Select Committee on Environment, Food and Rural Affairs Written Evidence


Memorandum submitted by the Environment Agency (DAR 06)

EFFECT OF BUDGET CUTS ON THE ENVIRONMENT AGENCY'S WORK

  Defra has announced cuts in the Environment Agency's 2006-07 budget of £23.7 million. This represents a 5% cut in the Agency's expected resource budget for that year.

  Defra has stated that £14.9 million of the total reduction affects the Agency's flood risk management budget.

1.  Could the Agency provide a detailed breakdown of which programmes and projects are affected by the £23.7 million reduction in its resources budget? Within these programmes and projects, what specific services have been, or will be, affected, delayed or stopped altogether? The Committee would like as much information about this as possible, particularly in relation to the £14.9 million reduction in the Agency's flood risk management budget.

  The £23.7 million reduction in the Agency's budget notified by the Secretary of State on 27 July breaks down as follows:


£ million

Flood Risk Management (FRM)
14.9
Environmental Protection, recreation, conservation, navigation (EPRCN)
8.5
Business Resource Efficiency and Waste (BREW) programme
0.3
Fisheries
0
Total
23.7


  The Agency's GIA from Defra is allocated within the above ringfenced funding blocks and therefore the reductions had to be taken against the relevant blocks. They also had to be delivered by reducing revenue rather than capital activity, as they all related to "DEL Resource" budgets.

  The July reductions followed upon reductions in our indicative budget allocations, which were notified by Defra on 13 April, amounting to £4.4 million (£4.0 million for EPRCN and £0.4 million for Fisheries). The Agency has therefore had to make aggregate in year reductions in its operating budgets of £28.1 million as follows:


£ million

FRM
14.9
EPRCN
12.5
BREW Programme
0.3
Fisheries
0.4
Total
28.1


  While this represents 3% of the Agency's total budget, it falls more heavily on those of our activities which are funded exclusively by grant-in-aid and which are of a revenue (as opposed to capital) nature.

  The lack of notice has required the Agency to make budget adjustments which are to an extent tactical and opportunistic. Successive planning rounds will enable us to develop more sustainable solutions.

  The Agency has advised the Secretary of State of the likely impacts of the reductions in a letter from the Chairman dated 3 October. A list of likely impacts is reproduced as Annex 1 to this response.

  The reductions need to be seen in the context of the Agency having each year to meet the costs of pay and price inflation from its efficiency savings. So the budget reductions are in addition to a real terms reduction in spending power from our GIA funding of over £20 million.

2.  To what extent will the budget cuts affect the delivery of the Agency's various programmes and projects? Which programmes and projects are more at risk than others?

  This question is largely answered by Annex 1.

  In addition, the Agency Board has made a number of strategic points about the reductions.

  Firstly, the reductions in flood risk management GIA run counter to the strategic direction of spending review 2004, reinforced by the messages of the Foresight Report, the adaptation requirements to climate change, and a recent report by the ABI.

  Adaptation measures are required to deal with the implications of climate change over the coming decades that are already inherent within the system. The ring fencing of capital and revenue expenditure is inflexible, as it does not allow us to enhance maintenance budgets to improve the unsatisfactory condition of a proportion of defences.

  There is a big difference, of course, between expediency for a single year and a permanent reduction in baseline funding which would have serious consequences for the standards to which flood defences can be maintained and would pose an increasing risk of defence failure. As yet we are not clear about funding for flood risk management in 2007-08 and beyond.

  The cut also falls on environmental protection activities funded by GIA, which is the only flexible funding the Agency has to take forward some of the Government's and the Board's strategic priorities. Annex 2 shows what environmental protection activities are funded from charges and what from GIA. The impacts of the reduction in GIA include a substantial reduction in measures to fight serious flytipping and the illegal disposal of waste in this country, as well as illegal shipments of waste overseas, getting the non-regulated into regulation, environmental health for deprived communities, building joint working with local authorities and effective public involvement on a regional and local basis.

3.  How has the Agency attempted, or how does it intend, to mitigate the effects of the budget cuts on the various programmes and projects affected?

  The Agency has established a programme of actions under the banner "More for the Environment, Better, Faster and For Less". This aims to manage the funding restrictions for 2007-08 and the three following years in as positive a way as possible in order to make progress with the delivery of the Agency's five year Corporate Strategy. The programme focuses on improving efficiency and effectiveness and reducing lower priority actions.

  Many of the actions taken to accommodate the in-year budget reductions for 2006-07 were tactical and opportunistic as in effect we had only half a year in which to deliver them by more sustainable solutions in the 2007-08 corporate and business planning round.

  Much will depend, however, on the level of GIA received in 2007-08 and the settlement for the three following years arising from the CSR07 process.

4.  How much discretion was the Agency given to determine which programmes and projects would be affected by the cuts?

  Within the ringfenced funding blocks of FRM, EPRCN, Fisheries and the BREW programme (see response to question 1), and subject to the focus on DEL Resource ("revenue") activity, the Agency had discretion to take its own decisions.

  In practice, options were limited to the "tactical and opportunistic" as a result of the in year nature of the cuts and lack of planning notice.

5.  How many job losses are expected within the Agency as a result of its budget cuts?

  We do not expect to make compulsory redundancies as a result of the 2006-07 budget cuts, but we have put in place tight controls over staff replacement and recruitment, and we will manage vacancies as they arise. Through this process we expect manpower numbers (in terms of full time equivalents) to fall by up to 200 by the end of the financial year.

  However, 2006-07 cannot be viewed in isolation, as similar or tougher financial restrictions may be expected for 2007-08 and the three following years covered by the comprehensive spending review. In addition the Agency will have to meet pay and price inflation. The Agency is therefore looking hard at the likely financial, manpower and delivery scenarios through its "More for the Environment, Better, Faster and for Less" programme referred to in the response to question 3.

EFFECT OF BUDGET CUTS ON NGOS AND SPONSOR ORGANISATIONS AFFILIATED WITH THE AGENCY

6.  Which NGOs, and other smaller bodies and companies affiliated with the Agency, will experience cuts in their respective budgets owing to the Agency's resource budget cuts, and to what extent?

  The Agency is not a grant-giving body, other than under the Land Drainage Act where it administers capital grant to Internal Drainage Boards and Local Authorities on behalf of Defra. As "DEL Capital" is not subject to Defra's in-year funding cuts, there is no impact in this regard.

  The Agency does, however, engage in collaborative work with other partners particularly at local level. Such engagement is dependent upon GIA funding from Defra and will therefore be impacted by the in year budget cuts. While we will endeavour to honour existing commitments, of necessity there will be a reduction in new partnership working, relating to biodiversity, recreation, health promotion, and working with the SME sector. We will also be unable to commit to co-funding new pump priming projects with partners.

7.  To what extent has the Agency, or Defra, provided advice to those bodies affected about their situation? What measures have been taken to assist such bodies in coping with cuts in their budgets?

  As advised in response to question 6, its not a case of cuts in budgets as such, but of a reduction in the Agency's capacity for engaging in partnership ventures. Communication around this is being handled locally and case-specifically by Agency staff in Areas and Regions.

BUDGET CERTAINTY FOR 2006-07

  In evidence to the Committee on 25 May 2006, Defra's Permanent Secretary said that the Department had "failed in our aim to give our delivery agencies enough warning" about the cuts in the 2006-07 budgets.

8.  Was the Agency given enough certainty at an early stage about the extent of its 2006-07 resource budget cuts? If not, what impact did this lack of certainty have on the Agency's work and plans?

  See our response to question 9 as regards timeline.

  The Agency's budget and business planning process begins in the summer before the start of the relevant financial year the following April. It would normally conclude with the Board's approval of the Operating Budget. Approval of the Agency's 2006-07 Operating Budget was given by the Board at its meeting in February 2006. The overall Agency budget was cascaded down to budget manager level and incorporated within our financial systems ready for detailed budget monitoring from April.

  The first round of cuts in Defra GIA (£4.4 million) was notified by the Director General: Environment on 13 April. The second round of cuts (£23.1 million) was notified by the Secretary of State on 27 July. This was well after the financial year had begun and too late to have been incorporated in a considered way in the Agency's Operating Budget.

  The impacts have been covered by earlier questions. The lack of notice of the cuts restricted the options for handling them to what was feasible. In some cases this has led to tactical and opportunistic decisions which will need to be corrected or replaced by more sustainable solutions in the 2007-08 planning round, depending on the level of funding allocation from Defra. This will include restoring service levels for flood defence maintenance, flood warning, transfrontier waste shipment inspections and working with partners especially at regional level.

9.  Could the Agency provide an approximate timeline to set out what Defra told the Agency about the extent of its budget cuts between the first warning that cuts would be made and its latest position on the budget? What was the impact of these messages on the Agency, in terms of planning and delivering its 2006-07 work programme?

  The key dates for formal notification were:

    13 April DG Environment's letter announcing £4.4 million GIA cuts;

    27 July Secretary of State's letter announcing £23.7 million GIA cuts.

  Each was preceded by informal dialogue and exchanges with officials to assess possible impacts under different scenarios of budget reduction.

  The dialogue preceding the 13 April announcement was initiated as early as late November 2005 but did not begin to crystallise until late March 2006, while the 27 July announcement followed a scenarios exercise initiated on 13 June.

  The Secretary of State's letter dated 27 July also contained a "health warning" that further cuts might be necessary later in the year and that consequently no more than 95% of the reduced budget should be committed. This restriction was formally lifted on 19 October.

  The impact of the messages of course injected uncertainty into the planning and delivery of our work programme, but we endeavoured to respond responsibly and positively by putting in place a management review process to identify options for accommodating budget reductions while the formalities were played out.

  We had originally planned to handle the first round cuts largely by a process of overprogramming which would have been managed-down by taking opportunities as the year progressed. The size of the second round cuts was such as to invalidate this "passive" approach and required a proactive rebudgeting exercise which was concluded and received Board approval by mid August.

  We considered the 95% restriction impractical as it added further uncertainty and risked unnecessary conservatism with consequential under-delivery of performance targets. We therefore welcomed its formal lifting.

10.  Were there any discussions about the causes of the cuts?

  Information on the causes of the cuts has been shared at official level as well as being given more formally by the Secretary of State and Ministers. We had sufficient information to understand the need for corporate support and behaviour by members of the "Defra family" in order to help Defra work their way out of their budget difficulties.

BUDGET CERTAINTY FOR FUTURE YEARS

11.  Has the Agency been told by the Department about the likelihood of further cuts in its budget in 2007-08, and beyond? What are the current estimates about the size of the Agency's budget next year, and beyond?

  Both Ministers and officials have warned of likely cuts in the Agency's budgets for 2007-08, as it is necessary to eliminate a Defra budget deficit of around £200 million.

  The Environment DG's letter dated 13 April advised of a cut in our EPRCN funding for 2007-08 of £8.2 million (compared with the £4.0 million "first round" cut for 2006-07).

  We have responded to a "scenarios enquiry" from Defra officials which asked us to advise of the impacts of additional cuts of 10% in DEL Resource budgets for each of our main funding blocks of EPRCN, FRM and Fisheries. We also presented alternative scenarios of 5% and 7.5%.

  When combined with the cuts notified on 13 April, a 10% reduction converts into the following budget sums (£ millions):


FRM
25.7

Fisheries
1.0
EPRCN
19.6
Total
46.3


  We had originally hoped for confirmation of our funding for 2007-08 by the end of October: Defra's latest commitment is to deliver this before Christmas.

  As regards funding for the years beyond 2007-08, we are being kept advised of Defra's engagement with Treasury over the Comprehensive Spending Review 2007 (CSR07). We know that the revised budget baseline for 2007-08 (once Defra have exacted cuts to balance their budget) will form the baseline going into CSR07.

  We are erring on the side of realism in our own scenario planning for 2008-09, 2009-10 and 2010-11, as regards both the level of Defra funding which we might secure and the impact of pay and price inflation on that funding for the three years, which cumulatively could reduce purchasing power by over £60 million for our GIA funded activities. Though the public sector pay bill is to be held at 2%, we are conscious that we have to compete in several specialist markets for staff. This was highlighted by the Committee in the recent report on the Environment Agency, which stated that it is essential that the Agency employ staff with the necessary specialist skills to undertake its work.

12.  If further cuts are expected in 2007-08 and beyond, which programmes and projects are likely to be affected? What would be the impact of further significant cuts to the Agency's budget next year.

  Assuming the cuts are somewhere in the range of the scenarios set out in our response to question 11, then the programmes and projects which will be affected are those revenue activities funded by Defra GIA and will include:

    FRM

    Recurring and non-recurring maintenance

    Flood mapping

    Flood forecasting and warning

    Strategy development, including catchment flood management plans and water level management plans

    EPRCN

    Tackling environmental crime

    Pollution incident response

    Environmental monitoring

    Science programme

    Tackling diffuse pollution, including agriculture

    Biodiversity action plans

    Navigation service standards

    Fisheries

    Salmon action plans

    Salmon monitoring and enforcement

    Fish movement audits

  We have advised Defra officials of the likely impacts in our response to their scenarios exercise. These will be increasingly serious as the percentage of budget reduction increases towards the 10% level.

  We will of course endeavour to mitigate the impacts through our "More for the Environment, Better, Faster and for Less" programme, but we will also have to make some hard choices about priorities. Having earlier knowledge of the cuts will help inform our 2007-08 planning process.

Environment Agency

November 2006



 
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