House of Commons - DIUS's Departmental Report 2008 - Innovation, Universities, Science and Skills Committee

DIUS's Departmental Report 2008 - Innovation, Universities, Science and Skills Committee Contents

4 Financial management

Comprehensive Spending Review 2007

The 2007 Comprehensive Spending Review (CSR07) provided DIUS with a total budget of £18.7 billion in 2008-09, £19.7 billion in 2009-10 and £20.8 billion in 2010-11, equivalent to 2.2 % annual average real growth.[91] According to the Treasury this included:

(a) increasing investment in the UK's public science base, which will rise by an annual average rate of 2.5% in real terms over the CSR07 period, meeting the commitment in the ten-year framework;[92] and

(b) spending on Higher Education and Skills rising by 2.0% in real terms over the CSR07 period.[93]

The Treasury said that this additional investment accompanied by savings (see below, paragraph 68) would provide for the delivery of:

(c) £5.3 billion a year by 2010-11 to increase adult skills and apprenticeships and make progress against the Leitch[94] ambitions for world-class skills;

(d) total public funding for business innovation led by the Technology Strategy Board of over £1 billion over the CSR07 period; including cofunding of at least £120 million committed by the Research Councils, and cofunding of £180 million committed by the Regional Development Agencies;

(e) more than £1 billion in additional funding for Higher Education over the CSR07 period to increase participation, maintain the per student funding level and provide more generous student support for 250,000 students;

(f) £682 million for the Medical Research Council contribution to the £1.7 billion fund to implement the recommendations of the Cooksey Review of health research;[95] and

(g) implementation of the Sainsbury Review[96] to further improve the UK science and innovation system.[97]

When he gave evidence to us in January 2008 the Secretary of State considered that DIUS had obtained "a good settlement".[98] He explained that DIUS had obtained "real growth" in every major area of activity from the science budget to the expansion of skills training to widening participation and increasing partnerships in higher education, "so we have certainly got the money […] to achieve the targets that we have set out for ourselves publicly in each of those areas."[99]

PSA TARGETS

When the Government published its Comprehensive Spending Review (CSR07) in October 2007,[100] it included a number of Public Service Agreements (PSAs), setting out the priority objectives for the next spending period (2008-09 to 2010-11). As DIUS's Departmental Report pointed out, it "effectively set our agenda for the next three years by giving us primary responsibility for two PSAs that are fundamental to building a more prosperous and successful nation".[101] The two PSAs are:

PSA 2: Improve the skills of the population, on the way to ensuring a world-class skills base by 2020.

PSA 4: Promote world-class science and innovation in the UK.

Managing budgets

Over the past year we have had a number of concerns about budget management by DIUS—for example, on the withdrawal of funding of £100 million for students studying equivalent or lower qualifications,[102] the science budget allocations,[103] and the movement of resources between Train to Gain and student support.[104]

29 OCTOBER 2008 ANNOUNCEMENT ON CHANGES TO STUDENT SUPPORT

At the start of the evidence session on 29 October DIUS distributed a statement which announced that the amount of student support available for children of middle-income parents coming into university in 2009-10 would be cut.[105] We have two concerns. First, the adequacy of the statement and, second, financial management within DIUS.

The gist of the change announced was to reduce eligibility for financial support for students by lowering the upper limit for parental income from £60,000 in 2008-09 to £50,020 in 2009-10.[106] This was not made clear in the statement. Instead, it compared the proposed 2009-10 thresholds with those in 2007-08. It stated:

the family income threshold for a partial grant will be £50,020, which means that all students with household incomes of £18,360—£50,020 will be eligible for higher levels of grant than in 2007-08.[107]

We asked the Secretary of State why the statement did not make it clear that there would be a reduction in financial support compared to 2008-09. He replied that the statement "is setting out what the system will look like, which is what we set out in the statement […] I think you will find […] that, on the websites and the places where it matters, this information is very clear."[108] During subsequent exchanges at the evidence session the Secretary of State estimated that "around 35[,000] to 40,000" students might not receive support as a result of the changes.[109] It also emerged that the plans for student expansion were to be reduced to 10,000 places in this year.[110] The 29 October statement also said that the "full annual impact of these changes will reduce the cost pressure by £100 million."[111] Subsequent reports indicated that the budgetary pressure that DIUS faced was £200 million.[112] We note that DIUS produced no press release or background information with the statement. Only those with a thorough background knowledge of the system would understand that the statement announced was a cut. We found DIUS's written statement announcing a cut in student support in 2009-10 unhelpful and incomplete. It fell below the standards we would expect from a government department. We recommend that when DIUS makes announcements affecting the financial support of students it sets out in the announcement, or in supporting material, the full consequences of the change.

BUDGET MANAGEMENT

Our second concern was budget management within DIUS. When asked about the 29 October announcement and as, we then thought, a £100 million projected overspend for higher education, the Secretary of State explained that

we have to look at the budgets available to us and we are looking, firstly, at the departmental unallocated provision. […] Secondly, within the system we have significant progress on our targets for cash-releasing efficiency saving, so obviously we will look at places where genuine efficiency savings can be made to produce cash, and then we will have to look at other parts of the DIUS budget. […] We do not want to breach the science ring-fence.[113]

We also raised with the Secretary of State the transfer of £128 million in 2007-08 from the further education budget to the higher education budget, £49 million of which was a permanent transfer.[114] When he gave evidence on 13 October 2008 Mr Watmore had explained that:

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. […] it was a borrowing for a night and then paying.[115]

Subsequently, DIUS explained that £116 million was transferred, of which £67 million was temporarily made available, to deal with Easter being early in 2008, and had been reallocated back to further education and skills budgets. The remaining £49 million was a permanent transfer from further education and skills to higher education in 2007-08 (see paragraph 95 below). When we raised the matter again with the Secretary of State on 29 October, he started his response by making some general observations about budgets and financial management in DIUS:

The reality is that we have a very large budget, about £20 billion […] some of which is ring-fenced by policy decision, particularly the science budget, and the other major budgets are very much demand-led or at least demand-influenced, not perhaps in quite the same way that [the Department for Work and Pensions] has to pay [Job Seeker's Allowance] to every claimant, but we can influence overall the student numbers, we can influence overall [further education] learners, but we are pressured under demands. I think it is an inevitable fact of running a department like this that, even over the course of the CSR, there will be adjustments one way or the other in most years that a department like this operates, just as historically, although it was not always so obvious, people who knew the old Education Department knew that there were always shifts between 16 to 19 and adult budgets one way or another, reflecting the flows of students.[116]

On the switch of resources from further to higher education in 2007-08, he considered that "it was the sort of adjustment towards an end of a financial year which over the years, one way or another, is likely to occur in a department of this sort."[117]

We listened carefully to the Secretary of State's explanation of budgetary management within DIUS. We conclude that DIUS is trying to have it both ways on budgetary management. On the one hand it pointed out that it was managing billions and appeared to claim that the switch of £49 million from further to higher education was an end of year "adjustment". On the other hand, however, in 2008-09 DIUS could not find £100 million to provide continued support for students studying equivalent or lower qualifications. We shall continue to monitor budgetary adjustments made by DIUS. Finally, we noted the Secretary of State's reference to the possibility, albeit as something that he did not want to do, of breaching the ring-fence on science resources. We recommend that, in responding to this Report, DIUS give a firm undertaking that the ring-fence on science resources will be maintained and that resources will not be switched from science.

UNALLOCATED PROVISION AND RESERVES

In his comments the Secretary of State referred to unallocated provision. It would assist our scrutiny if the Departmental Report set out the total unallocated provision and reserves—known in central government as "end year flexibility"—available to DIUS. In response[118] to our written questions we learned that DIUS carried forward into 2008-09 over a billion pounds[119] in end year flexibility—set out in Table 9 below—which with Treasury agreement is available to meet spending pressures.

Table 9

£000s Near Cash[120] Non Cash[121] Capital

RfR1 - Education Admin 5,971 0 0

RfR1 - Education Programme 521,329 80,759 133,583

RfR2 - Science Programme 251,263 -36,146 77,637

Total 778,563 44,613 211,220

We recommend that in future departmental reports DIUS set out in full the total amounts of unallocated provision and reserves (or end year flexibility) available and claimed by DIUS.

FORECASTING

We enquired whether the pressures on the higher education budget were caused by shortcomings in DIUS's forecasting or disruption arising from the Machinery of Government changes. Mr Watmore pointed out that in 2007-08 DIUS had "inherited budgets from different sources […] half-way through the year" and considered that to finish the financial year with a fully and properly audited set of accounts and all the money balancing was "a huge achievement".[122] We concur and congratulate DIUS for producing a full set of audited accounts. The Secretary of State was clear that the realisation half-way through the financial year of pressures on the higher education budget had "nothing to do with the formation of a new department".[123] He said that when grants had been increased from £1,000 to £2,700, the data was not available to predict with "absolute precision" the number of people going to apply for grants.[124] The data available was from 2005-06.[125] The Secretary of State said that issues that that arose would have been faced by a secretary of state in the old department had there been no Machinery of Government changes.[126]

To meet some of the pressures from higher education expenditure DIUS was able in 2007-08 to switch resources from the budget for further education, in particular Train to Gain. We examine Train to Gain further at chapter 6 but it appears that a pattern may be emerging of underspending on further education providing a reserve to meet pressures such as those arising on higher education. The emerging of a pattern of overspending on higher education met in part by switches from underspends on further education raises a question about the accuracy of DIUS's forecasting and, potentially, wider policy issues about the relationship between higher and further education. The accuracy of DIUS's financial forecasting is a matter we shall keep under review.

Administration costs

Table 10 below from the Departmental Report[127] sets out DIUS's administration costs, in other words the costs of running the department.

Table 10

(£000) 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Outturn Outturn Outturn Outturn Outturn Estimated outturn Plans Plans Plans

Administration
expenditure

Paybill 44,556 48,049 51,986 47,656 48,760 53,154

Other 28,028 28,298 32,931 21,395 21,667 16,253

Total administration expenditure*
72,584
76,347
84,917
69,051
70,427
69,407
70,000
68,000
67,000

Administration income
-3,078
3,200
-3,316
-3,638
-4,148
-1
-
-
-

Total administration budget
69,506
73,147
81,601
65,413
66,279
69,406
70,000
68,000
67,000

* Administration costs within the administration costs control regime

The Table appears to show an increase in administration costs of 4.7% between 2006-07 and 2007-08. These figures did not match with those in DIUS's audited accounts which record that its gross administration costs increased from £61.0 million in 2006-07 to £69.2 million in 2007-08,[128]an increase of 13%. We asked Mr Watmore about the increase. He confirmed that DIUS's administration budget was about £70 million but pointed out that he "expected to reduce that by 5% in real terms over the Spending Review".[129]He conjectured that the £61 million "was recorded […] without some of the overheads".[130]He made the point, which we have noted already in chapter 3, that the budgets for DIUS, DCSF and BERR should be consolidated and that when done it "is the same as it was".[131] He added that

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.[132]

The Departmental Report, and to a greater extent DIUS's audited accounts for 2007-08, show significant increases in DIUS's administration costs at a time when budgets in Whitehall are under pressure to produce savings. It is unacceptable that, when we sought to scrutinise DIUS's administration costs, to be advised that this has to be done by a consolidation of DIUS's, DCSF's and BERR's costs. Our job is to scrutinise the financial management of DIUS, not DCSF or BERR. We recommend that, in responding to this Report, DIUS produce accurate, hypothecated figures for its administration costs for 2006-07 which we can scrutinise and compare with subsequent years.

EFFICIENCY SAVINGS

As part of the Spending Review 2004 efficiency targets were agreed, prior to the creation of DIUS, by DTI and DfES:

(h) the total target for annual efficiency gains for DfES was £4.35 billion and for DTI was £380 million by 2007-08;

(i) DfES committed to a total reduction of 1,960 posts and DTI to reduce posts by 1,010 posts in the core Department by 2007-08; and

(j) DfES committed to relocation of 800 posts and DTI to 710 by 2010.[133]

After the Machinery of Government changes, responsibility for attaining these targets was "shared with DIUS and it has an agreed indicative share of the targets to be delivered in the areas that are now part of the department: Science, Innovation, Further Education and Skills and Higher Education functions".[134] In its 2007 Autumn Performance Report DIUS said that it was "on course" to meet the targets.[135] In a memorandum sent in July 2008 DIUS explained that the efficiency savings were reported using agreed OGC[136]/Treasury methodology and that the reported savings were validated by Director Generals as the Senior Responsible Owners through programme management arrangements. Some elements of the programme had also been audited by Internal Audit and DIUS central finance and the Treasury could also challenge "the data to check for robustness and validity".[137] DIUS reported in its 2008 Autumn Performance Report:

final net efficiency gains of £887 million (of which £558 million are cash releasing savings) against its target of £622 million at the end of March 2008. This is an over-achievement of £265 million. In addition DIUS delivered a further over-achievement of £198 million of gains, £154 million of which are cash releasing gains that Treasury has agreed can be rolled forward to count as early achievements towards its 2007 CSR commitment. This commitment will deliver further improvements and value for money of £1,543 million by the end of the CSR period. DIUS has also delivered a total of 133 relocations by September 2008 and will continue to report on the achievement of the remainder of the target by 2010.[138]

CSR07 also set efficiency targets for DIUS. The Treasury said in the 2007 Pre-Budget Report and Comprehensive Spending Review that the additional investment provided from CSR07 would be accompanied by value for money reforms generating annual net cash-releasing savings of £1,543 million by 2010-11.[139] The Departmental Report referred to a number of savings:

Research Councils to deliver value for money savings of £243 million by 2010-11.[140]

The Research Councils UK Gershon efficiency project has successfully achieved its target of delivering savings of £170 million on reprioritisation, co-funding, the restructuring of Research Council institutes and reductions in administrative spending by individual Research Councils.[141]

The Learning and Skills Council estimates that from an annual procurement expenditure of £1.6 billion, colleges could make savings of £75 million by March 2008.[142]

We have had problems scrutinising the £1,543 million in efficiency savings which DIUS agreed to make as part of the Comprehensive Spending Review 2007. First, the figures in the Departmental Report do not add up to £1,543 million. Second, although a more detailed list was provided in DIUS's Value for Money Delivery Agreement December 2007,[143] nearly half the savings (£700 million), which will fall on further education and skills, were not set out because DIUS was "still finalising details".[144] Third, the 2008 Autumn Performance Report provided no comprehensive account of the savings made in 2008.[145] We found especially the treatment of Train to Gain unclear. DIUS's 2008 Autumn Performance Report stated that

we have recently introduced new flexibilities; DIUS announced that small businesses will be the focus of £350 million of Government funds within Train to Gain to help them train their staff. As part of this package, we are introducing new flexibilities to allow funding for units or modules of accredited training in subjects known to be valuable to SMEs. We will also be supporting level 2 training for staff who already have a previous qualification at this level. Both of these changes potentially affect the level of our Train to Gain efficiency.[146]

We were unable from the information in the Departmental Report and the 2008 Autumn Performance Report to form a clear picture of the extent to which the savings required as part of the Comprehensive Spending Review Settlement 2007 are being achieved by DIUS. We recommend that in responding to this Report DIUS set out in detail with full baselines and costings—beyond those usually provided in Autumn Performance Reports—the savings promised as a result of CSR07 with progress made to date.

91 HM Treasury, 2007 Pre-Budget Report and Comprehensive Spending Review, Cm 7227, October 2007, section D4 Back

92 HM Treasury, DTI, DfES, Science & innovation investment framework 2004 - 2014, July 2004 Back

93 HM Treasury, 2007 Pre-Budget Report and Comprehensive Spending Review, Cm 7227, October 2007, section D4 Back

94 HM Treasury, Leitch review of skills: Prosperity for all in the global economy-world class skills, Final report, 2006 Back

95 HM Treasury, A review of UK health research funding: Sir David Cooksey, December 2006 Back

96 HM Treasury, The Race to the Top: A Review of Government's Science and Innovation Policies; Lord Sainsbury of Turville, October 2007 Back

97 HM Treasury, 2007 Pre-Budget Report and Comprehensive Spending Review, Cm 7227, October 2007, section D4 Back

98 Oral evidence taken on16 January 2008, HC (2007-08) 186-i, Q 34 Back

99 Oral evidence taken on 16 January 2008, HC (2007-08) 186-i, Q 34 Back

100 HM Treasury, 2007 Pre-Budget Report and Comprehensive Spending Review, Cm 7227, October 2007 Back

101 Departmental Report, p 21 Back

102 Third Report of the Innovation, Universities, Science and Skills Committee, Session 2007-08, Withdrawal of funding for equivalent or lower level qualifications (ELQs), HC 187 Back