in the 2002 Spending Review. We consider in turn the efficiency savings that it has undertaken to meet, its programme of property disposal, its ongoing Information and Communication Technology (ICT) programmes, and the issue of corporate sponsorship.

EFFICIENCY SAVINGS

50. The 2002 Spending Review requires the FCO to make annual efficiency savings of 2.5 per cent of current expenditure across all of its activities—"a stretching target" according to Sir Michael,[73] although it follows a 3 per cent target set in the 2000 Spending Review.[74] Sir Michael made it clear to us that this is not simply an arbitrary target imposed on the FCO by the Treasury, but "something that I would have wanted us to do anyway. I think it is incumbent on any organisation to be looking the whole time at where the lower priorities are, where are the things you are doing which maybe you do not need to do, so that you can shift your priorities towards the more important things".[75]

51. The FCO's interpretation of the efficiency savings target is that it applies to the years 2004-05 and 2005-06—the year 2003-04 being covered by the previous Spending Review's 3 per cent target—with the percentage being calculated from the baseline figure for current expenditure from the previous spending round, not including uplifts to the budget agreed in the 2002 Spending Review.[76] The logic behind this appears to be that the annual saving of 2.5 per cent is intended to prevent the value of the baseline being eroded by inflation, and allow extra funds awarded in the 2002 Spending Review maintain their value. The table below shows the level of savings that will have to be made if the target is to be met.[77]

	2001-2002 PRE-SR2000 DEL £000	2003-04-3% £000	2003-2004 PRE-SR2002 DEL £000	2004-05-2½% £000	2005-06-2½% £000
Diplomatic budgets	687	20.61	821.9	20.55	20.55
BBCWS	160	4.8	180.4	4.51	4.51
BC	137.3	4.12	155.7	3.89	3.89

Total FCO DEL	984.3	29.53	1158	28.95	28.95

52. We approve wholeheartedly of the intention that the FCO should operate as efficiently as possible. We would be concerned, however, if the requirement to achieve savings of 2.5 per cent per year led to cutbacks over and above improvements in efficiency. Sir Michael has told us that the target is "stretching". It is also binding. If ways of achieving greater efficiency are not identified, the savings will nonetheless somehow have to be made. We recommend that the Government in its response to this Report set out what progress there has been towards identifying those areas in which efficiency savings can be made, what these savings consist of, whether the efficiency savings identified will meet the agreed target of 2.5 per cent of current expenditure, and, if not, how the target will be met in full.

PROPERTY DISPOSALS

53. In accordance with the terms of the 1998 Spending Review, the FCO reinvested £90 million of the proceeds of asset sales (primarily sales of the FCO's overseas estate) over the three years from 1999-2000 to 2001-02.[78] The 2000 and 2002 Spending Reviews permit the FCO to reinvest up to £100 million of the proceeds of asset sales over equivalent periods. One of the main purposes of this reinvestment is to part-fund new ICT systems, hence the much-used phrase "From Bricks to Bytes". In 2001-02, for the first time, half of the revenues from property disposals were reinvested in ICT programmes.[79]

54. We asked Sir Michael about progress on asset sales over the current Spending Review period. He told us: "We have, I think I am right in saying, found about £41 million in the first year of that. We have two years to go and £59 million to find. It is going to be tough because there is a dwindling number of assets to sell. I think we can do it but it is going to be tough".[80] He also reassured us that the use of Key Performance Indicators would ensure that only underperforming properties would be disposed of: "We are not going to be selling off properties which really are providing good value to the taxpayer overseas".[81] If the FCO is unable to find £100 million worth of underperforming properties, the target will not be met: "We will not have a go if it means selling properties which are a real asset to the taxpayer overseas".[82]

55. The FCO has provided us in confidence with a list of properties sold or offered for sale in 2001-02, which reveals the extent of the FCO's disposal programme.[83] Properties sold ranged in value from less than £10,000 to tens of millions of pounds. By far the majority of sales consisted of staff accommodation which was either surplus to requirements (and therefore did not need to be replaced) or which was somehow unsuitable. In almost every case where a property has needed to be replaced, this has been achieved by renting, rather than by purchasing, on the grounds of increased flexibility and value for money.

56. The risks associated with this disposal programme are twofold. The first was highlighted by our predecessor Committee last year, when it noted that "buildings of distinction in key locations can contribute materially to the effectiveness of British diplomacy in the contemporary world".[84] The risk is that because buildings of distinction are precisely those which are likely to raise most money if sold, the temptation will be to sell them. In fairness, the only building which might fall into that category on the list provided is the residence of the Consul-General in New York. We are concerned, nonetheless, that while the Estate Key Performance Indicators set out in the Annual Report rightly cover issues such as the exploitation of a property's economic potential, comparative rental values and density of occupation, the contribution of distinctive, often expensive property to the effectiveness of British diplomacy does not appear explicitly to be taken into account.[85] We recommend that the Government ensure that the contribution of a building or location to the effectiveness of British diplomacy is given paramount importance when deciding its future.

57. The second risk is that the Government will sell property and replace it with rented property in order to raise the capital that it needs, rather than because rented property necessarily represents better value for money. The Consul General's residence in Munich has been sold, but the same property is now being rented by the British Government from its new owner for the same purpose. As a result of the sale, the FCO has considerable funds to reinvest. This strikes us as, on the face of it, a peculiar arrangement. We are not in a position to assess whether this transaction represented value for money. We will, however, ask the National Audit Office to look into the value for money of the practice of selling properties in order to rent them

back.

58. A project which involves selling real estate to fund ICT projects raises long-term issues of sustainability. ICT assets are depreciated at a much faster rate than buildings.[86] A point will be reached, probably in the relatively near future, at which the FCO will have sold by far the majority of its underperforming estate. Also in the relatively near future, a number of its ICT systems will need updating or replacing. The FCO will have to find other means of funding further ICT developments, once its estate has been thoroughly rationalised. We recommend that the Government explain in its response to this Report what provision it is making to fund future information and communications technology developments, other than through the sale of real estate.

59. The introduction of resource accounting and budgeting has highlighted an issue regarding the valuation of FCO assets. The FCO aims to ensure that its buildings conform to British health and safety standards, which are often far more expensive to conform to than local standards. FCO buildings also usually require levels of security which go well beyond local market norms, especially in the past year, since the perceived threat from international terrorism has increased. These are investments which cannot be wholly recouped when properties are sold, and must therefore be written off. Impairments[87] in 2000-01 were £198 million, more than 10 per cent of the value of the FCO's fixed assets.[88]

60. We asked the FCO in writing what it can do to avoid costly write-downs in the value of its estate. It responded, quite rightly, that it has no intention of deviating from British health and safety norms, nor to reduce security. It suggests instead that it might change how it funds these purchases by moving them from its Capital budget to its Administration Cost budget.[89]

61. Our main concern is that FCO staff overseas are properly and securely accommodated. In the new security climate since September 2001, there may be a case for reviewing how staff overseas are accommodated, and whether more of them should be living in secure embassy compounds. There is also, however, a responsibility to the taxpayer. Substantial sums of money are spent on FCO properties which cannot be recouped in full when those properties are sold. This makes it all the more important that suitable property is identified on a long-term basis, so that disposals need occur as rarely as possible, thereby minimising the cost to the taxpayer. We recommend that the Government bear in mind when deciding whether to dispose of a property the cost that will be incurred by fitting out any replacement to the required standards of health and safety and security.

62. We well understand that advice on property matters is best given by experts in the area where the posts are located, but there may well be a case—given the lack of specialism among serving officers of the FCO—for the appointment of a standing property consultant in London whose advice can be drawn on as appropriate, from time to time.

UNITED KINGDOM EMBASSY IN BERLIN

63. We noted that in the Annual Report, and on other occasions, the new embassy in Berlin is cited as a prestigious, modern building of which we can be very proud. It is boasted of as being a great example of a key building provided under a PFI initiative. It is also heralded as an example of modern architecture and design giving maximum utility and functionality to the user. In particular, the large hall area is supposed to provide much space that can be used to host both receptions as well as trade and cultural exhibitions, fairs, etc. We are therefore somewhat surprised that the area set aside for receptions and exhibitions is without air conditioning. We recommend that in its response to this Report the FCO provide a full explanation as to why air conditioning was omitted from the new Berlin embassy specifications and what has been the experience of both staff and other users of this space, during hot weather, since the building was first opened.

INFORMATION AND COMMUNICATION TECHNOLOGY

64. The FCO is in the midst of a large-scale ICT modernisation programme, with capital expenditure in 2002-03 estimated at £50 million, very nearly as much as the total value of the FCO's existing ICT assets.[90] Sir Michael was unequivocal in his evidence to us about the importance of this programme:

"It is using up a lot of our funds, but I think that the aim of being a global on-line organisation and not just a hub and spoke organisation is hugely important. Mentally we are still too hub and spoke and we need to become much more lateral in sharing best practice with posts who are doing a good thing in one country teaching others and sharing knowledge more laterally as well as back to London. I think that the combination of IT programmes that we are putting in place ... will enable us to be far more effectively joined up than we have been in the past."

As the FCO becomes more reliant on technology for its day-to-day business, it becomes all the more important that this technology should be robust and secure. The poor record of much of the public sector in managing ICT contracts suggests that this is an area which we should keep under continuing scrutiny. We will briefly consider in this Report progress on two of the most important contracts: the Prism Programme and the Foreign Office Telecommunications Network (FTN).

The Prism Programme

65. The Prism Programme—the largest of the FCO's new ICT projects—is based on an integrated IT software system for finance, personnel, payroll and procurement.[91] It aims, by providing more accurate and timely management information, to enable the FCO to manage its human and financial resources more effectively. In early January 2002, a 7-year contract for delivering Prism was signed with Cap Gemini Ernst and Young (CGEY). The total cost of the programme until the contract expires in January 2009 is estimated to be £84.7 million; the value of the main contract is £53.9 million.[92]

66. The FCO is convinced that the benefits of the Prism programme greatly outweigh its costs. It estimates that, purely in financial terms, the introduction of Prism will lead to annual savings of at least £12 million from 2005-06.[93] According to Sir Michael, the project is "absolutely fundamental" to meeting the FCO's objectives. It is not "just a piece of kit", but will require "quite a mental adaptation in the office".[94] It is notable that only a quarter of the total cost is capital cost; the remaining three quarters consists of payments for non-capital activities, such as change management, training and ongoing support.[95] We conclude that the successful introduction of the Prism Programme on schedule and to cost is crucial to the modernisation of the FCO's management structures, all the more so because success will depend on staff throughout the organisation being trained in and adapting to new processes and working practices.

FTN

67. The Foreign Office Telecommunications Network provides secure global voice, email and data telecommunications links. It is a vital part of a unified communications infrastructure through which all other IT services are provided. Global Crossing, an international telecommunications provider, is contracted to provide FTN. This is one of only two major PFI contracts which the FCO has.

68. Our predecessor Committee recommended last year that a full update on FTN should be included in the FCO's regular reports to us on IT and communications.[96] We are surprised that no mention is made either in these update reports, nor in the Annual Report, of the fact that in January Global Crossing filed in the US bankruptcy courts for provisional liquidation. While Global Crossing insists that it is merely restructuring its debts, the media regularly describe the company as bankrupt.[97] Press reports have even claimed that Global Crossing is under investigation by the Federal Bureau of Investigation and the Securities and Exchange Commission, accused of swapping fibre-optic capacity with a competitor as a way of manufacturing revenue.[98] We recommend that the Government explain in its response to this Report why it has failed to comment on the fact that one of its major PFI contract partners has filed for provisional liquidation.

69. Disclosure of any contingency arrangements in the FCO's contract with Global Crossing is barred on the grounds of commercial confidentiality.[99] We know, however, from our predecessor Committee's inquiry last year that the FCO does not own the technology or the equipment through which FTN is delivered; Global Crossing is paid to provide a level of service through its own networks.[100] We are therefore seriously concerned by the effect that the failure of Global Crossing could have on the FCO's ability to deliver all of its ICT programmes, as well as on the access of diplomatic posts around the world to secure communications facilities. We recommend that the Government set out in its response to this Report what risk, if any, the failure of Global Crossing would pose to the Foreign Office Telecommunications Network. We further recommend that the Government provide us in confidence with details of the contingency arrangements in place, and of any liability that the FCO might have, in the event that Global Crossing should fail, as well as the estimated cost of replacing the service provided by Global Crossing, details of how the due diligence process was carried out by the FCO and by any external advisors prior to the contract with Global Crossing being concluded, and the conclusions of any such due diligence reports.

CORPORATE SPONSORSHIP

70. The Annual Report contains a list of corporate sponsorship agreements worth more than £5,000 reached by the FCO during 2001-02.[101] Following our evidence session with Sir Michael, the FCO has provided us with further written information on these agreements: this information is published with this Report.[102] The list of sponsorship agreements in the Annual Report is not as helpful as it might be. It is not easy, for example, to gauge the nature of the projects sponsored from the brief descriptions provided. We recommend that more detailed information on corporate sponsorship appear in future FCO Annual Reports.

71. Sponsor involvement in Government activities needs to be treated with caution, as the FCO recognises in its sponsorship guidelines. According to these guidelines, "the key role sponsors can play in the public sector is in 'extending' the message. The FCO should always retain ownership of its projects and obtaining the support of sponsors must be secondary to achieving the aims of Government." The parameters for sponsor involvement are: that the sponsor's support must be seen as adding significant benefit to an existing activity, message or campaign; that there should be no overt commercial advantage to the sponsor in terms of the direct sale of products or services; and that the core project should not depend on sponsorship support for its funding. Sponsorship principles are also clearly set out.[103]

72. Of the five agreements valued at more than £5,000 which were entered into during 2001-02, four clearly relate to 'extending' the FCO's message, through support for the Information Kiosk Project and sponsorship of various information leaflets. We are in some doubt, however, as to how the loan of limousines and 4x4 vehicles in any sense 'extends' the FCO's message. We would also appreciate reassurance that Lexus (GB) Ltd is not receiving any overt commercial advantage through its position as official supplier of vehicles to the British Government's VIP Suites at Heathrow and Gatwick. We recommend that the Government in its response to this Report explain how the corporate sponsorship agreement for VIP transport meets the FCO's sponsorship guidelines.

People

73. The truism that people are an organisation's most important asset is particularly pertinent to a diplomatic service. The choice of diplomatic staff is crucial not only in terms of their ability, but because their role is to represent their country abroad. The diversity of diplomatic staff should ideally reflect the diversity of the country they represent. Most of the FCO's staff are not diplomats, but are employed locally by posts. Ensuring that these staff are treated fairly by all posts has not always been a priority. Diplomatic staff because of their position sometimes become caught up in political issues: it is vital that there are clear guidelines as to how they should act when faced with difficult choices, and that they receive strong support from the FCO in London. Finally, while most diplomatic staff are career public servants, occasionally extraordinary appointments are made, usually at ambassadorial level, often of former politicians. These are issues which we will consider in turn.

DIVERSITY

74. Increasing the gender and ethnic diversity of the FCO is an important challenge faced by the organisation, as Sir Michael acknowledges.[104] The gender profile improved between April 1997, when only 5.8 per cent of the senior management service were female, and July 2002, with an equivalent figure of 10.6 per cent.[105] Although this failed to meet the FCO's own target of 13 per cent, it is nonetheless an encouraging improvement. Sir Michael acknowledges that not only recruitment policy but also management arrangements need to change if more women are to be attracted to a career in the FCO. We are fully supportive of such an attitude. We appreciate too, however, that the organisation's global mobility requirement will limit the proportion of women who are likely to seek such a career.[106] We conclude that the gender profile within the FCO, while better than it was, can be further improved, and we recommend that barriers to the recruitment of women on merit be identified and eliminated.

75. We were also pleased to hear that, for the first time, two members of the FCO's senior management structure belong to an ethnic minority.[107] The FCO's attempts to attract ethnic minority staff are clearly beginning to bear fruit. Last year our predecessor Committee was "disappointed on [its] visits to posts abroad to encounter very few senior staff from the ethnic minorities".[108] We would be somewhat less negative in tone. It would be untrue to say that we have encountered many senior staff from the ethnic minorities, but we have been impressed by those whom we have met.

76. At the level of recruitment, we note that the proportion of ethnic minority candidates for FCO positions fell slightly in 2001: at the policy entry point, from 16.6 per cent of applications in 2000 to 16.1 per cent in 2001; and at the operational entry point, from 19 per cent in 2000 to 14.3 per cent in 2001.[109] We also note that the proportion of successful candidates belonging to an ethnic minority—7 per cent at policy entry point and only 2 per cent at operational entry point in 2001—is substantially smaller than the proportion of ethnic minority applicants. We recommend that the Government explain in its response to this Report what steps it is taking to encourage people from the ethnic minorities to apply for positions within the FCO, and furthermore what steps it takes to ensure that ethnic minority candidates are not disadvantaged by selection procedures.

LOCALLY ENGAGED STAFF

77. Of the 15,500 people who work for the FCO, it is too often forgotten that nearly two-thirds are employed abroad. Many of these locally engaged staff are nationals of foreign countries. Very little space indeed is given to local staff in the Annual Report, as Sir Michael has acknowledged.[110] His offer to ensure that more is included about the importance and numbers of local staff in next year's report is very welcome.[111]

78. This year's Annual Report includes the text of a new charter for the management of staff overseas, which was disseminated to all diplomatic posts in August 2001.[112] The principles of the charter are excellent. It is the responsibility of the FCO to ensure that these principles are put into practice at a local level. The establishment of a local staff unit within the Personnel Directorate in London is a welcome development. We strongly support the notion that a locally engaged member of staff should be a member of this unit.[113] Equally important are the training courses offered to those who manage local staff.[114] We also appreciate the increased opportunities for training on offer to the local staff themselves, although we were a little concerned to hear that this training must be requested before it is offered.[115] We would find it helpful to have information on how much training of locally engaged staff takes place in the United Kingdom; it is clearly important that as far as possible and relevant such staff should have direct experience of this country. We recommend that the Government do its utmost to ensure through practical steps that locally engaged staff, wherever they are based, are employed and managed in accordance with the principles contained in the Charter for the Management of Staff Overseas.

79. We raised with Sir Michael the employment rights of locally engaged staff who are British nationals, and have subsequently received written evidence from the FCO on the subject.[116] It seems that in some countries such staff do not have recourse to the local justice system if they believe that their employment rights have been breached. Currently, such staff also fall outside the jurisdiction of the British courts, although this is an issue to be revisited by the President of the Employment Appeal Tribunal later this year. It is clearly desirable that a member of staff should be able to have recourse to law, either in the state in which he or she is employed or in the United Kingdom. We hope that this issue will soon be resolved, in the interests of access to justice for all.

GUIDANCE ON SUPPORT FOR BUSINESS INTERESTS

80. In February, the then British ambassador in Romania was placed in an invidious position, having submitted a letter for the Prime Minister's signature in support of a contract which was being sought by a company, the owner of which, it emerged, had given funds to the Labour party. There followed wholly misplaced comment in the media casting doubts as to his party political impartiality.[117]

81. Such letters have been written under successive governments and are a perfectly proper and necessary part of any government's determination to try to strengthen the hand of British exporters round the world. It will occasionally follow that the company on behalf of which a letter has been written will have given a financial contribution to the governing party of the day.

82. It is essential that clear guidance is available to British diplomats, which they can rely on when such a situation next occurs. When we asked Sir Michael what guidance had been issued, he told us:

118

Sir Michael has since sent us a copy of a relevant confidential telegram,[119] as well as framework guidelines from British Trade International dating back to December 1999.[120] Detailed guidance has not been issued. According to the FCO, "general guidelines from London cannot cover all eventualities ... in any doubt, they [diplomats] should consult London direct for advice".[121] We are not concerned about all eventualities, but rather about the specific situation in which a diplomat may be at risk of appearing politically partial, and we continue to believe that more detailed guidance for this sort of situation remains appropriate. We recommend that the FCO issue detailed guidance to its diplomats as soon as possible on how they should respond to requests from ministers that they draft letters of support for companies seeking contracts abroad, when those companies are declared donors to a British political party.

POLITICAL APPOINTMENTS

83. By far the majority of British diplomats are career public servants, chosen on merit. The introduction of secondments between the FCO on the one hand, and the private sector and NGOs on the other, will also lead to the short-term appointment of diplomats whose main career is outside the diplomatic service. It is only very occasionally that someone who has not had a diplomatic career and who is not part of a secondment programme—usually a politician or public figure—is chosen to represent the country abroad. Sir Alastair Goodlad, the British High Commissioner in Australia and a former Member of the House, is a current example of such a political appointment. Previous examples have included Hon Peter Jay, who served as British Ambassador to the United States in the late 1970s, at a time when his father-in-law was Prime Minister; Lord Richard; and the late Lords Harlech and Caradon.

84. We believe that political appointments are generally detrimental to the diplomatic service and can only be justified if the individual concerned is judged superior on merit to any FCO candidate. Such appointments can only tend to undermine the reputation for integrity and professionalism of the diplomatic service and may cause resentment within it. If, nonetheless, there are in the future occasions on which the Government wishes to make political appointments to diplomatic posts, we believe that it would be entirely appropriate for us not only to seek an explanation of why these appointments have been made, but also to assure ourselves of the suitability of the people so appointed, by summoning them to give oral evidence before us. This would be in accordance with one of the core tasks for this Committee, as drawn up by the Liaison Committee and agreed by the House, to "to consider, and if appropriate report on, major appointments by a Secretary of State or other senior ministers."[122] We intend to consider any future political appointments to diplomatic posts.

Joined-up Government

85. Sir Michael has made it clear that one of his principal aims as Permanent Under-Secretary is to see the FCO "more closely engaged than it is at the present with other Whitehall departments because I see that foreign policy is increasingly indivisible from domestic policy".[123] We welcome his intention for the FCO to work more closely with other Government Departments, and the fact that an official has been specifically charged with "establishing closer links with all the key government departments with whom we have contacts, talking to them about the services we can provide to them and being clearer about the common interest that we have".[124] We recommend that the Government in its response to this Report make a fuller statement of its priorities in co-operating with other Government Departments, explaining also what machinery for such co-operation has been put in place and what progress has been made.

73 Q 108. Back

74 Value for money target, FCO Public Service Agreement 2001-04. Back

75 Q 117. Back

76 The previous Spending Review target of 3 per cent is being applied to the year 2003-04. Back

77 Source: Foreign and Commonwealth Office, October 2002. Back

78 Ev 50, Question 5. Back

79 Annual Report, p 138. Back

80 Q 117. Back

81 Q 119. Back

82 Q 120. Back

83 Not printed. Back

84 HC (2000-01) 428, para 16. Back