CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 999-i

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

INNOVATION, UNIVERSITIES, SCIENCE AND SKILLS COMMITTEE

 

 

DIUS DEPARTMENTAL REPORT 2008

 

 

Monday 13 October 2008

IAN WATMORE, BILL DICKINSON and ZINA ETHERIDGE

Evidence heard in Public Questions 1 - 123

 

 

USE OF THE TRANSCRIPT

1.

This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

 

2.

The transcript is an approved formal record of these proceedings. It will be printed in due course.

 

 


Oral Evidence

Taken before the Innovation, Universities, Science and Skills Committee

on Monday 13 October 2008

Members present

Mr Phil Willis, in the Chair

Dr Brian Iddon

Mr Gordon Marsden

Graham Stringer

Mr Rob Wilson

________________

Witnesses: Ian Watmore, Permanent Secretary, Bill Dickinson, Director General, Finance and Corporate Services, and Zina Etheridge, Director, Strategy and Communications, Department for Innovation, Universities and Skills, gave evidence.

Q1 Chairman: Could I welcome everyone to this committee meeting of the Innovation, Universities, Science and Skills Committee. This afternoon we are having a one-off session looking at the DIUS Departmental Report. We will return to it when we have the Secretary of State in front of us later on this autumn. Could we welcome today Ian Watmore, the Permanent Secretary for DIUS. Welcome to you, Ian. Bill Dickinson, the Director General for the Finance and Corporate Services at DIUS. Welcome to you, Bill. We have not met before but you are very welcome to this kind and generous Committee. And Zina Etheridge, the Director of Strategy and Communications at DIUS. You are very, very welcome too, Zina. I wonder if I could start by asking you, Mr Watmore and Mr Dickinson, both of you are not normal mandarins, if I might say, you have come from the private sector, from Accenture and KPMG. I just wonder if I could ask you both, what are the differences between a private sector approach and a Civil Service approach to policy delivery? What are the advantages of the Civil Service approach or what would be the advantages if you were coming from your private sector backgrounds?

Mr Watmore: Chairman, thank you. I think I should distinguish that I actually left the private sector to join the Civil Service, whereas Bill is on secondment for a year with us and will return to KPMG in the summer of next year. That is just to make that clarification.

Q2 Chairman: Okay.

Mr Watmore: I was asked quite early on in my Civil Service career to name some of the differences between public and private, and I started off by mentioning the bureaucracy, which I said is much worse in a Sarbanes-Oxley corporate than it is in the public sector these days. I said that slightly for light-hearted effect, but actually because I believe the Civil Service in particular has moved very rapidly from the stereotypes that are portrayed often in the media to one that really can be very nimble when it needs to be. I think we have probably seen good evidence of that from colleagues elsewhere in the Civil Service in the last week or ten days who have been fantastically nimble and have looked to the mark. I do not start with a prejudice that says private sector is good, public sector is bad, or anything of that sort. I certainly have not found that from within. In terms of what I have found, I have found incredible commitment amongst the staff at a level that many private sector organisations would actually kill for. The staff really, really care about what they do for a living and I think that is a fantastic, if I can use that word, asset for the management of the Department to tap into, and I am very proud of all of them. The second thing is what has been built up over quite a long period has been very strong accountability in a sort of vertical sense from the frontline to the minister and the Department in terms of particular aspects of policy delivery. We are quite clear when our ministers decide something how we flow it through to the frontline. I think the challenge for the public sector generally going forward, and it is one that we are trying to address in our Department, is how to deliver across those accountabilities because these days the problems that society face are so much bigger than any one team or one department can deal with on their own. That is something that we are all reflecting upon in Whitehall, how we make all of the parts add up to the very significant demands that were placed upon us in the last Comprehensive Spending Review.

Q3 Chairman: Okay. Bill, would you share much of that?

Mr Dickinson: Yes, I do. One of the things that also struck me when I joined the Department was the dedication and the commitment of colleagues to the agenda of the Department. The key difference I observe from the finance perspective is that policy outcomes that the Department is working towards achieving are the outcomes themselves, whereas from a private sector perspective often finance is there in terms of what profitability can we drive. Finance is there in the public sector capacity as an enabler rather than as an outcome of its own. I think that is the single largest difference that I observe. I would echo all of Ian's comments as well.

Q4 Chairman: Reading through the Annual Report, it does not read like another Departmental Report. You can take that as a compliment or a criticism, whichever way you like. What is the DIUS story? You say on page 15: "The DIUS story agreed with ministers and published". What is the DIUS story and what is the point of it? Is that not just jargon?

Mr Watmore: I might get Zina to chip in in a second on that.

Q5 Chairman: Did Zina write that bit?

Mr Watmore: She was part of the team communicating it. When we were created, you will remember yourselves that a number of people queried whether this particular Department should have been created. "Why split the Department of Education?" was a refrain that we heard often, and where were the joins across the different parts of it. We were very clear, and I think our secretary of state was very clear, what the vision was for the Department but we needed to communicate that in a way that all of our staff understood, and all of our stakeholders and people who were influenced by it and influence us. If we had not done that there would always have been this lingering in some quarters, "Why do it?" By doing that quite well, I think, we have moved on through that part of the agenda and people are no longer, at least publicly with us, querying whether it was a good idea to do it.

Q6 Chairman: So the story is simply that, what does the Department do?

Mr Watmore: Zina, do you want to add to that?

Ms Etheridge: It is what the Department does and what it is here for, what we are trying to achieve. Just building on Ian's answer a little bit, it is about explaining to staff and stakeholders why this Department had been created but also enabling people to make sure that what they were doing was fitting in with this vision, so the Department was created to take forward a vision of how policies should work together. The story was really one of the underpins to say, "This is what we are trying to do, so make sure that what you are trying to do is going in that direction".

Q7 Chairman: Why do you think that other departments do not have stories?

Ms Etheridge: I do not know if they do not all have stories. Partly because we were new we had to think from scratch what is it that we need to do that creates that thing which enables us all to make sure we are going in the right direction. I think starting from a blank sheet of paper enabled us to think quite carefully about what we needed to do that.

Q8 Graham Stringer: Can you tell us about your brand? You state in the introduction to this report, Mr Watmore, that establishing the brand will be a sign of progress. Can you tell us how you establish it and how the brand is different from your predecessor departments?

Mr Watmore: Yes, I hope so. Taking Zina's last answer and building on that, we had the opportunity to set out the Department we wanted to be in terms of both what we did, how we did it and who we worked with to achieve our ends. There were particular advantages and disadvantages from being new. One example of being new that is difficult is on day one all of your staff are coming from different parts of Whitehall and they have all got different backgrounds and different understandings. On the other hand, the advantage of that is you can move them all to something new and different if that is what you want. In our particular case we laid out our vision for the Department on one piece of paper, our so-called blueprint, and have tried to get all of those pieces of the blueprint now in action. Just to pick two or three examples of what we mean by the brand. One of the things is we have tried to make our Department very much focused around our tagline, if you like, of "Investing In Our Future". We thought that phrase resonated with everything that we did in the Department: investment, a cost in for reward out, not necessarily in the same timeframe because quite often what we are doing is putting cost into a system to get the benefits some years later, and often it can be decades later, so it is a true investment cycle. Secondly, it is in "Our Future". "Our Future" is a phrase that we are using in our advertising campaign for things like Train to Gain and the Skills Agenda. You may have seen some of the ads. The closing line is "Our Future. It's in our hands". The "Our Future" phrase we think resonates with people individually as something that matters to them and their immediate community and their family, as well as us as a nation and internationally. That was an example of carefully thinking through a tagline from scratch that was not just four words thrown together, we thought about it very carefully, what sort of Department do we represent, and we have built the brand of the Department around that. I give you one other example and then refer back, if you want to ask me a supplementary. We had the word "Innovation" in our name and innovation and Whitehall are not always synonymous in most people's minds, so we thought it was important that if we were to be credible on the subject of innovation we had to be living that part of the mission ourselves. We have tried to work in a different way, which we have been able to do because we are a small and new department, than maybe many of the big Whitehall bureaucracies.

Q9 Graham Stringer: So is the brand more important to the staff in the Department or is it more important to the outside world?

Mr Watmore: I think the brand ultimately of anything is targeted at its particular customer base. When we are serving the public we need a brand that resonates with the future. The "Our Future" brand that was chosen for the advertising campaign around the skills agenda and Train to Gain was very carefully researched to be resonant with those groups of the population that we most wanted to target. Other aspects of what we are doing are clearly aimed at our staff and our stakeholders because it is them that we need to bring along with us, so we have segmented the nature of the brand. I am sounding very marketing-y, which I am not. We have tried to break it down in terms of the different people we want to communicate with and have messages that resonate with them.

Chairman: Rob, you briefly wanted to come in?

Q10 Mr Wilson: I would like to ask Mr Watmore how much he thinks it would cost to establish a brand in the minds of the millions of people he is trying to reach.

Mr Watmore: That is a very hard question to quantify. I would be quick to say that it does not matter to me whether the millions of people in the British public have heard of our Department.

Q11 Mr Wilson: What is the point in having a brand?

Mr Watmore: What matters to me is that they have heard of the products and services that our Department is responsible for. It is really important, and I think this current economic climate will make it even more so, that people know of our apprenticeships, for example.

Q12 Mr Wilson: Who is the brand for? Is the brand for your Department or is it for each of the different services you are offering the public?

Mr Watmore: The overarching brand is for the Department, but then we segment for each individual service that we deliver.

Q13 Mr Wilson: But you do not care whether the public know what that brand is?

Mr Watmore: I said it does not matter to me whether they know of the Department; it matters to me that they know what the Department stands for, so they know about us for apprenticeships and universities ---

Q14 Mr Wilson: So you need a brand to be known?

Mr Watmore: --- and key skills products and the fact that Britain is pre-eminent in science and research, and if they study certain subjects at school they are more likely to succeed. Those are the things that I want the general public to be aware of.

Q15 Mr Wilson: Sorry, Chairman, I just want to persist with this. So you want people to know what the brand values of your Department are even if they have not heard of your Department?

Mr Watmore: Correct.

Q16 Mr Wilson: I return to my question again. How much do you think it will cost to establish that brand in people's minds over a period of time? Have you had any advice from any advertising or marketing company on that?

Mr Watmore: Not for the core Department we have not, but we have for the individual products. I do not have the numbers in front of me, but the Learning and Skills Council, which is responsible today for apprenticeships and for the Train to Gain programmes, has taken advice from others on how to build that brand and have then chosen the advertising campaign that you have seen on television.

Q17 Mr Wilson: Does that brand link back to your Department or to the Learning and Skills Council?

Mr Watmore: Ultimately it links back to our Department because we want the Learning and Skills Council to be working aligned with the university sector, aligned with the business providers of skills training, and if everybody is going off in a different direction they can be okay individually but the actual impact on the citizen will not be as good.

Chairman: So there is no point having a brand?

Q18 Mr Wilson: No, none whatsoever.

Mr Watmore: I do not agree with that, I am sorry. It is very important that ---

Q19 Chairman: We understand that the Learning and Skills Council needs to have a brand or Train to Gain or whatever, but does the Department itself?

Mr Watmore: It is also very important that the Department represents more than the sum of the parts of those particular products and services and, therefore, it is very important we understand how science and research and the university sector and the further education sector and the wider skills sector add up to delivering economic growth, social cohesion and all of the other objectives that we have set out.

Q20 Graham Stringer: That is very interesting. In your answer, as you do many times in the report, you have mentioned "customers". Who are your customers? Does that not imply that there are people coming to you with cash and choice, that they can go somewhere else apart from DIUS? What is in your customer intelligence pack?

Mr Watmore: Again, I might ask Zina to add on this because one of the programmes she is responsible for is the customer insight programme. One of the criticisms, going back to the earlier question I was asked, of Whitehall departments is they are not quite sure who their customers are, what are they doing it for. In our case, is it for the minister, is it for a university, is it for the college sector? We took the view that the customer base was individual learners, adult learners and businesses, businesses as employers and businesses as innovators in the economy. That is what we are doing this for. We have worked back from that and said if we are trying to service our customers, the learners and the business, then what do we need to put in place in the interim, structures and other bodies, in order to be able to deliver what ministers want to that customer base.

Ms Etheridge: If you think about what does knowing more about our customers tell us, it enables us to design better policies, for instance. If you are designing a policy where you are trying to get support for training to employers then you can design a much better policy if you know what employers are looking for and what they want, if you know how they access the information about the offer, to take quite a simple example.

Q21 Graham Stringer: Is that what is in your customer intelligence surveys?

Ms Etheridge: Some of it. We are still finalising them. It is things like who are the different segments of our audience, so learners, there are lots and lots of different types of learners, there are people coming back to learning mid-life, people who are coming into learning from age 18, so who are those people, how do they learn and what do we know about their background so we can best target the policy interventions that we have got at their needs.

Q22 Graham Stringer: That seems very sensible for a provider of services, but is "customer" the right word? Does "customer" imply not just the recipient of a service but somebody or some organisation that can go somewhere else? Is "customer" the right word, or is it a fashionable word?

Mr Watmore: No. In other places we talk about "citizen" as a word but then people say that is more to do with democracy and voting rather than consumption, and that does not really work with businesses.

Q23 Chairman: What about "client"?

Mr Watmore: "Client" works for business. Maybe "client" for us is not a bad word.

Q24 Graham Stringer: It just seems to me that "customer" is a fashionable word but it is also inaccurate because it does imply all sorts of other choices.

Mr Watmore: Of course, a lot of our people do have real choices all of the time every day. Some of them are struggling and they need help, but a lot of people choose, they choose between their universities, whether to go to universities in the first place, businesses choose whether to get involved in particular investment programmes, et cetera, et cetera. I am not going to get hung up on a phrase, the point is to get to the real people who matter and not serve some intermediate group that is neither here nor there.

Q25 Graham Stringer: My two very last points. Do you think this report would pass the plain English test?

Mr Watmore: I doubt that any document resident in Whitehall would totally pass the plain English test, but we did try very hard.

Q26 Graham Stringer: I have genuinely just opened this report randomly ---

Mr Watmore: We did try to write it in as simple and as succinct language as possible.

Q27 Graham Stringer: --- and almost the first paragraph I opened is like a parody of New Labour at its most craven: "An overarching national improvement strategy will drive up quality and performance underpinned by specific plans for strategically significant areas of activity, such as workforce and technology. The capital investment strategy will continue to renew and modernise further education establishments to create state of the art facilities". Whatever does it mean, apart from you want things to be better?

Mr Watmore: We will take your advice next time and we will get the plain English people in earlier. I am always conscious that documents written by people in senior positions can often be very inaccessible to the public.

Q28 Chairman: In response to Rob Wilson's question about how much did it cost to set up the brand you could not give us an answer and you had no way of finding that out. Can we ask how much it has cost to set up DIUS as a Department?

Mr Watmore: Within the Department itself we have had virtually no external help on branding and so on, we have done it ourselves. The cost of the branding is out there in the wider system, that is why I cannot give you a direct answer because I do not control it. Within the Department itself, I think I answered this question when I appeared with the secretary of state. Under the rules of machinery of government moves there is no new money in the system so the previous two departments before we existed, DTI and DfES, as they were known, had administrative budgets and that total was then split three ways between us, BERR and DCSF. There is no new money in the system and that makes it tough for all three of us because we are trying to do something new without the investment funding per se.

Q29 Chairman: So if we look at those three departments then their cumulative administrative costs for setting up their new departments will be no more than the budgets for DTI and DfES?

Mr Watmore: As was set out in the forward plan for those, yes.

Q30 Chairman: Would it be possible for us to have a note on that just to say whether that is true?

Mr Watmore: Yes.

Q31 Chairman: Thank you. In your introduction to the Departmental Report, you say: "We have already built a Department whose staff are proud of it". How do you know? Who has done the independent assessment of that?

Mr Watmore: We do have quite regular ways of polling our staff.

Q32 Chairman: So you decide yourself? You speak to people and they are not likely to say it is miserable, are they?

Mr Watmore: We have an anonymised survey. If you do not think our staff are likely to say it is miserable I doubt whether you have met many of them because they are very quick at coming forward with things they do not like or do not want to hear.

Q33 Chairman: Is this one survey you have done with the staff?

Mr Watmore: We have done two and a third is about to go out.

Q34 Chairman: All right. Can we have that information, is that possible?

Mr Watmore: Yes, I think so.

Q35 Mr Wilson: That was what I was going to ask, can we have the information specifically from the survey that you have asked about whether staff are proud of the new organisation.

Mr Watmore: Yes.

Q36 Chairman: In terms of the Capability Reviews, when will DIUS be reviewed?

Mr Watmore: It is being reviewed as we speak.

Q37 Chairman: When do you expect it to be completed and published?

Mr Watmore: Probably just before the December recess, I would guess on previous timescales.

Q38 Chairman: In terms of brand - I am coming back to brand - if you have a product, and I am mixing products and brands now, which is an innovative product, which is what you are claiming DIUS is, and innovation is actually in your title, in terms of modern communication then the website is really quite important. Agreed?

Mr Watmore: Yes.

Q39 Chairman: Why was it that it took months to get your website up and running, and why is it still so difficult to access? You are a man who has come from an IT background.

Mr Watmore: Yes, I know. It is something which I aim to improve all the time. You start on day one with nothing. You are literally told on day one that there is a Department.

Q40 Chairman: This is an 18 billion business.

Mr Watmore: I realise that. So on day one we put up a simple web page and referred people to the relevant bits of the former departments' web pages which happened to be DTI and DfES where they still held the information about science and higher and further education. Then over time we have built the website up and we have regular programmes of releasing new websites on the Department. I am trying to remember the timeframes. We have one coming imminently.

Ms Etheridge: We are working to have a completely new, revised website by January-ish, early next year, which takes on all of the information and data which was previously on both the DTI and DfES websites but also quite a lot of separate sites that had been set up by those previous departments holding information about our Department.

Q41 Chairman: So if I was one of your customers and I want to interrogate this Annual Report, can I do it on your website?

Ms Etheridge: I believe so, yes.

Q42 Chairman: No, you cannot because you cannot get past the first chapter.

Ms Etheridge: Okay.

Q43 Chairman: Or you could not. You might be able to do it today, but when I tried to do it you could not.

Ms Etheridge: I am sorry, I will go back and make sure that is fixed.

Mr Watmore: There is nothing that we have done with our websites that is designed to inhibit people from getting information, so if that was the case that is an error. The intent is to make this sort of information publicly available.

Q44 Chairman: The point I am making to you, and I do not mean this to be unkind, is that your report is full of jargon, and my colleague, Graham Stringer, has pointed that out, yet the fundamental route of communication, which is your website, does not seem to be the innovative website you would expect from your Department. Is that a fair criticism?

Mr Watmore: I will take the wording point from my previous answer, but in terms of getting this document done, and let us be clear this was done very quickly in a very short space of time and for the people who put it together in that space of time, I am okay with it, we want to improve it next year and we want to improve it again.

Q45 Chairman: Let us come to the website.

Mr Watmore: For the website it is the same again, it is work in progress. There is no way that I would sit here today and say our website is synonymous with the Department that we want it to be, but we have built it up progressively and when we bring out the next release that will be further innovative, and when we bring it again after that it will be edging towards where I would like it to be.

Q46 Chairman: Could I just ask whether you consult with your customers in terms of the improvements you are going to make to your website?

Mr Watmore: We normally do that. I do not know precisely off the top of my head the mechanism by which we consult but I know our website team does take external opinion into the design for producing the new website.

Chairman: Thanks very much.

Q47 Mr Marsden: Mr Watmore, can I ask you one or two questions about your co-ordination with DCSF. At the end of July the THES did a one year on review of DIUS and under the headline, "Shows willing but could do better", they said as follows: "One year on there is still concern that the creation of two education departments has left gaps that have yet to be bridged". The quote is specifically from Steve Smith, the Vice-Chancellor of the University of Exeter, who is saying: "I am centrally involved in the links with schools and universities and with the best will in the world there is just a bit more co-ordination to do". In general, but perhaps specifically on that very important issue of links between schools and universities, how would you assess the co-operation?

Mr Watmore: Just before I lose the thought, Steve Smith is actually one of our capability reviewers, so he will have his chance to put his own opinions on that particular topic into the Capability Review when it is published, so we shall see what he says on that. My view on the general point about co-operating between two departments and then the specific between us is I think, as I said at the beginning, one of the challenges that Whitehall has is that almost every problem is bigger than one department, therefore co-ordination and co-operation and collaboration between Whitehall departments is essential in order to be able to solve any of modern day life's problems. Sir Gus O'Donnell, as Head of the Civil Service, continues to make that a big theme in the agenda. In the generality, we recognise there are issues across Whitehall but there is a lot of work going on to try and join those particular collaborations up. In the specific, we have key relationships with about four or five different departments. Clearly we have it with DCSF. We also have it with BERR, from where we came. We also have it with DWP particularly around the skills and employment agenda. We also have it with groups like the Foreign Office on international affairs. We have very close co-operation with all of those and I think we work pretty well with all of those departments. I am not going to suggest they are perfect but I think we work as well with DCSF as any of the others.

Q48 Mr Marsden: Chairman, with your indulgence. With respect, Mr Watmore, that is a bit of a Cook's Tour which conceals rather than reveals. You are a department that has been cloven, along with DCSF, from one Education and Skills Department. I know you have taken on board other responsibilities elsewhere, but the fact of the matter is for most of your clients, consumers, customers, call them whatever you want, the key question is there used to be one education department, there are now two education departments, are they working well together and are they adding value. If you could focus on the specifics of your relationships with DCSF that would be useful.

Ian Watmore: I would be very happy to do that. First of all, the relationship between the two Secretaries of State is very close; they work a lot together; they meet regularly; and they discuss all matters of mutual policy on a regular basis. Secondly, the same is true of my Permanent Secretary colleague, David Bell, and I. We meet often. We speak several times a week when it matters and there is very close co-operation. We have formal structures in place; we share boards together. We have joint boards, as it happens, with DWP as well to give us the tripartite relationship. We also have specific boards to deliver on key programmes; for example, in the restructuring of the Learning and Skills Council into the different agencies that will be made. That is a board that is jointly chaired between one of my Directors General and one of David's Directors General. We have a joint unit on apprenticeships because apprenticeships straddle the age range that we recognise and apprenticeships start at 16 obviously and go through in theory until retirement date. So we have a joint interest in that. On each of the programmes where we have a shared interest we have a joint structure to oversee it, which is driving progress.

Q49 Mr Marsden: It is helpful to put on record the specifics of the structures, but of course structures are only the start of the process. What comes out of those structures is what is important. Taking up the specific reference that you made to apprenticeships, apprenticeships, as you rightly say, potentially go through from 16-19 all the way through. We know in demographic terms, and the whole argument is about re-skilling, that adult apprenticeships are going to be an absolutely key issue for the future. But are you worried that if you look, for instance, at the draft Bill, it is focused on those under 19 and there are differences, in any case, between what is being offered to those under 19 and those over 19. I mean, those under 19 we are told will have, by 2013, the right to two apprenticeships, and those above it will not. Are you worried that DIUS will end up as the poor relation in things like apprenticeship policy precisely at a time when demography and other things suggest that it ought to be even more important for adults?

Mr Watmore: At the beginning of your question you said how important it was for adults, and I one hundred per cent agree with you. My personal view is that the workforce of the future, apprenticeships, will become an increasingly important way for adults to improve themselves and/or change their careers, as much as it is for people to enter the workforce for the first time. So, I am one hundred per cent with you that it is an element. In terms of the way we have set it up, I think part of the reason for having the Joint Apprenticeship Unit is precisely so that we do not get into the position where one person rules over the other, and that both of the important groups of citizens that we have discussed in that question get the service that they want. In fact, the Joint Apprenticeship Unit happens to be predominantly in my department and the primary relationship, at the end of the day, to the National Apprenticeship Service effectively is with the Skills Funding Agency, which will be sponsored by our department. So, certainly sitting where I am today, I think it is unlikely that we will end up as the poor relation.

Q50 Mr Marsden: Fair enough. Let me take you on to another area where there is overlap and possible tension - I will not say any more than that - and that is the funding of 16-19 year olds, and indeed FE funding in general. Again, one principal in an FE college has recently has been quoted as saying, "It can be difficult to budget because DIUS does not want money for adult learning to go to 16-19 year olds and DCSF does not want money for 16-19 year olds to go to adult learning". I wonder, first of all, if you recognise that that is a problem and, secondly, whether you have had concerns expressed about the potential problems of overlap in funding from organisations at either end of the spectrum, whether we are talking about the Association of Colleges or we are talking about an organisation like NIAS?

Mr Watmore: Maybe at the risk of re-opening the customer discussion, the point at issue here is that the money that DCSF has is intended to be spent upon people 16-18 in age and the money that we have is intended to be spent on the 19 and overs. So at one level I do not think it is necessarily a good idea to mix and match those funds. When they get to the individual college level, we recognise that individual colleges are dealing with both communities, most of them are anyway, not all of them. Obviously some will just go to the 6th form college and some major on adults. The ones we are talking about are the ones that do both. Then we want them to serve both communities properly, but we do not particularly want them to mix funding that was target at over 19s at the local level.

Q51 Mr Marsden: I accept that from what I might call, and I do not mean this pejoratively, an instrumentalist point of view in the sense that that chunk of money goes to that and that chunk goes to the other. There is a rather more concerning issue. Money is spent, or money should be spent, at the end of the day because there is a meeting of minds and a follow-through between the two departments in terms of where the priorities lie. There again I suppose I am concerned about whether that is there. One other point because I mentioned schools and universities before: what has the specific co-operation been between your department and DCSF on the development of the 14-19 programme of diplomas? Although that is an area for them, what happens as a result of that and the way in which vocational education is regarded is crucially important for the success in your department.

Mr Watmore: Yes, and I could add things like the STEM agenda to that as well, where if we do not get the teaching right and the inspiration right in schools on STEM subjects, then we do not get the follow-through to university and research institutions. I agree with that. All I can say is that each of the issues you have highlighted is an area of mutual interest in the policy and when there is a mutual interest in the policy, we have worked jointly together right from the Secretary of State through the officials. The Spending Review then determines where the money goes and when the Spending Review has determined that money is for this sector or that sector, if it then goes to one department or another, then that is the basis on which we pursue it.

Q52 Mr Marsden: I will move on now, Chairman, but I just want to ask Ian, and we have asked about specific co-operation in specific areas, whether his department would be good enough to give us a note on the particular areas, the level at which and how they actually co-operate?

Mr Watmore: I would be happy to do that.

Chairman: This is about staff time and the costs of resources going into that liaison because clearly, if it is a very expensive business, you will then question why you actually split the Department.

Q53 Mr Wilson: In this report in Chapter 2 it says, and I quote: "Our vision is to be able to demonstrate innovation across every aspect of our organisation." Bearing that in mind, what are the things you would point to as world class examples of innovation by your department?

Mr Watmore: I might ask Zina to come in with one or two of the uses of the new media that we have been exploring and the ways of reaching people who are quite difficult to reach. Let me give you just a few practical things. Inside the Department we have enabled people to work as effectively as we possibly can, given Government security. People can work where they need to work; they do not have to be chained to their desk in a Whitehall office. Quite often I visit a place like a university or a college and I might go for a specific visit and then I am working from there for the rest of the day, very much leading the way, whereas a lot of people would not be able to do that; they would be chained to their desk. Secondly, we have made sure that we are spending as little money on our own internal infrastructure and getting the most of the front line. We have a very efficient use of space in our department in the sense that we hot desk - by which I mean nobody, including myself, is allocated a desk. So when we come in in the morning, we go and find a desk to work from and we sit down and work from there through the day. I do that and so do all the rest of the staff. That makes for a definite Whitehall first. It also makes for efficient use of space and it breaks down barriers and silos amongst staff in the Department. Those are two internal examples that I would allude to. Perhaps Zina could add a couple of external examples.

Ms Etheridge: One of the things that we have been really keen to do is make sure that we use new communications technologies, like social media, in the most effective way to engage with stakeholders, for instance, better than we might do if we just stood and interacted in traditional ways through sending out consultation documents and getting their comments in or having meetings with them. So on the Innovation White Paper, for instance, one of the things that we did was set up an interactive version where people could break it down chapter by chapter; they could put comments on to the website chapter by chapter, so that different consultees could respond to other people's views on it rather them just all sending it in to Whitehall. We had to get a much more interactive debate going, which was creating a domain within the community rather than just having a White Paper on which we then said, "Go out and tell us what you think of it, and then we will tell you what we think of your replies in several months' time".

Q54 Mr Wilson: May I say, Chairman, that although that might be leading edge around Whitehall, I would not say that any of those three examples were particularly leading edge out there in the marketplace. I would not say I am overly impressed with those.

Mr Watmore: Maybe I could give you one other example then, which is I do believe is different and that is working with the National Physics Laboratory. There is now a part of the website Second Life which people will be familiar with perhaps, which is one of those newer style social media and interactive sites based on the computer gaming industry originally where they have joined forces with NASA and other big scientific organisations in the United States and created a region of Second Life called Science Islands or SciLands. That allows collaborative working by scientists across the globe without people having to fly half-way round the world in order to see it.

Q55 Chairman: This is not the Department doing this.

Mr Watmore: We have done that in conjunction with them. We are now looking ---

Q56 Chairman: Are you actually saying that you are taking credit for that?

Mr Watmore: I am saying that in our wider departmental footprint where we are reaching out to do things, the National Physics Lab has set up ---

Q57 Chairman: But they did it; it is the Physics Lab that did it.

Mr Watmore: No, I understand that, but we sponsor them and they did it with us and I have worked with them on it. We are looking to see how we can introduce departmental things into that.

Q58 Chairman: On that ground you could claim every university innovation as yours.

Mr Watmore: It is not quite the same because universities are not directly sponsored by us and the NPL are. I am just giving you examples of things that impact real people, real world experiences that are different.

Q59 Mr Wilson: Can I ask you about one of the things that I did notice you had launched as a pilot scheme, and that is this 50 gift vouchers for further education. Is that a matter of pride and innovation for the Department?

Mr Watmore: The particular scheme in question is something that was one of our policy ideas. I do not see that as more broad than just a number of innovative or new ideas for trying to stimulate better improved outcomes. Another example that we have done, which I think is in the same vein, is using the innovation vouchers as part of our Innovation Nation White Paper, which was to try to get money to the people who otherwise are not normally reached, the smaller companies for the smaller and medium sized ideas.

Q60 Mr Wilson: Can I be clear? Is there a pilot scheme where you can go and buy a 50 gift voucher to contribute towards the cost of further education?

Mr Watmore: I am racking my memory here but I believe it is possible for people to do that in order to help people fund their way through different forms of education. If you want more detail on that, I can give you that.

Q61 Mr Wilson: There was a report in The Financial Times around this time last year that suggests that you have launched this as a pilot scheme.

Mr Watmore: I am pretty certain that there is one of our offerings in the further education sector just to enable people to do that. Can I check with you off-line and let you have a note on that?

Q62 Mr Wilson: So you could not give me any information about what its take-up is, what it costs to launch it?

Mr Watmore: Not here now. I will send a note.

Q63 Mr Wilson: You will come back to us with a note. I am reliably informed that you have two roles: one is obviously Permanent Secretary of the Department; but also you have this role as Accounting Officer with responsibility for ensuring regularity and propriety of DIUS's expenditure. Am I right in that?

Mr Watmore: That is what the Permanent Secretary's job is. All Permanent Secretaries in Whitehall departments are also the Accounting Officers for those departments.

Q64 Mr Wilson: Thank you for clarifying that. Particularly in your department, how do you reconcile responsibility to promote innovation, which obviously carries significant risks and probably fruitless expenditure in many cases, with your obligations to keep tight control of the purse strings?

Mr Watmore: I might ask Bill to add a perspective from our Audit and Risk Committee that we have set up and to give us an oversight on that in a minute on general financial risk matters. As people know, if every innovation worked, it would not be innovation; it would be safety first stuff. Of necessity it is going to mean that things that are tried will not always work. Certainly within the Department, I am okay with that. The phrase we used to have in my business sector was "the important thing with innovation is to recognise the failure early and not to prolong its agony beyond when it was clear that it was not going to work". To have a failure-free environment means you are not innovative and so you have to allow some failure to occur. In terms of our interest in the wider economy, what we are trying to do is to find arrangements, as many and as varied as we can, in which the public and business sectors are working together to try new things and new ideas. The Innovation Nation White Paper was very much around that, building on predecessor things like the Technology Strategy Board, which is funded from Government and working with business on key platforms for innovation, right down to the examples of innovation vouchers, which could be given to companies in order to help them improve their particular idea.

Mr Dickinson: The Audit and Risk Committee includes three members from outside the Department. It is chaired by one of our non-executive directors and includes two other external members who bring both public sector and private sector expertise. Part of their role is to challenge the executive, in particular about new areas of development. I think that is the overlap between your question around innovation and to what extent that creates risk and how well is that risk managed. The Department has a robust framework of programme management controls; so, for example, the shared service programme has a senior accountable officer and a programme board. Part of the role of the Audit and Risk Committee is to make sure that those risk structures and management structures are in place, and that the executive has a perspective on what is changing in the Department.

Q65 Mr Wilson: Is there anyone from the National Audit Office on that committee?

Mr Dickinson: They attend. They are invited to all the meetings.

Mr Watmore: They cannot be members because they are formal auditors of the Department but they attend.

Q66 Chairman: Can I ask you, Bill, as a rider to Rob Wilson's question: does the Risk Committee review specific innovative projects or is this just a generic look at the whole Department?

Mr Dickinson: The Audit and Risk Committee has set an agenda for the year that includes some standing items; so for example it will review our resource accounts ---

Q67 Chairman: Can I give you an example? The Department is about to support Individual Skills Accounts. Does the Risk Committee then do a risk assessment of Individual Skills Accounts, particularly in view of what happened with the Individual Learning Accounts, which went so badly wrong a few years ago, but which was a very good idea?

Mr Dickinson: Part of the scope of the Audit and Risk Committee's work includes a review programme across the Department's activities. When it comes to the Further Education and Skills Directorate, part of the probing will be around what are the new developments within that area. That will include Skills Accounts. Both the Audit and Risk Committee and the Executive Risk Sub-Committee would look at new policy areas, which would include Skills Accounts.

Mr Watmore: If I could clarify that, the big areas of policy change, of which that is obviously one and others we could list, are the things that come to the top table as risks for us to review, and the board and the Audit Committee look at them regularly, as do the Ministers.

Q68 Mr Wilson: When are you going to publish your Annual Innovation Report?

Mr Watmore: That is being prepared as we speak and will then be put to Ministers and then we are into the usual timeframe of publication. I am hoping that we will get it out before Christmas. I cannot say that for definite, and of course we have a new Minister who has to get up to speed on the subjects.

Q69 Mr Wilson: Can you briefly say what it is going to cover?

Mr Watmore: Primarily it is going to cover, in shorthand, those things which the Sainsbury Report cued up a year ago . It was Lord Sainsbury's Report, called 'Race to the Top', which signalled that this Annual Innovation Report should be published; so it is what is in that, topped up with those additional things that we said we would do in the Innovation Nation White Paper in the spring, which is the then Minister's additional areas. It will include things like public service innovation across Whitehall and innovation practices and policies and the specific areas that Sainsbury cued up a year ago.

Chairman: We have entered into risk but I know that Graham Stringer has a few more questions to ask in that area.

Q70 Graham Stringer: Item one on your risk list is failing to ensure that better education, research and innovation outputs translate into better economic and social outcomes. How ever do you measure that? So many things affect the economy, as we know at the moment, and social outcomes. Is it not a completely meaningless risk for you to take responsibility for?

Mr Watmore: The first half of your comment I agree with; it is really hard to measure. However, on the second half, we have to measure the impact that we are having with all of our programmes because if you come back to the fundamental premise of this department that probably now 15 billion to 20 billion a year of public sector money is going through our department into the wider sytem, very often that only bears fruit over a medium-term period. So we are reaping the rewards today, for example, in some areas of science and innovation from an investment that happened several years ago. As we saw from CERN last week, it was two decades' worth of investment that came through in Switzerland. We have to find ways of measuring the ongoing impact of that investment, otherwise, to put it bluntly, the Treasury will not continue to support us in the medium term. I believe, and I think all of my colleagues believe, that we can do this; we can do it in ways that really demonstrate impact not just economic impact but impact on people's individual lives and local communities. To give you just a couple of examples of that, we are working with the research councils and using their capability - and remember that some of those are some of the leading social scientists and economic researchers in the country - to evaluate the spend of the Department on the society in which it serves, both economically, business-wise and on individual communities.

Q71 Graham Stringer: Are you telling this Committee at a time of what at best is an economic downturn to recession and at worst is a depression that you can disaggregate the impacts of a huge project like CERN from all those other economic impacts on the economy?

Mr Watmore: No. I do not think we would claim to be able to do that, but I think we would hope to be able to demonstrate that the totality of our spend makes a difference.

Q72 Graham Stringer: If you cannot do it for a large project, if you cannot disaggregate it, how can you do it overall? I would be fascinated by your methodology.

Mr Watmore: That is why we are trying to employ some of the world's leading social scientists and economists in appraising the methodology with us because it is not easy.

Q73 Graham Stringer: Is it possible? That is the question I am asking.

Mr Watmore: I think it is possible because what is clear is that economies that do not spend very much on the sorts of agendas on which we spend do struggle in key economic areas. There is a correlation between well-targeted spend on what we call our talent and innovation agendas, so the talent side of the equation, individuals, and the innovation side in terms of ideas and research. If we put those two investments into play, we believe we will be able to demonstrate the economic and social impact.

Q74 Graham Stringer: On your risk list you do not even have downturn in the economy, yet there is anecdotal evidence, and some of it in the press, that in the ex-polytechnics students are not turning up at the moment, there are fewer students because they are worried about getting into more debt when the banks are in crisis. Why is that not part of your risk assessment, your risk list, and do you have any information that students are not turning up in the numbers expected?

Mr Watmore: In terms of "is it a specific risk?", the answer is that when we put the risk list together we decided that what we were trying to do was invest over economic cycles and therefore we would go with the cycle of the economy. The key thing to demonstrate was that over the economic cycle we made a difference with our investment. Given the current situation, however, we are obviously working very closely with our Ministers to look to see what the behavioural changes are on the ground and what, in particular where we have some short-term discretion over money or programmes and so on, we can do to help people through what are obviously very difficult times. That is helping businesses, small and medium sized enterprises in particular, and helping individuals. We are looking at that with our Ministers as we speak.

Q75 Graham Stringer: Can you answer the specific question that was in there? In an economic downturn and in a normal economic cycle you might expect there to be fewer students because potential students take different decisions and do not turn up. Are you monitoring that? The registrations have all taken place in the universities now. Can you tell us if there are fewer students than expected? Secondly, a lot of the courses depend on workplace learning and tuition. My guess is that one of the first things that business will cut back on, because that is the experience of previous downturns, is that commitment to training education in combination with the universities and colleges. Have you any evidence that that is happening?

Mr Watmore: There are two parts to that question. On the formula, as a department we receive the information that the various funding council bodies - Learning and Skills Council, et cetera, and the colleges and the universities - get, and if there is an aggregate shift in behaviour on the ground, then we will get to know that quite quickly.

Q76 Graham Stringer: How quickly is that?

Mr Watmore: At the moment, the evidence is not strongly coming through but if it were to do so, we would get it very quickly.

Q77 Graham Stringer: All the registrations took place three or four weeks ago.

Mr Watmore: Yes. We have not yet had from the university or college sector evidence of material shifts in behaviour. You always get people churning at this time of the year. They sign up for courses and then do not come and so on. We have not had evidence yet of a material shift.

Q78 Graham Stringer: I am sorry to interrupt you. Can you be more specific about that? Does that mean you have evidence that the numbers are as expected or that you just have not got evidence?

Mr Watmore: At this point, sitting here, it is the latter. We have not had evidence pushed up that there is a material shift, but we are checking with our bodies.

Q79 Graham Stringer: When would you expect to have a view?

Mr Watmore: The interesting ripples of this economic impact are that right now it is all about the banks and the big financial institutions and every day that goes past people are predicting if we are through the worst. Today as I came out the FTSE was quite well up, but maybe that will keep up or not. The behavioural shifts, both in the economy and for individuals, I think are going to go on for a very long time from that. People are starting to make decisions now about whether to go to university or college. Businesses are starting to make decisions about whether or not they are going to take apprentices on, et cetera. So I think the follow-through of the current financial situation, which is primarily in the City and Wall Street et cetera, is going to be fed through into the real economy over quite a long period of time, and we are a significant part of that. We will be vigilant in working with all of these bodies to assess the early warning signals and to pre-empt them where we can. For example, in recruiting a new Head of the National Apprenticeship Service, which we are doing and hope to make an appointment soon-ish, said person in a different era might have been finding it easier to get apprenticeships and would spend more time focusing on the potential apprentice. In the current era I suspect a lot of the attention will have to go on the business side in order to keep the supply of business apprenticeships up, so that people who are coming through will naturally find places to go. I think we have to move our behaviour with the way the economic situation flows through. At the moment, it is very hard to predict precisely how and where, but we have all seen in the past different behaviours of groups of citizens in different eras that we can use to model, and at least try to give us an idea of what we are likely to see.

Q80 Graham Stringer: Are you aware of any universities that have difficulties with Icelandic banks and their assets?

Mr Watmore: I believe there were some universities that had assets in banks and I think they have notified the Funding Council, which is their appropriate responsibility.

Q81 Graham Stringer: Can you be more explicit?

Mr Watmore: I cannot and I would be very cautious about doing something that is as commercially sensitive as that in public, if you do not mind. I just know that there were organisations that did submit issues to the Funding Council.

Chairman: That is the difference between a university and a local authority.

Q82 Graham Stringer: I just do not understand, if we are going to see a university go bankrupt or have real financial problems that were not expected and students are not going to be educated, that that is a commercially-sensitive matter.

Mr Watmore: No, but I do not think there are any in that situation. I think you asked me whether any of them had holdings in banks, and I think they have notified the Funding Council if they have.

Q83 Graham Stringer: What sort of order of magnitude are we talking about?

Mr Watmore: I do not have the information in front of me. The Funding Council, HEFCE, in England deals with those situations and only if there are problems of an extreme nature that are causing institutions to be at some sort of risk do we tend to become involved.

Q84 Chairman: I think the point that would concern us, Mr Watmore, is that you are supposed to be monitoring risk and yet you do not seem to be monitoring risk with the universities?

Mr Watmore: I am not saying that at all. I am saying that my colleagues are in touch with HEFCE; HEFCE are in touch with the university sector. They are monitoring the risk of the situation; it is being monitored. It is not in any way seen to be extreme at this point.

Q85 Graham Stringer: Is the sale of the Student Loans at risk, given the current financial situation?

Mr Watmore: Do you mean is it at risk of happening at all or what?

Q86 Graham Stringer: Will it make any difference to the budget?

Mr Watmore: It is clearly not possible to sell the Student Loan book in today's capital markets. Our job under the current policy is to get to a position such that when the markets recover, and when the value-for-money conditions return to something that would be acceptable, then we will be able to put the first tranche of Student Loans into the marketplace, but that is clearly not happening currently.

Q87 Graham Stringer: How will that impact on your budget?

Mr Watmore: Interestingly, and the accounting on this is quite complicated, the major impact of raising the money from the Student Loan sale, were it to happen, impacts the Treasury's overall finances of Government. The impact on us, and Bill will correct me if I get this wrong, is primarily on the cost of the project to sell the loan book, because we obviously have to run resources to do the sale, and on the balance sheet value of the loan book itself, which is an accounting treatment that would have to be adjusted if the book were to be sold.

Q88 Graham Stringer: If I understand that, you are saying that you benefit from it because you do not have the cost but the Treasury do not have a capital receipt?

Mr Watmore: Could you say that again? I did not understand the question.

Q89 Graham Stringer: Maybe I did not understand. You seem to be saying that because you are not incurring a cost of sale ---

Mr Watmore: No, I was trying to say that we incur the cost of the sale of the project, and so it is our account. The value of the loan book is sitting on our accounts; it is in the resource accounts. Were even a slither of those loans to be sold off, that impacts the revaluation of the loan book on our balance sheet, but the actual cash that is raised from the sale goes straight to the Treasury; it does not come into our account.

Q90 Chairman: It is not actually placed in your accounts. It is not within your current account in terms of this CSR period?

Mr Watmore: No, the income is not but were we to make a sale, it will cause our accounts to be adjusted because we will have to revalue the assets.

Chairman: We understand that.

Q91 Dr Iddon: We will move on to public sector agreement targets and the indicators used. In your report you say that science an innovation is on target, but you do flag a warning, and I quote you, "Significant challenges will remain, particularly in raising business research and development (R&D) and increasing the supply of science, engineering and mathematics skills available to the economy". Can you update us about what has been achieved since the Report was written in those two major areas, briefly?

Mr Watmore: We need to be careful. Much of the Report is about the targets for the last Spending Review that culminated in the March just gone, and then we also referenced the spending targets that have been set in the new Spending Review. We should get that clear. In terms of the concern about STEM skills and subject availability, I think that is something that is common ground amongst all of us, that the number of people taking STEM subjects at university and at "A" levels and so on has been rising again, but from a base that is lower than we would like. I know that our new Minister, Lord Drayson is particularly passionate about that particular topic. Indeed, it was one of the first meetings I had with him last week on the subject because we all know that the growth of a STEM skill base in this country is long-term; you cannot just conjure them up. It matters what sub-division of the STEM subject you have. We could have STEM subjects rising across the board but have no nuclear capability to do the requirements of our energy policy. It is not just the breadth of STEM; it is also the specifics of STEM. I think that is going to be a significant part of our Science in Society policy programme coming up. A lot of that is around individual behaviours. I have a phrase, and you may forgive me for the pun. It is "STEM sells", where the word is spent with an "s". In other words, we want to try to incentivise people that if they pursue STEM careers, it is likely to be advantageous to them as individuals through their working career, whatever they choose to do, and equally companies that recruit from that base are more likely to get people who will be able to benefit them. It is a long-term programme but it is very important. We then have to match it with the supply side of both school and university and college teachers later on so that we get it right through. We need the feedback route coming from business. If there is one bright spot over an otherwise horrendously gloomy economic picture over the last week, as Lord Drayson said, there are an awful lot of people with PhDs in maths and physics in the City who might be encouraged to go back and do science and research in either a commercial setting or a teaching setting as the fallout from the City occurs. I do not know whether that will prove to be the case, but it is certainly prima facie an interesting one. It is a long-term game and it is one that we have to play; we have to raise the aspirations of all our people and then raise the capability to teach and follow through, and we have to raise the connectiveness with business so that those people find good careers and businesses find that the benefit from the people.

Q92 Dr Iddon: Let me be a bit more specific on the ambition for business enterprise R&D. The Government had an original target for 2014 of raising that R&D to 2.5 per cent, yet in the report the figure is 1.08 per cent. I do not understand that. Have we dropped the 2.5 per cent figure for 2014?

Mr Watmore: No, not to my knowledge. The one thing that we have done, however, is said that R&D expenditure as a measure of activity is a narrow measure relative to innovation across the whole economy. If I can illustrate that, in many of the successful parts of the economy - and I would have said nine months ago the financial services sector but I probably should stick to creative sector as my best example at the moment - and we have a very thriving creative sector in this economy, very little R&D is recorded in such a sector because of the way they do the accounting on that, and yet they are one of the most R&D (in the true sense of the word) rich industries as they are constantly researching new products. So R&D tends to be measured in those companies which are at the manufacturing/engineering type end of the spectrum, which a country like Germany has much more of and therefore tends to have much more R&D spend. We have a very innovative economy in a lot of sectors but we do not recognise that in the pure R&D measure. One of our recommendations from the Innovation Nation White Paper was to create a new innovation index that would measure the real activity in the real economy of an innovative nature regardless, which would include R&D but would be right across the whole economy. We have said we will do that in conjunction with NESTA, which is one of our bodies, which you are probably familiar with and which has a lot of expertise in this arena.

Q93 Dr Iddon: I just want to turn to another indicator which we have bragged about in the past few years, particularly Sir David King has bragged about it, and that is the share of world citations target. It is on page 82 in this particular report. In 2006 that was reduced to 11.5 per cent when 11.9 per cent or more had been achieved in each of the four previous years. What has happened? It seems to have gone down.

Mr Watmore: Yes, it does, but I am pretty certain that the 2007 figure is back up to 12 per cent again. I think the generality of this indicator is that it does tend to fluctuate from year to year, particularly with some aspects of the way that the research citations come out; they come out in published batches and then new research creates a lot more citations. We are also dealing with what I might call the Olympic challenge for next time round in that we win disproportionately more medals in this particular game than probably a country of our size should. To even maintain it at this level is going to be a fantastic achievement going forward.

Q94 Dr Iddon: To clarify this, are you saying the outturn for 2006 is actually 12 per cent?

Mr Watmore: No, for 2007. Somebody will correct me if I have the wrong figure. From my memory it is 2007. It tends to go from one year to the next by small numbers of half a per cent. My worry would be if it went to 6 or 7 per cent or something. That would be a dramatic collapse. If we are in the 11 or 12 per cent region, then we are performing relative to our size at a level that is comparable to our Olympic Gold Medal holders this summer.

Q95 Chairman: Briefly, Ian, one of the areas where clearly particularly Lord Sainsbury was very keen, and Race to the Top was very much about innovation in the business world in the market, and yet on page 87 of the Report you show a decrease between 2005 and 2007 in four of the six innovation in the market areas. Could you briefly say if there is a good reason for that?

Mr Watmore: Could you refer me to the right figures again?

Q96 Chairman: It is page 87, innovation in the market, six of the indicators and four of them are showing a decrease. Does this mean that as a nation we are becoming less innovative since we set up the Department?

Mr Watmore: I can give you a quick answer to that. I would rather write to you on that.

Chairman: Yes, please do so. We will move on.

Q97 Mr Marsden: Mr Watmore, I would like to move to issues around administrative costs and expenditure management, if I may. Can I start off by asking you about your gross admin costs? The audited accounts say that your gross admin costs increased from 61 million in 2006/07 to 69.2 million in 2007/08. In a note to the accounts you obviously refer to the new accommodation and the new IT infrastructure as significant elements in that increase. That is an increase of 13 per cent. Can you tell me how that increase percentage-wise compares with the increase in gross admin costs for DCSF or across Whitehall generally?

Mr Watmore: I cannot do the latter here. I can say that the figure that I think is around 70 million (that is the figure I have in my head and 69.7 million was the published one) that is the outturn is our slice of the three-way split that I talked about earlier, so that the three departments had an original administrative budget that was two departments and we have been divided into three. We were given around about 70 million of that. We are expected to reduce that by 5 per cent in real terms over the Spending Review.

Q98 Mr Marsden: Is it that you do not know how much DCSF have increased over the last year or do you simply not have those figures to hand?

Mr Watmore: I do not have the figures to hand but I know that the total of the three departments is the same as it was. My guess is that where the 61 million was recorded, it is without some of the overheads.

Q99 Chairman: You are going to give us a note on this.

Mr Watmore: The three-way carve up, if you like, of the two sets of numbers adds up to the same thing.

Q100 Mr Marsden: Let me ask you then about your budget for 2008/09, which is something that is now presumably solely under your control, which appears to be around 73 million. My mental arithmetic tells me that is an increase of just over 5 per cent. Is that not a rather optimistic figure, given what has been happening with inflation running?

Mr Watmore: The underlying number is actually 70 million.

Q101 Mr Marsden: The underlying number of what?

Mr Watmore: The underlying number for the administrative budget for this year is 70 million but we have an investment number of 3 million on top to create some of the things that go with being in the new department, so it is a one-off cost of 3 million on top of the 70 million. Our underlying run rate is the 70 million, and next year we have to reduce it by 5 per cent and 5 per cent the year after that, inflation adjusted.

Q102 Mr Marsden: You think you have produced a conservative budget rather than an optimistic one, do you?

Mr Watmore: I do, yes. I also think we are incredibly efficient relative to normal Whitehall departments. We have an extremely efficient administrative spend, given our head count and given the extraordinary reach of our expenditure. We are fifth biggest in Whitehall expenditure and second cheapest in terms of cost base.

Q103 Mr Marsden: You might be efficient enough on administrative spend but there are two areas I want to ask you about which look rather curious. In the audited accounts it shows that DIUS spent 128 million more on higher education support for students in 2007/08 than was the estimate, and there was not, as far as I am aware, any explanation provided for that. The accounts also show that you spent 284 million less on your grant to the LSC than planned and the TES commenting on this indicated that this was money that was originally intended to go to Train to Gain for employers, which was then diverted to pay for university student grants. I am just quoting what the TES said. There are two questions. First of all, is it correct that you did not provide an explanation of either of those issues in your Report and, if so, why not? Secondly, what comment do you have on what the TES and others have said about robbing Peter to pay Paul; i.e. taking money that was not taken up from Train to Gain and using it to cover your over-spend on student grants?

Mr Watmore: I think on the specific, and I will correct this afterwards if I have mis-remembered, and this is not a reason that you are going to like, it was because Easter came early. It is a curiosity of the fact that the next term of the university sector started on 31 March, which happened to be the last day of our financial year. I think that is where the overestimate occurred. It is as simple as that. If I have that wrong, we will correct it afterwards. It is the way these accounting matters work, on a per day basis. We had a day of a new term in the old financial year and therefore it came into the old financial year. We managed that across the financial year boundary. I do not think on this particular occasion there was a Peter and Paul robbing and paying; it was a borrowing for a night and then paying. But I think there is a more general point, which is that in the Department's budget as a whole we do have to balance to the total expenditure which was set, and within that we have a couple of important ring-fences that we cannot breach, the science ring-fence which includes a big chunk of money that goes to HEFCE and the TSB innovation ring-fence. Beyond that, it is our duty to balance the money. We try, wherever we can, to make sure that the HE money goes to HE and the FE money goes to FE but there are occasions when those judgments have to be made and then our Ministers have to make them.

Q104 Mr Marsden: That is a very convoluted explanation. It may have to be. I want to be absolutely clear on the record. Are you telling this Committee that the figures that I quoted to you, which you have not disputed, the fact that there was an under-spend in the one area and an over-spend on the others, was entirely an issue to do with timing of the financial year?

Mr Watmore: I am saying to you that I think so. If that is wrong, I will come back to you.

Chairman: You have told us that you will give us a note if it is different.

Q105 Mr Marsden: Fair enough. My only comment in passing is that it is slightly surprising you have one or two people who do not know when the date of Easter is.

Mr Watmore: It was an inherited position.

Q106 Mr Marsden: All right: the Department of Education and Skills does not know. But, you have not touched on my central point. Do you agree that there was an under-spend of this amount of money on Train to Gain and that that money was then subsequently diverted to cover costs in the university department?

Mr Watmore: For a day and then we passed it back.

Q107 Chairman: I think the crucial issue here is that Easter was 31 March and on 1 April did suddenly the LSC element of the budget for 2008/09 actually show 245 million extra?

Mr Watmore: My understanding is that that is the case, but, if I am wrong, I will let you know. The more general point that I think Mr Marsden is raising is an important one, which is the balancing of money. The money was intended for different sectors when it was allocated in the CSR. There are some places we cannot move money from A to B but when we get to the main ---

Chairman: We have heard that. We know that. The key issue that Gordon Marsden is asking is: why did it not appear somewhere as a note?

Q108 Mr Marsden: I am asking that question, Chairman, but in a way what Mr Watmore has said has raised a rather more fundamental question. What you seem to be implying is that, even if this was just a bit of shuffling paper to cover financial years and all the rest of it, it would be perfectly reasonable for a huge chunk of unclaimed Train to Gain money of 200 million simply then to be put into the HE sector. On that point, I would like to ask Mr Dickinson, because you come, Mr Dickinson, from the private sector from KPMG. I wonder what you would have said as an external auditor if you had gone into a private company which had under-spent on one area by 200 million for a year and then subsequently diverted that to another area of the company without there having been some sort of assessment of priorities internally.

Mr Dickinson: The decisions that were made at the end of the last financial year were subject to scrutiny within the Department - Ian Watmore has just discussed that - including discussions with Ministers.

Mr Watmore: We did not move money in that last year to my knowledge from one sector to another. However, if we were to be in the situation where that was a possibility - and it can happen in any given year in a material way - then that is something that our Ministers would have to make the decision on. Normally they would make that a very public statement. So this is an accounting matter.

Q109 Chairman: We are not getting anywhere on this. Ian, can I say that I want to put this to bed. You are going to give us a note. Our main concern is that a lump of money was not taken out of one budget and then given to another without a clear explanation as to why that was with a proper audit trail. Our key issue is that in fact the Learning and Skills Council, Train to Gain or any other programme, was not permanently robbed of this money. If this is purely an accounting device to get over ---

Mr Watmore: It is my understanding ---

Mr Marsden: Can I merely make the point, and this is a separate point and it maybe a point for Zina in particular to ponder on, that if that is the case, if the explanation you have given us today, Mr Watmore is the case, and given that this issue has already raised considerable concern in the FE sector and been reported on in the media in a number of different places, it is rather concerning that your Department has not picked up this problem and dealt with it in terms of its media strategy before now.

Chairman: We will leave that hanging in the air.

Q110 Dr Iddon: Ian, I want to turn next to the Government Office for Science. Can you reinforce our impression about this department? Is it an integral part of your Department and therefore you are the Permanent Secretary of it or is it seen to be independent of the Department? Can you just say something about its status now?

Mr Watmore: I am afraid it is one of those "it is both" answers in the sense that the money that is spent on the Government Office for Science and the people who work in it are "resources, financial and people of the Department", so they are part of the Department for that purpose. However, the Government Chief Scientist now, Professor Beddington, has a direct reporting line to the Cabinet Secretary and to the Prime minister for his ministerial and Civil Service management structures in order that he can operate across the whole of Government and deal with issues that the Prime Minister wants him to deal with, with the backing of the Cabinet Secretary. It is kind of both, I am afraid, and it is just the way it is.

Q111 Dr Iddon: On page 46 of the Annual Report it leads us to believe that a paper is going to be produced on GO-Science which will set out its forward agenda and vision. In the light of what you have just said, can you tell us who is drawing up that paper and when can we expect to see it published?

Mr Watmore: That would be a John Beddington co-ordinated activity with the Chief Scientists of all of the departments, for which mine happens to be Adrian Smith, who I think you know has recently been recruited to the Department. I do not have the details and timing. It is his responsibility.

Q112 Dr Iddon: Perhaps we can take that up with John Beddington at some time. Sir David King of course was quite keen on departmental reviews for science. We have seen a number of those. There is a suggestion around page 46 of the Report that there is a review of these departmental reviews. Are you able to say which way that will go or are we going to abandon departmental reviews for science or will they be changed in some way, or what?

Mr Watmore: I am not sure which phrase you are referring to but my understanding is that Professor Beddington is still very keen on these.

Q113 Dr Iddon: So again we should refer to him?

Mr Watmore: Yes.

Q114 Dr Iddon: We will move on from the Government Office for Science to the Science and Innovation Network overseas which used to be, of course, part of the Foreign and Commonwealth Office but is now part of DIUS.

Mr Watmore: It is both. It is mixed between us.

Q115 Dr Iddon: But your department funds it, I understand?

Mr Watmore: No, it is split.

Q116 Dr Iddon: It is jointly funded?

Mr Watmore: Yes, it is.

Q117 Dr Iddon: What plans are there to develop that network? I hope it is going to stay as it is and not diminish in any way?

Mr Watmore: No, absolutely not. Let me see if I can explain. In the old structure inside the Foreign Office they had a core team of people in London, I think from memory six or seven people, who co-ordinated the activity of their whole Foreign Office network around the globe. They pumped a certain amount of money into that co-ordinated activity around the globe. What happened as part of this year's settlement, the Spending Review, is that the six people or so transferred to us so that we do the co-ordination of the network. The Foreign Office make their network available to us to deliver on that in the same way as before and the funding of that network's expenditure is split so that our contribution rises during the course of the three years, so that by the end it is a 50/50 split between us and the Foreign Office. We will be having the staff driving the network. The actual network itself will be funded 50/50 between us and the Foreign Office at the end of the Spending Review. In terms of the rationale behind that, it was basically part of the Foreign Office's strategy for a whole range of topics, which amusingly goes under the code name of "More Foreign and Less Office", which I quite liked, but the Foreign Office strategy is to say, "We are an international network at the disposal of the rest of the system of government to do things which are important to the rest of government". I think their worry was that they were pursuing things that maybe nobody cared about any more or they were not pursuing them enough and that by putting the ownership back in the hands of the driving department, they would get the appropriate amount of driving. It is our intention really to maximise the use of the Foreign Office Network and to connect them. Part of the reason for agreeing to all of this was to connect it very closely with our Minister and the new Minister, Lord Drayson in particular.

Q118 Dr Iddon: Thank you for that. I want to ask one or two brief questions on research funding post-2007 CSR now. There is a table 12 on pages 111 and 112 of your Annual Report. We do know that AHRC and STFC budgets have been under strain, to put it mildly, in the last few months, but those tables show a decrease from the current year to next year, which will make, in our opinion, matters worse for both those research councils. Can you give us a reason for that reduction this afternoon?

Mr Watmore: No. I know the Committee's concerns on these budgets and it would probably be wise if we do not go straight through a big debate about that right here. Suffice it to say my understanding is that if you took the STFC line, for example, the figure on page 112 where it goes 656 in the outturn for 2007-08 and then drops to 617 - and again I am sorry but it is accounting matters that come in here - one point is that the STFC spent in that year some of its accumulated end-of-year spend that it had accumulated over several years, so it surged in in one year because of the particular culmination of certain timings. It was not part of the underlying run rate. The second point is that it benefits from expenditure in what we now call the Large Facilities Capital Fund, which is somewhere else down on this chart, right at the bottom, the one that is LFCF (the second one up from the bottom of that chart) where, for example, a big chunk of that 105 million that is in the current year will actually go on behalf of STFC-funded capital projects and therefore the two numbers are not like for like for that reason, I am afraid[1].

Q119 Dr Iddon: This is a conspiracy theory doing the rounds. It goes like this: both HEFCE and the research councils have now come under the control of DIUS and therefore this might be an appropriate time to bring both these research streams together and that this is the end of the dual support system. That is the conspiracy theory. What have you got to say about it?

 

Mr Watmore: I could not possibly comment! I am very careful to say that the events we are living through at the moment I am not going to comment on. Our Ministers have been consistently on the record as saying, since they came in, that the dual support regime is one they will protect and preserve and it is not under threat.

Q120 Dr Iddon: And you believe them?

Mr Watmore: I do, yes.

Q121 Mr Wilson: The Times Higher Education in July raised questions about the viability of HEFCE, In particular, it was very concerned about the levels of micro-management that were being put upon it by the Department. There are concerns, I must say, throughout the sector that this is the case. Is it not the case that the Department and Ministers clearly do not believe in HEFCE's role any more and that there is no strong case for continuing with it in the way that it is being managed currently?

Mr Watmore: All I can say, in sympathy with the very last answer I gave, is that I have not heard any of our Ministers talk about HEFCE in that way and I do not have any evidence that we are going to abolish it, re-shape it, whatever.

Q122 Mr Wilson: Do you accept that there is micro-management?

Mr Watmore: To be honest, it is very hard for me to judge because ---

Q123 Mr Wilson: Have you looked at the annual letter to HEFCE over the last, say, ten years?

Mr Watmore: Yes, I have seen the documentation, but I think the reality is that one of the strengths of creating DIUS was to give the university sector a prominence which it, frankly, never used to get in the old Department of Education. I was not part of the old Department of Education, so I am going on what people have said, but they have always said that in the old Department of Education, schools had the predominant focus of attention from Secretaries of State and Ministers. One of the reasons for creating the new department was because universities are such an important, vital, vibrant and successful part of our country and our economy. Therefore, I think it is really significant that we were created for that reason and I think it is a real statement of this Government's faith and commitment to the university sector. This is something that is very visceral to the Prime Minister and to all the Ministers I have spoken to. They see this not just as something to be preserved because we are good at it and it is one of those great things of British life; they really passionately believe, and have evidence to support it, that the university sector is great for the economy and great for social mobility. If you put those two things together, it is something to reinforce behind, not neglect. Ministerial commitment is very strong. Now, does that translate in some quarters to people saying that is micro-management? That is for others to judge. Your question was: does HEFCE work; is it to be restructured/abolished? From my perspective, HEFCE is a very good organisation run by a very good Chief Executive. We rely upon it significantly. I have not heard ideas in the frame for completely restructuring or doing anything materially different to it. Since, as you know, David Eastwood has announced his departure from the organisation next spring to go to Birmingham, very imminently - in fact we are already out there really - we are taking all these positions on a recruitment for his successor. That will, I think, give you more evidence than I can give here that we intend to commit to HEFCE's future.

Chairman: On that note - Rob, I know you have a lot of other things to ask - we do have a number of issues that we have not raised, which we will write to you about if we may, Ian, to get some responses. May I thank very much indeed Zina Etheridge, Bill Dickinson and the Permanent Secretary, Ian Watmore, for being very frank and good witnesses this afternoon. We have enjoyed your company. Thanks to my committee.



[1] Note from the witness: "The formal STFC allocations are: 573,464k in 2007/08; 623,641k in 2008/09; 630,337k in 2009/10; 651,636k in 2010/11. These figures may be adjusted by in-year additions through allocations from the Large Facilities Capital Fund and draw down of EYF in Supplementary Estimates. (Figures from Table 2.1 of the Allocations of the Science Budget 2008/09 to 2010/11, published by DIUS in December 2007.)"