Select Committee on Foreign Affairs Written Evidence

Letter to the Clerk of the Committee from the Head of the Parliamentary Relations and Devolution Team, FCO, dated 24 April 2006

2005-06 SPRING SUPPLEMENTARY ESTIMATES

Dear Steve,

  Your letter of 22 March requested further information on the matters detailed below.

Chris Stanton

Parliamentary Relations and Devolution Team

INCREASE IN ADMINISTRATION BUDGET LIMIT

  Table 1 (below) shows a breakdown of the £29.439 million increase in the administration budget limit at the Spring Supplementary.

Table 1

Breakdown of increase in admin budget limit	£ million
Impairments DUP rolled forward from 2004-05 as EYF	20.0
Unused 2004-05 cash DUP rolled forward as EYF	5.0
Non-cash 2004-05 underspend rolled forward as EYF	3.1
Overseas Price Movement (OPM) Adjustment	1.4
Total admin uplift in Spring Supplementary	29.4

  With the exception of the OPM adjustment all of the increases above were funded by end year flexibility (EYF) and so came from administration budgets already available to the FCO.

  The ring-fenced non-cash impairments Departmental Unallocated Provision (DUP) was set up as part of the Spending Review 2002 settlement to enable the FCO to manage its fixed asset impairments. Any unspent funds can be rolled forward as EYF to build up a buffer for managing future non-cash risks. In 2004-05 we did not need to draw on this DUP as impairments totalled under £3 million. As mentioned in the Memorandum, we needed to draw down this DUP in 2005-06 because we are forecasting significant impairments due to expected write-downs on completed buildings in Iraq.

  In addition the FCO has a non-ring-fenced DUP, which it originally created out of its SR2002 settlement as recommended by Treasury. Its purpose is to maximise flexibility within the SR settlement to respond to new priorities and pressures. The FCO did not draw down this DUP in 2004-05 because we were already forecasting additional pressures in 2005-06, so we planned to carry it forward as EYF. Pressures included meeting the costs of the Afghan Drugs Inter-Departmental Unit, Iraq programmes, International Organisations subscriptions and Comcen redundancies.

  The FCO's SR2004 settlement included a commitment by the FCO to achieve 2.5% per annum efficiency savings. We are still on target to achieve these and can redeploy the savings elsewhere within the FCO. The FCO currently estimates that it will exceed its 2005-06 savings plan of £38.7 million. Administration costs are controlled by ensuring budgets allocated are within the administration limits specified by Treasury and not allowing virement into administration from other budgets.

  The FCO has sought Treasury approval for the remaining £20 million impairments DUP and £12 million of core DUP to be classified as administration. The details are still under discussion with Treasury but they have indicated that for 2005-06 this will be dealt with as an exceptional end year virement.

VISA AND CONSULAR SERVICES

  Visa and consular income is both demand led and volatile. We therefore take a conservative view of income, and matching expenditure, in drawing up the Main Estimate to ensure that we do not end up with an income shortfall leading to an overspend. Forecasts of activity are regularly reviewed in the light of actual demand and a final adjustment is made in the Spring Supplementary to reflect our final expectation of increased cost and income. The details of consular and visa funding are quite complex and given that this is an area of interest, officials from our Financial Planning and Performance Department would be happy to meet with you to provide more detail and discuss. Benefits arising from additional resources Resource movements in the Spring Supplementary are largely routine and planned, (eg Conflict Prevention draw down, joint funding of the Afghan Delivery Plan, transfers between government departments, International Organisations cost-sharing agreement) and so do not change our ability to deliver from original plans. The unplanned, additional money received in the Spring Supplementary are the Reserve claims to meet Tsunami Costs incurred in 2005-06 and 2004-05. This has enabled us to meet our PSA Objective 9—High quality consular services to British nationals abroad.

END YEAR FLEXIBILITY

  As mentioned above, the Resource EYF available in 2005-06 has accumulated from Departmental Unallocated Provision which was not drawn down in 2004-05.  In addition, there was £3 million of non-cash underspend in 2004-05.  The remaining £16.6 million of EYF is planned to be used in 2006-07 to help meet forecast pressures including: International subscriptions increases, Flu Contingency Planning, restructuring of the Senior Management Structure and the Professional Skills in Government programme. Capital pressures include Lancaster House dilapidations and the cost of altering the ICT infrastructure design as a result of changes in Government Security Standards and implementation of the solution.

DEL AND ADMIN BUDGET LIMITS

  As requested, we have extended the DEL and administration budget tables to show three historical years.

Table 3 DEL Comparison	£ million
	2002-03 Actual	2003-04 Actual	2004-05 Actual	2005-06 Budget	2006-07 Plan	2007-08 Plan
Resource DEL1	1,540.900	1,585.188	1,753.649	2,005.937	1,691.645	1,728.645
Capital DEL	96.171	49.821	73.677	136.697	111.203	109.203
Less: Depreciation2	-126.597	-103.538	-70.043	-138.716	-168.624	-184.624
Total	1,510.494	1,531.471	1,757.2733	2,003.918	1,634.224	1,653.224

1  Resource DEL figures for 2006-07 and 2007-08 are understated because they do not include conflict prevention expenditure, which will be transferred at the time of the 2006-07 and 2007-08 Main and Supplementary Estimates. In addition 2005-06 included expenditure on a number of one off items (Tsunami expenditure, Efficiency Challenge Fund & G8 & EU presidencies).

2  Depreciation, which forms part of Resource DEL, is excluded from the total DEL, since Capital DEL includes the purchase cost of capital assets. To add on the depreciation of those assets would double count their cost.

3  The 2004-05 figures have been updated to show actual figures—the memorandum mistakenly showed forecast for 2004-05.

Table 4 Administration Budget Comparison	£ million
	2002-03 Actual	2003-04 Actual	2004-05 Actual	2005-06 Budget	2006-07 Plan	2007-08 Plan
Administration budget	763.007	745.715	752.907	825.677	862.068	883.068

1  2006-07 and 2007-08 figures have been increased by £35 million and £50 million since the memorandum because Treasury have approved the reclassification of the impairments DUP as administration. The reclassification of the core DUP as administration has not yet been finalised so will be reflected in a Supplementary Estimate. Forecast administration outturn for 2005-06 is £858 million, which includes £43 million of provision for impairments (compared to £3 million expenditure on impairments in 2004-05).

CHANGES TO NET CASH REQUIREMENT

  There was an overall increase of £226.434 million. This can be broken down as follows:

	£m
Resource DEL Increase RfR1	113.622
Resource DEL Increase RfR2	110.785
Capital DEL increase	13.719
Net Accruals adjustments	-11.692
	226.434

  The net accruals adjustments are made up of the following:

Non-cash to cash switch
Decrease in capital charge	2.000
Decrease in depreciation	18.000
DUP Drawdown
Impairments DUP 2005-06	-20.000
EYF
Impairments DUP 2004-05	-20.000
Non-cash underspend 2004-05	-3.092
Use of provisions made in previous years	11.400
Net accruals adjustments	-11.692

  The non-cash to cash switch is in line with recent Treasury guidance. The switch is partly to enable a change in accounting policy to reclassify expenditure on furniture from capital to resource and partly to reflect the increase in rental properties and reduction in owned properties. The £11.4 million use of provisions is for cash paid out in respect of provisions made in 2003-04 and 2004-05 for early departure costs and for other staff provisions.

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Prepared 8 November 2006