Efficiencies and the FCO's financial
position
204. In our last report we recommended that, given
the scale of the FCO's efficiency programme, it should devote
more space in its annual report to reporting progress on meeting
its efficiency target.[274]
We were pleased to see that the FCO has acted on our recommendation
in its 2007-08 annual report.[275]
205. In the Spending Review 2004 (SR04) period, the
FCO was set a target of finding £120 million in efficiencies.
In July 2008 it sent its final report to the Treasury on its SR04
Efficiencies Programme. This showed that the FCO had achieved
savings of £132 million, the biggest savings being achieved
by the Corporate Procurement Group which realised savings of £23.4
million.[276]
206. In its Comprehensive Spending Review 2007 (CSR
07) settlement, the FCO was allocated a 5% real terms cut in administration.
It has an efficiency target of £144 million (or at least
3% annual cash-releasing efficiency savings on its 2007-08 near-cash
Departmental Expenditure Limit (DEL) baseline by 2010-11, of which
£130 million must be resource and £14 million capital).
The FCO sent us the summary table below, showing its provisional
targets by project:Summary
Table of FCO VfM Project Efficiency Targets[277]
| Projects | Efficiency Target
|
| Europe Zero Based Review (ZBR) | £ 9,000,000
|
| Roll out of Europe ZBR to other regions |
£ 2,900,000 |
| IT ZBR | £ 9,500,000
|
| Finance Function Review | £ 1,700,000
|
| Improved procurement | £ 11,000,000
|
| Increased FCOS efficiency | £ 6,000,000
|
| Reducing the overhead costs of overseas Representation
| £ 3,000,000 |
| Increased UKTI Efficiency | £ 4,400,000
|
| Rolling back grade-creep in London | £ 3,200,000
|
| Future Funding of VIP Suites | £ 2,000,000
|
| Gratis Visa | £ 2,000,000
|
| Reduction on time spent by Defence Attaches on non-defence activities
| £ 10,500,000 |
| Language Training | £ 1,500,000
|
| BBC World Service efficiencies | £ 23,270,000
|
| British council efficiencies | £ 18,240,000
|
| Allocative Efficiencies* | £ 41,500,000
|
| Capital Efficiencies | £ 9,000,000
|
| Total | £ 158,710,000
|
| Restructuring Cost | £ 8,400,000
|
| Net Total | £ 150,310,000
|
207. The FCO pointed out that this table did not include predicted
benefits of the shared services programme as these were under
review (see paragraphs 215 to 218 below). It also emphasised that
it had allowed for a contingency in case certain projects under-delivered.[278]
208. We asked the FCO for further information about
allocative efficiencies. The FCO replied:
Allocative efficiencies in CSR 07 are generated
from moving resources from lower priority areas allowing savings
to be released and invested in higher priority areas. During 2007
Resources Allocation Round (RAR) budget were adjusted accordingly
to release 'cash' from these areas to be used in priority areas
as outlined in the Strategic Framework.[279]
209. The FCO's current budgetary position is set
out in the table below.
|
| 2008-09 | £000s
|
|
| Resource DEL | 1,979,547
|
| Capital DEL | 206,060
|
| Less Depreciation* | 105,050
|
| Total DEL | 2,080,557
|
|
| *Depreciation, which forms part of Resource DEL, is excluded from total DEL since capital DEL includes capital spending and to include depreciation of those assets would lead to double counting.
|
210. The FCO told us that its senior management were seeing "better
monthly reports, enabling us to be more confident about reallocating
resources and achieving a smaller underspend in 2008-09".[280]
We were also told:
At the same time, we are pushing ahead with a set of projects
to make our PRISM system easier to use and take advantage of new
Oracle tools for planning, budgeting and measuring the use of
staff time. We aim to introduce those new features in 2009-10.
We have established that there is a performance
gap between our overseas posts and UK departments in terms of
complying with our Purchase to Pay (P2P) processes. The UK position
has improved significantly in the last year and we are concentrating
on raising overseas performance. We are implementing a series
of improvements to our internal financial controls. These are
designed to place more reliance on in-built software, reduce the
level of year end audit testing and speed up the implementation
of recommendations in our audit programme.[281]
211. The FCO's Board minutes for 30 May 2008 suggested
that the FCO is facing a number of "emerging budgetary pressures"
this financial year, including how to manage the Treasury's withdrawal
of its support for the Overseas Pricing Mechanism (OPM), which
used to protect departments from weakening of sterling.
212. The FCO subsequently wrote to us in November
2008 outlining what action it had taken to mitigate the effect
of the Treasury's withdrawal of support for the OPM. We were told
that, upon ascertaining the Treasury's position, the FCO immediately
began to consider options for managing its foreign exchange exposure,
including the forward purchase of certain currencies. The FCO
also took advice from commercial banks and the Bank of England,
explored what government partners were doing and consulted independent
financial experts. We were told that proposals were then made
to the FCO's Finance Committee and HM Treasury and in May 2008
"approval was given to hedge using simple 'outright forward'
contracts."[282]
These contracts have no premium and guarantee an agreed exchange
rate for a given volume of currency on a given date in the future,
thereby providing absolute budget certainty. The FCO noted:
To date we have contracted with the Bank of England
to buy 80% of our net US Dollar and euro exposure up to October
2009. The principles we have applied to managing our foreign exchange
exposure are to (a) maximise budget certainty, (b) be low risk
and non-speculative, (c) hedge a maximum of 80% of net foreign
exchange exposure, and (d) recognise that the 'do nothing' option
is itself speculative and potentially high risk. […] As a
result of the hedging, we know that we will have the foreign currency
funds to finance our activities in this FY; but we will face a
tougher challenge in 2009-10.[283]
213. The Board minutes for September 2008 stated
that the FCO's financial position was "likely to be very
tight in forthcoming years" and would "need to be kept
under review".[284]
In correspondence with us the FCO has stated that although the
Treasury's increased contribution to expenditure on international
subscriptions should enable the FCO to meet commitments this financial
year, there is less certainty over the position for 2009-10 and
2010-11. It told us that:
We are currently forecasting additional pressures
of around £3 million in each of these financial years, and
a likely increase in the UN Regular Budget and other international
subscriptions will push this figure higher. That being the case,
we will have to curtail activities in other programmes in order
to meet these non-discretionary costs.[285]
214. We are deeply concerned that as a result
of the Treasury's decision to withdraw its support for the Overseas
Price Mechanism, the FCO may not be able to meet higher international
subscriptions over the next two financial years unless it cuts
its activities. We conclude that it is deplorable that the FCO
should have to shoulder the financial burden from within its already
tight budget to pay for subscriptions which also benefit other
Government departments, and we recommend that additional non-discretionary
costs should properly be met by the Treasury.
Shared services programme
215. Last year we were told that the FCO would have
a Shared Services Programme to "simplify, standardise and
streamline corporate services" within its network of Posts
in the CSR 2007 period and that this had the potential to produce
£22million in efficiencies.[286]
In early April 2008 the FCO informed us that it was working on
the design of its first Shared Service Centre, which would be
in the UK, and would cover the UK and 14 northwest Europe Posts.
We were was told that the Centre would initially focus on finance
and procurement, but would later extend its activities to cover
human resourcing also.[287]
The first step in this programme was to set up a UK processing
centre. This is sited at Hanslope Park near Milton Keynes; we
visited it in July 2008.
216. We were subsequently told that the programme
had received a red (take immediate action) rating at its Gateway
0 review.[288] Three
out of ten of the review's recommendations were rated red. These
related to the shape of the programme, its governance and the
need to establish an "Intelligent Client" Function for
the North West Europe Facilities Management contract.[289]
The FCO said it welcomed the recommendations and was taking action
on them, including strengthening the leadership of the programme
by appointing a more senior programme director (Andrew Lloyd).[290]
217. The FCO Board held a detailed discussion on
Shared Services at its September 2008 meeting.[291]
On 3 October, Sir Peter Ricketts wrote to tell us that the Board
had taken a decision to end its shared services programme and
replace it with a new "corporate services programme",
with Andrew Lloyd taking on the post of Director of Corporate
Services. He stated that experience had shown that in order to
realise benefits from the shared services programme, the FCO first
had to "spend more time modernising individual corporate
services, before moving to larger scale sharing of services overseas".
The new programme is intended to:
- Simplify, standardise and streamline
the FCO's corporate services, particularly in the areas of finance
and human resources;
- Develop the UK Processing Centre
into a UK Shared Services Centre, with initial further consolidation
of financial transaction processing, with a focus on driving service
levels up. Over time the Centre will be expanded to provide further
support across corporate services functions;
- Set the corporate framework and provide support
to deliver more joint working on corporate services among groups
of Embassies in particular regions, where it makes good business
sense to do so, and building on good practice already developed,
for example among the FCO's Posts in North America.[292]
218. We recommend that in its response to this
Report the Government should set out what lessons it has learnt
from the failure to implement a shared services programme, and
what progress it has made on setting up its new corporate services
programme.
266 Ev 135 Back
267
Ev 58 Back
268
Ev 167 Back
269
Ev 155 Back
270
Ev 174 Back
271
Foreign Affairs Committee, Foreign and Commonwealth Office Annual
Report 2006-07, paragraph 102 Back
272
Ev 195 Back
273
Ev 196 Back
274
Foreign Affairs Committee, Foreign and Commonwealth Office Annual
Report 2006-07, para 8 Back
275
Foreign and Commonwealth Office, Foreign and Commonwealth Office
Departmental Report 1 April 2007-31 March 2008, pp 114-117 Back
276
Ev 135 Back
277
Ev 79 Back
278
Ev 79 Back
279
Ev 170 Back
280
Ev 155 Back
281
Ev 155 Back
282
Ev 174 Back
283
Ev 174 Back
284
Summary of Minutes of FCO Board, 26 September 2008 Back
285
Ev 166 Back
286
Foreign Affairs Committee, Foreign and Commonwealth Office Annual
Report 2006-07, para 86 Back
287
Ev 70 Back
288
This is a programme-only review by the Office of Government Commerce
that investigates the direction and planned outcomes of the programme,
together with the progress of its constituent projects. It is
repeated over the life of the programme at key decision points. Back
289
This project was looking at outsourcing the cleaning, upkeep and
maintenance of FCO buildings in the UK and North-West Europe.
In September the FCO informed the Committee that Interserve (Facilities
Management) Ltd had been awarded the seven-year contract. It anticipates
savings of around £9 million over this period and also expects
the contract to "deliver significant benefits in terms of
standardisation of services for staff, better value for money,
a reduction in the management burden at Posts, and innovation
from the facilities management industry." (Ev 153) Back
290
Ev 128 Back
291
Ev 165 Back
292
Ev 153 Back
