MEMORANDUM FROM COMMUNITIES AND LOCAL GOVERNMENT
SPRING SUPPLEMENTARY ESTIMATES 2006-07
1. European Regional Development Fund
The net increase in sub-head RfR 1 I (European Structural Funds - Communities and Local Government) of almost £42 million is requested to cover the write-offs and losses on ERDF programmes and projects. The Committee would like further information on the write-offs and losses, in particular:
(i) Which closed programmes and projects do the write offs and losses relate to?
The closed programmes and projects relate to the 1994-99 European Regional Development Fund (ERDF) programme round in England which comprised 45 separate regional and sub regional programmes; approximately £5 billion in total expenditure of which £2.4 billion was ERDF grant from the European Community.
(ii) Why is it necessary to write-off the balances? What has been done to pursue any amounts owed to the Department?
The write-off is necessary to clear a number of accounting balances arising from reconciliation issues between regionally and centrally held data.
Payments from the EC for the 1994-99 programmes were made through a combination of advance payments at programme start followed by instalments generated as progressive expenditure thresholds were met. These programmes continued to spend until the end of 2001 and were then subject to a protracted closure process which did not complete until end 2005. This period coincided with a number of changes in Departmental systems.
These programmes were administered by Government Offices in the English regions on a cash basis (in line with EC regulations). The move to accruals accounting and transfer of the Department's accounts from the earlier ASP accounting system to the present SAP system, in combination, generated a number of reconciliation issues between regionally held data and those held centrally. Extensive effort has been made to clear these differences since they came to light in 2004/05 but it has not proved possible to reconcile all records.
After consultation with the National Audit Office, it was agreed that the pragmatic solution was to write-off the balances which have resulted in accrued income from the EC being overstated.
We are confident that we have received all monies due from the EC in respect of these programmes and there are no other amounts outstanding to the Department that can be recovered from any third party.
(iii) Which government bodies do the existing balances sit with and who are the counter-parties to the balances? How long have the balances been outstanding?
The existing balances sit with the Department for Communities and Local Government. There are no counter-parties to the balances. The balances have been outstanding since 2004-05.
(iv) How will the near-cash resource be used?
Funding allocations are made in Euros, but the expenditure is in Sterling. As a result, losses (or gains) may arise due to fluctuations in the foreign exchange rate during the period between the point at which the funding is allocated and the point at which the funds are spent.
The near-cash resource will be used to cover the losses relating to the foreign exchange rate. This arises from the statement of expenditure declared to the European Commission for the European Regional Development Fund delivered by the Government Offices in 2006-07.
(v) Has any money had to be repaid to the European Commission in relation to the closed programmes?
Yes. The previous system involved the Commission making payments in advance, and unused funds being returned to the Commission. Under this system, the West Midlands Objective 2 1997-99 programme owed £941,555.27 (€1,376,522.67) and paid this back on 21 September 2005. The Objective 5 B (1994-99) Marches programme in West Midlands was overpaid by £938,400.59 (€1,379,453.14) and returned to the Commission on 2 November 2005.
(vi) What was the value of similar write-offs and losses in 2004-05 and 2005-06? What will be the total value of write offs and losses in 2006-07?
No write-offs or losses were taken in 2004-05 and 2005-06 in relation to the EXERDF programme. The total write off to be taken in 2006-07 is £38,798,302 relating to the 1994-99 programme.
2. Early Exits
Extra resources and transfers are being requested to cover early exit costs of staff in both the Government Offices and the central department and to cover transfers to Government Offices.
(i) How many staff exits will be funded by the additional resources and transfers in the Spring Supplementary Estimate relating to 'early exits'?
In 2006-07 the central Department funded a total of 170 early exits at an estimated whole cost of £20 million and the Government Offices funded 252 (of which 106 were this Department's staff) early exits at an estimated whole cost of £19 million. The £8.5 million EYF requested in the Spring Estimates was added to other funding and administered as single budgets so we cannot separately identify specific exits associated with the additional resources.
(ii) How many of the posts vacated by early leavers will be refilled?
The early exit scheme allows us to bring in a new skills mix to respond effectively to the new challenges and opportunities we face. Therefore, the business will be re-evaluating the remaining roles before deciding on how best to accommodate the tasks involved.
(iii) How will these exits contribute to the Department's ability to meet its efficiency targets and workforce reduction targets by 2008, both in terms of financial savings and headcount numbers?
Early exit schemes, such as this one, are expected to contribute substantially to the Department's workforce reduction targets in addition to natural wastage. The total number of exits from this scheme that contribute towards our target has not yet been finalised and will be reported in arrears once further analysis has been completed.
(iv) Why do some early exit costs require non-cash resources and others near-cash resources?
Near-cash resources are required for payments made in the year of the early exit. This usually represents the full liability for staff aged under 50. Staff who are aged between 50 and 60 (the normal retirement age) when they leave the Department also qualify for monthly payments equivalent to their pension entitlement from the date of early retirement until their normal retirement age. Departments need to provide near cash top-up funding each year to cover these payments. This future liability is reflected in the Departmental accounts through a non-cash provision, which is released to near-cash as the payments are made in subsequent years.
(v) Why do the costs of early exits in the central department and transfers to Government Offices (£8.5 million in total drawn down from EYF) not count against the administration budget?
Of the £8.5 million EYF drawn down in the Supplementary Estimate, £5 million is a non-cash provision for the early exits in the Government Offices. This is included within the administration budget.
The remaining £3.5 million resource costs have been classified as Other Current (programme) expenditure for this year only. The Treasury has agreed that our proposals to restructure the Department represented good value for money and that we could not afford restructuring on the scale proposed without additional flexibility in the administration budget for the 2006-07 year where the additional costs are expected to be highest. This is in line with the Chancellor's announcement in Budget 2004 that, where Departments present a strong business case, some elements of transitional costs may be excluded from the Departmental administration budget.
(vi) How many staff are transferring to the Government Offices, and for what purpose?
The 2006-07 Spring Supplementary Estimate requested draw-down of £5 million non-cash resource to be transferred from the central department to the Government Offices towards the costs of the early exits scheme in the Government Offices. We have no plans to transfer staff to the Government Offices and have not requested any extra resources within our 2006-07 Supplementary Estimates to do so.
Revised estimates of expenditure on the Firelink programme in 2006-07 have reduced the need for funding by over £12.5 million in that year.
(i) How much of the £12.5m underspend on the Firelink programme in 2006-07 has slipped into 2006-07 or later years, and how much is a permanent reduction in the programme's costs?
The £12.5 million underspend on the Firelink programme in 2006-07 has not slipped into later years. At the time the Main Estimates were prepared in January 2006 the contract for Firelink had not been awarded and the Department was still negotiating with bidders. We were also at that time negotiating with our partners in Scotland and Wales on whether they would join the project and if so their contribution to costs. The costs in the Main Estimates were therefore our best prudent estimate of the costs likely to arise for England from the contract. The contract was signed on 29 March 2006, but it was not until late June that Scotland and Wales contractually committed to participate and the costs falling to the Department became firm. The Spring Supplementary Estimate reflects those costs. This resulted in £5 million of resource near cash and £4.8 million resource non cash being transferred to the Departmental Unallocated Provision and £2.7 million near cash being transferred to the FireControl project.
(ii) How has the underspend impacted on the timing of the rollout of the programme?
The underspend does not impact the timing of the rollout of the programme.
(iii) Will any of the savings made in 2006-07 be scored against the Department's efficiency target?
There will not be any efficiency savings from Firelink until it is operational in Regional Control Centres in 2010.
4. Right to Buy receipts
£45 million is being transferred from Departmental Unallocated Provisions to fund a shortfall in Capital Pooled Right to Buy Housing Receipts, reflecting lower than forecast right to buy sales. Where in the country is the shortfall most noticeable? Is it the volume or value of sales which is having most impact on the lower than forecast receipts?
The Department does not forecast Right to Buy (RTB) receipts at a regional level. However, the greatest decline in RTB sales over the last three years has been in London. Both volume and value of sales are having an impact.
It is exceptionally difficult to say with any certainty what the cause is for the decline in right to buy sales. Most probably, it is a combination of factors including the value of the right to buy discount, the cost of borrowing, the availability of stock and the condition of the available stock. These are all factors that can influence a tenant's decision to purchase their dwelling.
By 2010 work will have been completed on 3.6 million homes and over £40 billion will have been invested in improving the condition of existing social housing. We are also investing £970 million in 2006-08 in the HomeBuy programme which will help 35,000 households into low cost home ownership.
5. Reclassification of Income
Part III to the Spring Supplementary Estimate shows a £1 billion reduction in extra receipts payable to the Consolidated Fund, but this is not explained in the Estimate Memorandum. What is the reason for the decrease?
£988 million of the reduction in Consolidated Fund Extra Receipts (CFERs) is related to the decline in Right to Buy receipts detailed in the answer to question 4. A proportion of these receipts (those from debt free authorities) score as income within the department's DEL, but the majority are simply paid over to the Consolidated Fund.