Supplementary memorandum submitted by
the Department for Environment, Food and Rural Affairs
RESPONSE TO THE COMMITTEE'S ADDITIONAL QUESTIONS
TO DEFRA ON BUDGETS AND REQUESTS FOR FURTHER INFORMATION
BACKGROUND
Part 1 of this document includes questions the
Committee did not have time to raise with the Permanent Secretary
in the 4 December oral evidence session on Defra's Departmental
Report 2006 and Defra's budget, and additional questions in
light of this evidence session.
Part 2 lists the Committee's requests during
the session for further information.
PART 1. ADDITIONAL
QUESTIONS TO
THE DEPARTMENT
CONTINGENCY FOR
UNEXPECTED EVENTS
In evidence, the Permanent Secretary said that
Defra had no contingency to deal with sudden outbreaks, such as
the avian flu outbreak in Spring 2006. In the past, Defra has
traditionally been an under-spending department; it was therefore
accustomed to having additional finances to cover such relatively
small outbreaks.
1. Given that the Department says it is no
longer an under-spending department, how will Defra cope with
any future sudden disease outbreaks (such as another avian flu
outbreak) or floods, especially if they occur late in the year
when there is little scope for transferring funds from other projects?
— How serious and expensive would
an event have to be before HMT granted additional finances for
such an event?
It is not possible to set an exact figure, as
this would depend on the circumstances involved and other priorities
and issues faced at the time. As an indication, we would not expect
to be able to accommodate pressures that reflected more than 2.5%
of our budget, and would normally aim to manage any pressures
amounting to less than 1%. Our response to pressures within that
range would depend on circumstances, and the timing—a pressure
of £30 million that we may be able to accommodate at the
start of the year might be unmanageable if encountered during
the fourth quarter.
IMPACT OF
DEFRA'S
BUDGET DEFICIT
The Committee was told in the evidence session
that, at the time budget cuts were made, the Department only had
a relatively small amount of its budget which was uncommitted,
and therefore available to be cut.
2. Had the decision been made to revise budgets
significantly earlier in the calendar year 2006, to what extent
would the Department have had greater flexibility in deciding
which areas budget cuts could be made?
These decisions are made in a context of uncertainty,
and their essence is one of risk management. An earlier decision
would have been taken on the basis of more uncertain information.
Whilst this might have provided more scope to cut expenditure
sooner, it would also have involved a greater risk that such cuts
would prove unnecessary. Since all of Defra's activities are conducted
in pursuit of Government policy objectives, we seek as far as
possible to avoid such action.
DEFRA'S
EFFICIENCY PROGRAMME
In its written evidence to the Committee, the
Department said that, due to Defra's deficit, "some initiatives
to streamline corporate services were scaled back to ensure that
key services were not compromised" (Q1)
3. What is the impact of Defra's £200
million deficit on the Department's Efficiency Programme? How
many efficiency projects (across the Defra family) have been cancelled
or delayed because of the deficit?
As a result of the £200 million deficit,
some work was scaled back and some re-prioritised, including the
Smart Working project, work on the Laboratory Strategy and some
IT programmes. These changes have had no impact on delivery of
the targets by the Efficiency Programme, which is currently forecast
to exceed the financial target.
END YEAR
FLEXIBILITY (EYF)
The Department has said that £55 million
of spending was delayed from 2005-06 to 2006-07 because HMT refused
to allow Defra to access its full EYF in 2005-06. Defra is instead
hoping to draw down £50 million of this amount in 2006-07.
4. Could the Department clearly explain why
the £55 million factor (relating to 2005-06 programmes and
projects delayed into 2006-07 because Defra could not draw-down
its full EYF) has been included in the Department's £200
million total? The Department has presumably not lost this money
if spending has been delayed into 2006-07—so why would this
factor mean cuts needed to be made in 2006-07?
The deferment of £55 million worth of programmes
and projects from 2005-06 into 2006-07 was because we had less
budget in 2005-06 due to the partial withholding of EYF draw-down.
Treasury made it clear at the end of the 2005-06 EYF deliberations
that 2006-07 EYF would be capped at £50 million to cover
all eventualities. Departmental allocations for 2006-07 already
included a planning assumption of £50 million EYF (made following
the allocation of SR04) so the deferment of £55 million resulted
in a direct budget shortfall.
NON-CASH/NEAR-CASH
TRANSFERS
5. When did the Department first identify
that its original 2005-06 budget overstated the Department's non-cash
requirements?
— When did the Department start
planning to use this non-cash resource as near-cash?
The tighter controls on near-cash and non-cash
were only unearthed when Defra came to do the 2005-06 first quarter
review and deal with the EYF restriction. The tighter controls
and demarcation of near-cash and non-cash expenditure only came
into force from 2005-06 onwards. The application of these rules
did not become apparent until during the summer of 2005 when the
limitations on EYF draw-down were being proposed by Treasury.
Defra was not alone in trying to understand the revised fiscal
framework and so the Treasury issued guidance in the form of MS
FD (05) 24 on 11 August 2005 to help provide clarification on
the introduction of near-cash control totals. This was supplemented
by the issue of "Consolidated Budgeting Guidance from 2006-07"
by Treasury on 13 December 2005.
6. When did the Department first inform HMT
that it wished to effect this transfer? How long after this did
HMT inform the Department it would not be able to transfer more
than £20 million of non-cash into near-cash?
The Department did not notify HMT. Instead,
the guidance released made it clear that use of funds in this
way was not permitted.
7. Could the Department please provide the
Committee with the relevant sections of Treasury budget guidance
that existed prior December 2005 which led the Department to assume
a greater amount than £20 million of non-cash could be transferred
into near-cash?
The answer to Question 5 above provides details
of the relevant guidance issued by the Treasury during 2005. But
the straightforward answer to this question is "no".
It was the lack of clear guidance (only remedied by the Treasury
with the guidance provided on 11 August 2005) that led to this
assumption, rather than guidance that existed.
EU DISALLOWANCE
In the evidence session, the Permanent Secretary
said that the Department had made provision in its 2005-06 accounts
under two headings: £150 million provision for disallowance
relating to failure in controls, and weaknesses in validation
that had happened before 31 March [2006]; and £63 million
of potential disallowance that had arisen after 31 March [2006]
related to fines for late payment and for partial payments (Q
229).
Note 31 of the Department's 2005-06 Resource
Accounts states "At 31 March 2006, the main items under
this heading were: a potential disallowance liability in respect
of partial payments and late payments attributed to the SPS, estimated
at £63.5 million... ", implying that the £63
million referred to in the session relates to a potential disallowance
that arose during 2005-06 rather than 2006-07.
8. Could the Department clarify in which year
the £63.5 million contingent liability for potential disallowance
arose? If it relates to 2005-06, does it mean that the 2006-07
event mentioned by the Permanent Secretary gives rise to a further
potential disallowance over and above that disclosed in the 2005-06
Resource Accounts?
The events referred to in the £63.5 million
contingent liability were disclosed as non-adjusting post-balance
sheet events in the accounts for 2005-06 in accordance with accounting
requirements under the Government Financial Reporting Manual and
UK GAAP. They did not form part of the liabilities recognised
in the balance sheet of the 2005-06 Resource Accounts and their
financial impact is, therefore, in 2006-07.
Note 35 of the Resource Accounts (p 89) states:
"The delays faced by RPA in processing payments
due under the SPS experienced during the financial year continued
thereafter. One of the steps taken as part of the subsequent processing
of payments, sanctioned by Ministers, was the making of partial
payments, £770 million in total. The European Commission
was consulted before these payments were made and Commission officials
advised that making these payments could give rise to disallowance
up to 10% of the payments made. In addition RPA took steps to
streamline the controls over processing claims for payment. These
steps resulted in 94.9% of payments being made by the regulatory
deadline of 30 June 2006. However, this level of payment may still
give rise to late payment penalties.
The risks arising from the partial payments,
streamlining in controls and late payments have given rise to
a material exposure to disallowance which will result in a failure
to recover sufficient monies from the EU to fully fund the payments
made under the SPS. These are provided for in note 21.1 under
EAGGF financial corrections and a contingent liability in note
31.1."
9. Could the Department clarify whether the
whole potential liability ("10% of £770 million")
referred to in Note 35 of the 2005-06 Resource Accounts has been
disclosed within notes 21.1 and 31.1?
— Does some of this liability relates
to dates after 31 March 2006 but before 30 June 2006 and will
therefore give rise to a liability in the 2006-07 Resource Account?
Defra has requested that this information remain
confidential to avoid adverse outcomes from future negotiations
with the European Commission (EC).
PART 2. COMMITTEE
REQUESTS FOR
FURTHER INFORMATION
During the evidence session, the Committee requested
some further information from the Department. The Committee would
like:
(1) the monthly financial reports received
by the Board for every month in 2005-06 and 2006-07, to date.
(Q 145 in the evidence session).
Reports provided separately.[6]
(2) a breakdown about what both avian influenza
costs (one in 2005-06, the other in 2006-07, each costing £10
million), referred to in the Department's written response, were
spent on. (Q 178).
— The actual spend in 05-06 was £9
million;
— Defra is currently estimating the
06-07 outturn as £19 million (the figure mentioned by the
committee was based on an earlier estimate).
The figures are:
|
| | £m
|
| 05-06 (actual)
| 06-07 (f/cast) |
|
| Poultry Register | 6
| 6 |
| Surveillance and Collection of Dead Wild Birds
| 1 | 4
|
| Diagnostic Testing of Dead Wild Birds | 0.5
| 2.5 |
| AI Knowledge (eg Outbreak Modelling and Incursions)
| 0.5 | 1
|
| Miscellaneous Expenditure (eg Communications, Vaccine banks, provision in case of move to higher state of awareness)
| 1 | 4
|
| Outbreaks | 0
| 1.5 |
| Total | 9
| 19 |
|
The amounts in the above table represent total expenditure
on Avian Influenza (AI). However, it is important to note that
only £10 million (£3 million administration and £7
million programme expenditure) has additionally been allocated
to the AHWDG and SVS to cope with the work involved in 2006-07,
the remainder coming out of existing budgets. In 2005-06, Defra
agreed with the Treasury to absorb additional costs for AI work
up to a threshold of £10 million.
(3) A note to explain:
(i) how the Department would meet the costs of disallowance
for 2005-06 if it only became clear two years hence, and meet
any potential gap; (Q 247)
The answers to Questions 8 and 9 above provide some background.
From provision already made in 2005-06 Resource Accounts (but
with potentially serious implications for near-cash in the CSR07
period), any top-up would have to come from existing budgets in-year.
(ii) how any EU disallowance re the Single Payment Scheme
would be paid for from 2007-08 onwards and which budget it would
impact. (Q236-7)
This is the subject of on-going negotiations with the Treasury.
(iii) The Department also offered to provide details about:
— the level of cover provided by Treasury (Q
236);
For both 2006-07 and 2007-08, there is provision
of £67 million.
— the provision the Department has made in its
2005-06 budget; the level of existing provision in the 2006-07
and 2007-08 budget; and future years' provision. (Q 247)
The provision to cover for disallowance in 2005-06 was £137
non-cash and £37 million near-cash (agreed in the Spring
Supplementary Estimates 2005-06). As stated above, there is £67
million cover for each of the remaining years in the current spending
period. There is nothing in budgets over and above Treasury Estimate
provision. Future years' provision (ie beyond 2007-08) remains
the subject of on-going CSR07 negotiations with the Treasury.
There is also a distinction between the creation of the provision
(which is non-cash) and the near-cash impact when the provision
is confirmed (and when the financial correction takes place).
This too is the subject of on-going discussions with Treasury,
as we anticipate major implications for near-cash in the CSR07
period.
(4) The Committee would also like full details about the
2007-08 budgets for core Defra and Defra's agencies/NDPBs. In
evidence, the Permanent Secretary said Defra agencies/NDPBs would
be notified about these "before Christmas [2006]".
See separate paper on 2007-08 budgets [Annex A].
Department for Environment, Food and Rural Affairs
January 2007
6
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