House of Commons - Foreign Affairs

Select Committee on Foreign Affairs Eighth Report

4 Performance and efficiency

39. In its Report on the 2004-05 Departmental Report, the Committee criticised the FCO for failings in its management of the Prism management information project.[43] The FCO responded, informing us of a number of steps that have been taken both to improve the performance of Prism and to avoid a recurrence of the problems with other large IT or procurement projects.[44]

40. The minutes of February's FCO Board meeting show that there were continuing problems with Prism. For example, the system did not have sufficient memory to function properly and further memory had to be installed. The minutes record that the FCO was pursuing with the contractors, Capgemini, the possibility of compensation for the problems that the lack of sufficient memory caused.[45] The minutes of May's Board meeting show that the Prism project was still experiencing so many severe difficulties that its performance was assessed at 'red':

41. In June, we asked Sir Michael for a progress report on Prism. His response was cautiously upbeat:

In our recent visits to Posts overseas, we have also detected a more positive attitude and a reduced level of frustration over Prism among FCO staff.

42. Table 5 on page 80 of the Annual Report shows that more than a quarter of all efficiencies planned for 2006-07 and 2007-08 are to be achieved from information and computer technology. However, only five per cent of efficiencies came from computer technology in 2005-06. Explaining this, FCO Finance Director Ric Todd told us that delays in the implementation of Prism and other IT projects such as Future Firecrest mean that the savings made by these programmes have "moved to the right"—that is, they will be realised later than had been predicted, but they will be realised.[48]

43. It does appear that after a number of difficult years the FCO is now closer to getting a grip on its IT programmes. In its response to our last Report, the FCO undertook "to provide regular written updates" on Prism.[49] We will monitor these reports as well as assessing progress on other IT projects, and we will be ready to follow up any matters of concern.

CAPITAL UNDERSPEND

44. At its meeting in May 2006, the FCO Board considered a paper on how to address the FCO's continued capital underspend. Analysis of figures contained in the Estimates and in the Departmental Report carried out for us by the Scrutiny Unit of the House of Commons Committee Office suggested the underspend could be of the order of £23 million, or 13 per cent of the total provision.[50] Mr Todd told us that in fact the underspend would be even higher—£39 million.[51]

45. The minutes of the May 2006 Board meeting state:

Delays in the Future Firecrest IT programme and in some estate projects had led to most of the underspend.[53] The underspend is not of itself a huge problem because, Mr Todd told us, it can be carried over to the following financial year.[54] More worrying, as the Board has acknowledged, is what the scale of the underspend tells us about FCO's management practices:

46. The Board includes non-executive members from the private sector, including BUPA and KPMG, and Sir Michael told us that he would take advice from these experienced business practitioners "about how we try to get this right."[56] It is important that the FCO gets this right. Poor programme management was one of the major failings identified in the Collinson Grant study and we conclude that improving it must be a priority for the new Permanent Under-Secretary.

AUDITING ARRANGEMENTS

47. When Sir Michael Jay appeared before us in June, we discussed whether the FCO's internal financial control and audit procedures were up to professional standards.[57] Sir Michael later wrote to us, stating that the FCO was about to enter into a partnership arrangement with a private sector audit firm to "enhance and support" the FCO's in-house auditing structures.[58] He also told us that the National Audit Office had been invited by the Board of the FCO to conduct a review of its internal financial control systems in the Autumn of 2006. We welcome these developments.

48. We conclude that the FCO Board is right to seek input from the private sector and from the NAO into its financial control and auditing arrangements. We recommend that the FCO inform this Committee of the outcomes of these exercises as soon as they are available.

STAFF NUMBERS

49. The FCO has a target during the 2004 Spending Review period (2005-08) of reducing the headcount of United Kingdom-based staff by 310. This staff reduction regime appears to exclude locally-engaged staff overseas—whose numbers increased by 400 last year to 9,600—and United Kingdom-based staff working in entry clearance and consular services, whose numbers are also set to increase, by 500 by 2008.[59]

50. Sir Michael explained the reason for excluding these staff from the reduction target.

Mr Todd elaborated on this:

51. In response to our previous Report, the FCO provided information on which senior management structure posts have been abolished or regraded.[62] We found this information helpful in reaching an understanding of where the cuts in senior posts are likely to have an impact. We recommend that in its response to this Report the FCO provide information on posts outside the senior management structure that have been created or abolished in the past year.

Risk management

52. For any large organisation, management of risk is an essential responsibility of senior management. For the FCO, which has stewardship of substantial public funding and is charged with protecting and projecting the national interest, the dangers posed by the risky political, strategic and commercial environments in which it operates are potentially huge. The Office therefore maintains elaborate structures and procedures designed to ensure that its senior managers are aware of the main factors which might lead to a reprioritisation of goals or reallocation of resources.

53. The FCO has an Audit and Risk Committee, the purpose of which is to advise the Permanent Under-Secretary on:

the strategic processes for risk, control and governance and the Statement on Internal Control (SIC);

FCO accounting policies and resource accounts, including the process for their review prior to submission for audit and the levels of error identified;

the planned activity and results of both internal and external audit;

the adequacy of management response to issues identified by audit activity, including the NAO Management Letter;

assurances relating to the corporate governance requirements of the FCO (e.g. Home and Overseas Self-Audit);

proposals for tendering for Internal Audit services or for purchase of non-audit services from contractors who provide audit services; and

the arrangements in place by which staff may, in confidence, raise concerns about possible improprieties in matters of financial reporting and other matters ("whistle-blowing"). The Committee's objective is to ensure that arrangements are in place for the proportionate and independent investigation of such matters and for appropriate follow-up action.[63]

The Committee meets at least four times a year.

54. The FCO also has a system of internal control to manage risk:

55. To assist this work, the FCO maintains a Top Risks Register and various subsidiary risk registers. According to the Resource Accounts for 2004-05, the top risks in that year were "security (both of staff and physical assets); ICT project risk; and responsiveness to international crises, whether consular (e.g. tsunami) or political in nature." The Board Minutes for May 2006 record that "There are now fewer risks, with both operational and strategic risks focused on the impact on the FCO. … although there were still finely balanced arguments for different risks being included or not."[65] The Board now reviews the register on a quarterly basis.[66] We asked for, and received, a copy of the Top Risks Register for July 2006.

56. We asked the FCO why the July version of the register did not identify Iraq and the Middle East as two of the five strategic risks listed. The FCO replied that "since [these] were already the subject of intense policy focus, and considerable FCO resources, they were left out of the Top Risk Register in order to make room for other types of risks, such as an energy or major humanitarian crisis."[67] The risk register is intended to focus on those risks "which, if they occurred, would have corporate implications for the FCO (requiring decisions on shifting resources to deal with them)."[68]

57. The need to be prepared for a major humanitarian crisis was underlined in August, when the situation in Lebanon produced a sudden requirement for FCO consular assistance with the evacuation of British and other citizens from that country.[69] However, the humanitarian emergency was a consequence of a wider threat to stability in the region, caused by armed conflict between Israeli defence forces and Hizbollah fighters. If that conflict had escalated further, it too would have placed great demands on FCO resources. We therefore welcome the fact that the Board will be looking at the register's coverage of strategic risks in the Autumn.[70] We recommend that the FCO Board ensure that, in focusing on the top five risks it faces at any one time, it has full information on the broad range of risks facing it, including those that relate to existing hot-spots such as Iraq and the Middle East.

PSA targets

Misalignment of targets and strategic priorities

58. All government departments are obliged to measure their performance against a series of Public Service Agreement (PSA) targets, agreed between the department and the Treasury. The FCO's Departmental Report for 2005-06 provides on page 12 an overview of its strategic priorities and explains how these relate to its PSAs:

In 1998 the Government introduced PSAs, setting out what government departments plan to deliver in return for the resources allocated by the Treasury.

During 2005-2006, we have been working towards two different sets of PSA targets (see Table 1). These are the 12 targets set during the 2002 spending review (SR 2002) covering 2003-2006 and the nine targets set during the 2004 spending review (SR 2004) covering 2005-2008. In this departmental report we are reporting progress against two sets of targets as both spending reviews overlap in this financial year. This report provides final progress assessments against the 2002 targets (pages 125-153) as well as details of progress towards achieving the 2004 targets (pages 110-124).

We are committed to providing regular and reliable progress assessments towards meeting our PSA targets. The Treasury also monitors our progress to make sure we have used the resources allocated to us effectively.

59. The FCO had nine strategic priorities at the time the Departmental Report was produced (a tenth, on 'climate security', has since been added by Mrs Beckett). Of these, three have no related PSA targets under the SR04 framework, although they did have targets under the SR02 framework. These are:

Strategic Priority 2: Protection of the UK from illegal immigration, drug trafficking and other international crimes
Strategic Priority 7: Security of UK and global energy supplies
Strategic Priority 8: Security and good governance of the UK's Overseas Territories

60. The Departmental Report does not state why there are no current targets for these priorities. We therefore asked Sir Michael to explain the discrepancy. He told us,

You have hit upon an issue which has been quite a difficult one for us, certainly for the time I have been in this job, which is the need to get the PSA targets and the strategic priorities in sync with each other, and that has not been straightforward. At the moment we have PSA targets which were a result of SR 2004 and agreed there, which we are charged with fulfilling, but not all of the PSA targets agreed as part of SR 2004 do reflect the new strategic priorities.[

Ric Todd, the FCO's Director, Finance, added that,

61. We recommend that the FCO keep this Committee informed of progress towards aligning its Public Service Agreement targets with its strategic priorities.

'SCORING' PERFORMANCE AGAINST TARGETS

62. A look at the scores for performance against some of the targets in the Departmental Report illustrates the difficulties involved in assessing the FCO's performance, particularly against targets which depend on external factors that may be outside the FCO's control or even, in some cases, beyond their capacity to influence.

63. For example, the Departmental Report 2005-06 notes that following the US-India agreement on nuclear energy development, the United Kingdom is relaxing its ban on nuclear dual-use exports to India, which is a nuclear-armed state.[73] It also notes that Iran is the FCO's "top counter-proliferation priority." Given that the period covered by the Report ended on 31 March 2006, when the prospects for a successful resolution of the Iran nuclear issue were perhaps even less good than they are now, we find it surprising that the FCO assessed progress on PSA-1A (the target relating to weapons of mass destruction), which is couched in terms of "rolling back [WMD] programmes," as 'amber' rather than 'red'. Similarly, progress on the PSA on securing "more robust action by the international community" on weapons of mass destruction, PSA-1B, was assessed as 'amber', rather than 'red', although the Non-Proliferation Treaty (NPT) Review Conference failed to reach a substantive agreement.[74]

64. The FCO's Finance Director, Ric Todd, told us that,

Sir Michael Jay followed this up in writing, explaining that in the FCO's view the 'amber' assessment of this target was justified, given the progress made in areas other than the NPT. He conceded, however, that "we remain seriously concerned about the risks of proliferation, especially with respect to Iran and DPRK [North Korea]."[76] This exposes one of the limitations of the exercise, which is that the set of assessments used to build the rating can and often will incorporate contradictory measurements of progress.

65. Another example of this, also taken from the FCO's Departmental Report for 2005-06, is the rating of performance on SR04 PSA-7 (understanding of and engagement with Islamic countries and promotion of reform). This, too, is shown as amber, or 'on course'. However, four of the seven 'reform' scorecards are red, and none is green. Among the red scorecards is perhaps the most important one, "promoting a moderate version of Islam in Islamic countries and the UK."[77] Sir Michael told us that the disparity between the individual scorecard markings and the overall rating had much to do with the fact that, although governments in North Africa and the Middle East had signed up to commitments to introduce democratic and other reforms, they had so far failed to implement them.[78] Of course, a target couched in terms of engagement with the Islamic world, and promoting a moderate version of Islam, is essentially about inputs, not about outcomes. In scoring its performance against this target as 'red', the FCO may therefore have been a little hard on itself.

66. In the case of many departments—particularly those providing services to the public, such as health and education—it is possible to devise targets that are quantifiable and measurable, even for outcomes. For the FCO, devising such targets has been more of a problem. We were critical in our last Report of the fact that too many of the FCO's targets are expressed in terms of outcomes which are beyond its ability to secure.[79] We suggested to the FCO that it discuss with the Treasury a move to targets based more on inputs and outputs than on outcomes.

67. In reply, the FCO told us that:

We will certainly wish to monitor this process.

68. The FCO will have to negotiate new PSAs with the Treasury as part of the Comprehensive Spending Review process now under way. Sir Michael hinted that some of the less useful current PSA targets might have been dictated, or at least heavily influenced, by the Treasury.[81] If this is so, we would expect FCO Ministers to support their officials in negotiating specific, measurable, achievable, realistic, time-related targets. They would certainly have the support of this Committee if they were to do so. The FCO has told us: "We welcome the FAC's interest in and views on our PSA targets. PSAs are proposed to HMT and we will take into account any views made. We will start negotiations with HMT later this year on the 2008-2011 PSA."[82] The FCO has also undertaken to provide this Committee with full details of the 2008-2011 PSA as soon as it has been agreed. However, we would rather see the draft PSA before it has been agreed, so that we may comment on it.

69. We recommend that the FCO share its draft Public Service Agreement with this Committee, before the negotiation process with HM Treasury is completed.

Fraud

70. In our Report on last year's Departmental Report, we commented on cases of fraud carried out at Posts overseas.[83] We were surprised that the FCO had not informed us of the largest identified loss by fraud in its history—even though it had occurred at an Embassy we were about to visit—and we were very concerned that the National Audit Office had found that weaknesses in financial control and failure to apply correct procedures had allowed this and other frauds to take place.

71. In its response, the FCO apologised and told us that procedures had been put in place "to ensure that the FAC are advised, promptly, of any significant FCO frauds, in parallel with reporting to the PAC [Public Accounts Committee]."[84] It also informed the Committee of a further large fraud by persons unknown involving the loss of satellite 'phones in Iraq, resulting in a loss of £594,000, and of a fraud carried out by a British Council employee in Bahrain in 2004, in which £148,000 was lost.[85]

72. Since then, the FCO has informed us about two further cases of fraud. In Ulaanbaatar, Mongolia, eleven locally-engaged staff were dismissed in May after it was discovered they had been under-declaring their social insurance contributions, thus incurring their employer, the Embassy, a liability of more than £20,000.[86] In August, we were given details of a further fraud at the Embassy in Santo Domingo, Dominican Republic, where the locally employed accountant stole £200,000.[87]

73. In both cases, it appears that the frauds remained undiscovered, not because of any lack of procedures or mechanisms to prevent them, but because the procedures were not followed. The Ulaanbaatar fraud came to light only after the FCO reminded all Posts to ensure they were following local regulations. In September 2005, the Embassy checked records going back to January 2003 and discovered that monthly returns to the Mongolian authorities since that date had been falsified by locally-engaged staff, without the knowledge of FCO staff.[88] In the case of Santo Domingo, the FCO was alerted by a local bank in July 2006, following which fraud was discovered dating back to July 2004. The FCO told us that "the fraud was allowed to take place because of non application of prescribed procedures rather than gaps in the control framework."[89]

74. In its response to our earlier Report, the FCO set out the steps it has taken to prevent recurrences of such frauds:

the introduction of the Prism "purchase to pay" system. This provides a good assurance that payments are valid before they are made;
the annual programme of home self audit and self audit for Posts. This provides an additional annual check that the most important controls are in place;
the end of month checking regimes at Posts have been revised to make them more analytical and risk-based in approach, to highlight issues promptly; and
there is a major initiative in place to remove cash from the FCO's payments and receipts systems.

Procedures for the payment of satellite (and mobile) 'phone bills and for sending 'phones to Posts have also been changed, and the Finance Director wrote to all Heads of Mission reminding them of the need to ensure that prescribed procedures are in place.[90] Sir Michael Jay told us that he attached huge importance to ensuring that Ambassadors realise they are accountable as sub-accounting officers for financial propriety at their Posts.[91]

75. We hope that these various steps will achieve a reduction in the number of cases of fraud, but we do not suppose they will eliminate fraud completely. As we noted above, external advice or oversight may be helpful in ensuring that the FCO's internal financial management and auditing procedures are up to the highest standards.[92]

76. There remains the FCO's undertaking to inform this Committee as well as the PAC of "significant" frauds. Government accounting guidelines require departments to inform Parliament, and to give details in their accounts, of any individual frauds involving the loss of more than £250,000.[93] However, departments are obliged to consult the Treasury on "any cases, irrespective of the amount of money concerned, which involve important questions of principle; raise doubts about the effectiveness of existing systems; or contain lessons which might be of wider interest." We agree that the scale of a fraud is not necessarily the only or even the best indicator of its significance or its seriousness. For example, a fraud may also be significant or serious because, although a relatively small sum has been lost, it is perpetrated by a senior official, or it involves high political sensitivity, or it exposes a serious lapse in procedure, or it risks creating a danger to national security. We would not, therefore, be content for the FCO to limit its reporting of frauds to this Committee to cases involving a loss above a particular threshold, and certainly not to those greater than £250,000. We recommend that the FCO inform this Committee promptly, and if appropriate before it is made public, of any fraud which is significant in terms of the sum lost, or which involves important questions of principle, or which raises doubts about the effectiveness of existing systems, or which contains lessons which might be of wider interest.

43 Foreign Affairs Committee, Second Report of Session 2005-06, HC 522, paras 62 to 69 Back

44 Cm 6791, response to recommendations 19, 20 Back

45 Minutes available at www.fco.gov.uk Back

46 Minutes available at www.fco.gov.uk Back

47 Q 21 Back

48 Qq 93, 94 Back

49 Cm 6791, response to recommendation 19 Back

50 Compared with a 'Capital DEL' provision of £175.5m the FCO's estimated outturn is £152.5m. See Main Estimates, HC 1035, bottom of page 335 and Departmental Report Table 8 and last part of Table 15. Back

51 Q 80 Back

52 Minutes of the May 2006 FCO Board meeting, available at www.fco.gov.uk Back

53 Q 80 (Ric Todd) Back

54 Q 82 Back