2 Finance-related issues
Q
1 Impact of the fall of Sterling
Sterling's decline and the
FCO budget, 2008-10
21. The finances available to the FCO in 2008-09,
like those of other departments, were determined in the 2007 Comprehensive
Spending Review (CSR 07), which set broad departmental spending
limits for the three years 2008-11. On the basis of a budget of
£1.58 billion in 2007-08, the FCO's settlement was for additions
to this baseline of £99 million in 2008-09, £125 million
in 2009-10 and £123 million in 2010-11.[30]
We considered the FCO's CSR 07 settlement in detail in our
Report on the Department's 2006-07 Annual Report, which we published
in November 2007 shortly after the settlement had been reached.
We calculated then that the CSR settlement represented budget
growth in real terms of 3.4%, -1.2% and -2.8% in each of the three
years concerned, which averaged at an annual real reduction of
0.2% over the three-year period. We concluded that the FCO's CSR 07
settlement, "one of the tightest in Whitehall, risks jeopardising
the FCO's important work".[31]
22. There have been minor changes to the FCO's
budget since the outlines set out in the CSR 07. The Department's
outturn was for spending of £2.03 billion in 2007-08, followed
by £2.26 billion in 2008-09. The plan for 2009-10 is £2.12
billion.[32]
23. Compared to those of other departments, the
FCO's budget is distinctive in three respects:
i. It is small: £2.3 billion represented
0.6% of government departments' combined spending in 2008-09.
By comparison, the Department for International Development (DFID)
took £5.7 billion (1.6% of the total) and the Ministry of
Defence (MOD) £45.4 billion (12.7%).[33]
ii. A large proportion of the FCO's spending
is relatively inflexible, because it goes on staff salaries and
buildings, rather than programmes. The FCO considers around 80%
of overseas Posts' costs to be inflexible in the short term.[34]
The FCO is also primarily responsible for paying the UK's subscriptions
and other dues to international organisations such as the United
Nations (UN), which are typically determined according to a set
formula which the UK is unlikely to be able to alter in the short
term (see paragraph 36). Out of its total budget, the FCO considers
its available "discretionary" spending—excluding
international subscriptions, peacekeeping and conflict-related
spending, and the ring-fenced funding for the British Council
and BBC World Service—to be only around £830 million,
which represents 39% of its total 2009-10 budget.[35]
iii. Over half the FCO's budget is spent in currencies
other than Sterling.[36]
This is the highest proportion in Whitehall.[37]
DFID makes its overseas aid disbursements largely in Sterling:[38]
that Department's Permanent Secretary told the International Development
Committee in November 2009 that its Euro-denominated contribution
to the European Development Fund was its only major spending commitment
to have been hit by Sterling's recent fall.[39]
The FCO's foreign currency spend includes many of the costs which
are also relatively inflexible, such as subscriptions and other
assessed contributions to international organisations (which are
typically paid in US Dollars or Euros), and the local costs of
maintaining the FCO's overseas estate and paying locally-engaged
staff.[40] By contrast,
the foreign currency spend of the MOD, for example, is accounted
for to a much greater extent by major capital projects. The MOD's
foreign currency spending is also largely in US Dollars,[41]
whereas it has proved a particular constraint on the FCO that
it spends in 120 different foreign currencies (see paragraph 119).[42]
Given the small size of the FCO's overall budget,
the impact of exchange-rate losses and/or rises in inflexible
costs is larger, proportionately, than for departments with larger
overall spends.
24. The Treasury determines departmental budgets
in Sterling terms. Until the CSR 07, the Treasury and the
FCO operated the Overseas Price Mechanism (OPM), in order to even
out the effects of exchange-rate fluctuations, and thus maintain
the purchasing power of the FCO's budget in local currencies when
Sterling weakened compared to the exchange rate assumed by the
Treasury when setting the budget. The two Departments had been
operating the arrangement at least since the 1980s.[43]
Reflecting the uniqueness of its budget in terms of exposure to
currency risk, the FCO was the only Department with which the
Treasury operated such a mechanism.[44]
Under the OPM, every six months the FCO calculated the net effect
of exchange-rate fluctuations and differential inflation rates
on its overall purchasing power overseas. When the FCO's purchasing
power was greater than intended, because Sterling had strengthened,
it returned money to the Treasury. When the FCO lost out because
Sterling had weakened, the Treasury made up the shortfall (from
the Treasury Reserve). According to the National Audit Office
(NAO), in the three years before 2007-08, the operation of the
OPM meant that the FCO transferred funds to the Treasury, to the
tune of £5-14 million each year. In 2007-08, the year in
which the CSR 07 took place, the weakening of Sterling obliged
the Treasury to transfer £1.4 million to the FCO.[45]
25. As part of the CSR 07, the Treasury
withdrew its support from the OPM, and left the FCO largely exposed
to the effects of exchange-rate fluctuations. According to the
NAO:
[The] Treasury's purpose in withdrawing [the] OPM
was to introduce what it saw as more modern methods of risk management.
It has long been the Government's policy to ask departments to
bear the risk of predictable variations in expenditure in their
Departmental Expenditure Limits (DEL). At the time of the CSR 07
settlement, the Treasury considered it appropriate to extend this
to include currency movements, particularly as there were risk
management instruments commonly available in the financial markets.[46]
The NAO told us that, by contrast, the FCO considers
that its foreign currency spending should be counted outside its
DEL, and instead as Annually Managed Expenditure (AME), which
is expenditure which is "subject to variation that is unpredictable
and results in cost variations of a scale that cannot be managed
within Departments' DELs".[47]
The NAO added that, at the time of the CSR 07, "what
neither the FCO nor the Treasury foresaw was the extreme volatility
in foreign currency markets in the early part of the CSR period
following the global financial crisis".[48]
26. The NAO also told us that "the Treasury
looks to [the] FCO to factor in exchange-rate changes as a part
of resource allocation decisions".[49]
The then Chief Secretary to the Treasury, Yvette Cooper MP, told
the House in March 2009 that the OPM "did not provide the
[FCO] with the incentive to factor in medium-term changes in currency
costs when it allocated its resources".[50]
The NAO noted that the FCO:
contends that in several areas of foreign policy
priorities, such as the need to negotiate a climate change agreement
or to respond to the terrorism threat, the risks and opportunities
to the United Kingdom of doing business abroad, or choosing not
to, do not change alongside rises or falls in foreign exchange
rates.[51]
Sir Peter Ricketts confirmed that he did "not
think you can allow foreign exchange to drive foreign policy".[52]
To make the point, if since November 2007 the FCO had sought to
favour spending in the major currencies against which Sterling
had weakened least, it would have prioritised spending in Indian
Rupees, Russian Roubles, Turkish Liras and South Korean Won.[53]
If the Department had sought to favour spending in the major currencies
against which Sterling had been most stable, it would have allocated
extra resources to spending in Turkish Liras and Swedish Kronor.[54]
Sir Peter Ricketts told us that, if the Treasury wished the FCO
to allocate resources partly on the basis of reducing exchange-rate
risk, he would "find that quite hard to turn into operational
effect".[55]
27. In our Report on the FCO's 2007-08 Annual
Report, published in February 2009, we warned that "given
its spending commitments in foreign currencies, the FCO is likely
to be more adversely affected than most other government departments
by a depreciation of Sterling". We expressed concern in case
the FCO's performance against its targets was affected by Sterling
weakness.[56] In its
response, in April 2009, the FCO said that it was "too early
to say" what effect Sterling's fall might have on its performance.[57]
28. As financial years 2008-09 and especially
2009-10 have unfolded, the impact of the OPM's withdrawal on the
FCO's finances, under current economic circumstances, has become
ever-clearer and more serious. The CSR 07 took place when
Sterling was at historic highs against the US Dollar and Euro.
In the CSR, the Treasury assumed exchange rates of £1=$2.0143
and £1=€1.4578.[58]
Since then, Sterling has been below these levels—permanently
against the Euro, and for all except the very beginning of the
period against the Dollar. Sterling fell especially sharply below
the CSR rates after the full onset of the global financial crisis
in autumn 2008 and the subsequent drastic deterioration in the
UK's public finances.[59]
As we prepared this part of our Report in late January 2010, Sterling
was down by nearly 22% against the Euro and nearly 20% against
the Dollar compared to the rates assumed in the CSR. Sir Peter
Ricketts told us that Sterling was down by 25% against "many
of the major currencies".[60]
29. We conclude that the withdrawal
of the Overseas Price Mechanism (OPM) made the 2007 Comprehensive
Spending Review (CSR 07) settlement a uniquely risky one
for the FCO, compared to other departments. We take no pleasure
in pointing out that we warned of the possible effects of the
OPM's withdrawal a year ago. Especially in the light of exchange-rate
developments since the CSR 07, we cannot see that it remains
credible to regard the costs of currency fluctuations as predictable
ones which the FCO might reasonably be expected to absorb. Apart
from the substantive spending effects involved, requiring the
FCO to absorb such serious exchange-rate risk undermines accountability
and strong budgetary planning. We further conclude that any suggestion
that the FCO should allocate its resources partly on the basis
of exchange-rate considerations is ludicrous. We agree with the
FCO's Permanent Under-Secretary Sir Peter Ricketts, that exchange
rates should not drive UK foreign policy.
30. To compensate for the impact of the fall
of Sterling on its purchasing power since autumn 2008, the FCO:
- in its 2008-09 Winter Supplementary
Estimate drew down all the funds remaining in its 2008-09 contingency
reserve (the Departmental Unallocated Provision [DUP]), totalling
£17 million, leaving the Department with no contingency for
the rest of the financial year;[61]
- in its 2008-09 Spring Supplementary Estimate
used £6.5 million in End-Year Flexibility,[62]
as well as claiming £24 million for international subscriptions
and £27.6 million for conflict prevention from its Treasury
reserve (see paragraphs 42 and 99);
- in its 2009-10 Winter Supplementary Estimate
again drew down all of its DUP, totalling £17 million;[63]
and
- in its 2009-10 Spring Supplementary Estimate
transferred £16 million from capital to administration spending,
including £3 million transferred from capital End-Year Flexibility,
and increased current non-cash Annually Managed Expenditure (AME)
by £30 million.[64]
On 9 March 2010, the FCO announced that it required £90 million
of the total £134.6 million in additional funds it was seeking
in the 2009-10 Spring Supplementary Estimate as a repayable cash
advance from the Contingencies Fund, in order to cover ongoing
operational costs such as the payment of suppliers until Parliament
approved the Spring Supplementary Estimate towards the end of
March 2010.[65]
31. In March 2009, the Foreign Secretary estimated
the potential budgetary pressure on the FCO in 2008-09 arising
from Sterling's fall at £90 million (including around £60
million affecting the spending of overseas Posts).[66]
By November 2009, the NAO put the figure for 2008-09 at around
£100 million, or around 5% of the Department's total budget.[67]
Despite this, in 2008-09 the FCO remained within its budget.[68]
32. As regards 2009-10, we noted in our previous
Report that the FCO anticipated a "tougher challenge"
and a "very tight" budgetary position, and that it had
raised the likelihood that it would have to "curtail activities".[69]
In correspondence in January 2009, the FCO told us that "if
Sterling continues to fall, it may not be possible to continue
the FCO's operationally essential work in a global network of
Posts, without additional funding". The FCO estimated that
"unless Sterling strengthens from its present low levels,
the FCO will need to find significant amounts of additional savings,
possibly up to £95 million, in each of 2009-10 and 2010-11
to meet [its] projected commitments".[70]
In its 2009 Autumn Performance Report, the FCO stated that "continuing
pressure on international and UK resources could affect delivery"
of the Government's "Global Conflict" Public Service
Agreement (PSA 30), which the Treasury had agreed for the CSR
2007 period with the FCO as the lead Department (see paragraph
288).[71]
33. In a letter to us of October 2009, the FCO
summarised the situation as it saw it:
from within one of the smallest Departmental Expenditure
Limits in Government, we have to manage a risk that is neither
foreseeable nor regular in its impact across the network. Over
half the Department's budget is spent in foreign currencies. Exchange-rate
movements can consequently impact on our ability to deliver in
our priority foreign policy areas. […] [The] fall in the
purchasing power of Sterling—by a third against the Dollar
and a quarter against the Euro—has had a major impact on
our resources which will continue through 2009/10 and 2010/11.[72]
34. In March 2009, the Foreign Secretary suggested
that exchange-rate pressures on the FCO in 2009-10 might again
amount to at least £90 million.[73]
In November 2009, the NAO confirmed that the FCO estimated exchange-rate
pressures in 2009-10 as amounting to around £100 million,
or around 12% of the £830 million which the Department reckons
as being available for its "discretionary" spending.[74]
On 20 January 2010, the FCO Minister Baroness Kinnock said that
the shortfall in the FCO's budget for 2009-10 now stood at £110
million.[75] Sir Peter
Ricketts told us in December that the Department was "struggling"
to meet its budget in 2009-10.[76]
Overall, the NAO assessed the withdrawal of the OPM and the subsequent
fall of Sterling as having had "a major impact on the FCO's
business worldwide".[77]
35. We conclude that, on the
basis of the figures given by Baroness Kinnock in January 2010,
the FCO has lost around 13% of the purchasing power of its core
2009-10 budget as a consequence of the fall of Sterling. We concur
with the National Audit Office, that the withdrawal of the Overseas
Price Mechanism and the subsequent fall of Sterling have had "a
major impact on the FCO's business worldwide". We note that
the budgetary transfers which the FCO has made to try to help
cope with the hit have absorbed all of the Department's contingency
reserve at the Treasury in both 2008-09 and 2009-10, and we conclude
that this represents an unacceptable risk to the FCO's ability
to perform its functions.
DUES TO INTERNATIONAL ORGANISATIONS
36. A particular issue in relation to the FCO's
budget and the fall of Sterling is that of the UK's subscriptions
and other obligatory ("assessed") contributions to international
organisations, such as assessed peacekeeping costs. The UK's subscriptions
are paid almost entirely out of the budget of the FCO (see paragraph
42); assessed conflict-related costs are shared with the MOD and
DFID. Contributions to international organisations are typically
paid in US Dollars or Euros, depending on the organisation.[78]
A state takes on a legal obligation to pay the relevant subscriptions
and other assessed contributions when it accedes to an international
organisation. Member States' dues are normally calculated as a
share of the relevant budget, the share being based on a formula
which is often subject to only difficult and infrequent renegotiation,
and which typically reflects most heavily the sizes of Member
States' economies—although, certainly at the UN, the UK
pays a disproportionately large share compared to some states
with larger and/or rapidly growing economies.[79]
37. Year-on-year, Member States can control the
size of their dues to international organisations most directly
by influencing the size of the organisations' budgets. For example,
in its 2008-09 Annual Report the FCO noted that it had "successfully
maintained a zero real growth budget […] for the Council
of Europe".[80]
The Foreign Secretary told the House in March 2009 that the Department
was seeking to do likewise across the range of international organisations
as they set their budgets for 2009-10.[81]
During our 2008-09 inquiry into "Global Security: Non-Proliferation",
we noted with some disquiet the Government's unwillingness to
countenance an increase in the core budget of the International
Atomic Energy Agency (IAEA), despite its support for an expansion
in the Agency's activities[82]—although
we also identified scope for rationalisation of the large number
of organisations and initiatives in the non-proliferation field.[83]
However, at least as regards the UN, Sir Peter Ricketts admitted
that there was "little [the FCO] can do" about the "inexorable"
rise in the UK's subscription, because of the UN's consensus-based
decision-making.[84]
38. The UK's dues to many international organisations
are rising independently of Sterling weakness, and are set to
continue to do so in forthcoming years. This is partly because
the UN and the EU are undertaking more peacekeeping activities
(the UK is the fourth-largest funder of UN peacekeeping);[85]
and partly the result of a number of one-off capital projects,
such as the construction of NATO's new headquarters (for which
the UK is liable for 13% of the cost).[86]
Sir Peter Ricketts told our inquiry two years ago that the FCO's
budget had "not kept pace" with rising international
subscriptions.[87] Former
Ambassador Sir Ivor Roberts was more forceful, telling us in evidence
at that time that it was "disgraceful that the Foreign Office
should somehow be penalised for the fact that international subscriptions,
over which it has no control at all, are going up, partly reflecting
the success of the British economy".[88]
39. Given that they are due in foreign currencies,
the fall of Sterling has directly increased the Sterling costs
of the UK's international subscriptions and other dues, and therefore
the FCO's spending obligations. For example, the FCO told us that
the Sterling cost of the UK's share of the NATO HQ project had
risen from £98 million in 2007 to £129 million as of
October 2009.[89] At
our request, the FCO provided us with a table comparing the changes
in the UK's dues in foreign currency terms with the same changes
converted into Sterling. The figures show that, for example, while
in Dollar terms the UK's payment to the UN Regular Budget is expected
to rise by 18.8% from 2008-09 to 2009-10, in Sterling terms this
converts into an expected increase of 30.9%. Whereas the UK secured
an expected reduction in its Euro-denominated subscription to
the Organisation for Security and Co-operation in Europe (OSCE)
of 10.3% between 2008-09 and 2009-10, in Sterling terms this converted
into an expected 6.8% rise.[90]
40. In Sterling terms, the UK's total payments
for international subscriptions rose from £136.2 million
in 2007-08 to £147.5 million in 2008-09 and an expected £172.7
million in 2009-10.[91]
For 2010-11, in March 2009 the FCO was estimating likely international
subscription costs of £163 million.[92]
However, its estimate of likely subscription costs for 2009-10
has shifted from around £146 million in February 2009 to
£193 million in March 2009 to £173 million in its February
2010 letter to us.[93]
This highlights the serious difficulties involved in predicting
the required payments in Sterling terms.
41. These figures for international subscriptions
exclude assessed peacekeeping costs, which came to £309.6
million in 2008-09.[94]
For 2009-10, the FCO said in March 2009 that it was budgeting
for £456 million in combined payments from itself, DFID and
the MOD for assessed peacekeeping, a rise of around 50% on 2008-09
(see paragraph 101).[95]
42. As part of the CSR 07, the Treasury
agreed that when the Sterling costs of the UK's international
subscriptions exceeded £102 million a year, it would fund
60% of the excess. Previously, from 2003-04, the Treasury had
funded 50% above the same baseline.[96]
The Treasury regarded the increase as compensation for the withdrawal
of the OPM. The increase in the Treasury's obligation under the
cost-sharing agreement partly accounts for the successive rises
in the amount for international subscriptions claimed by the FCO
from the Treasury Reserve in the Spring Supplementary Estimate,
from £12.8 million in 2006-07 to £18.5 million the following
year, £24 million in 2008-09 and £44.5 million in 2009-10.[97]
In total, the FCO said that it received just under £30 million
from the Treasury in 2008-09 under the international subscriptions
cost-sharing agreement.[98]
This should have reduced the costs paid by the FCO to around £120.2
million (5.3% of the Department's overall budget), compared to
the UK's total subscription costs of £147.5 million. For
2009-10, on the basis of the FCO's forecast of £172.7 million
in overall subscription costs, the cost-sharing agreement should
make the FCO's share around £130.3 million, or around 6.1%
of the Department's total budget. While the cost-sharing agreement
has not saved the FCO from encountering serious difficulties as
a result of the UK's rising subscriptions, the Department welcomed
the fact that it at least means that "the risks of rising
subscriptions and exchange-rate losses are shared between the
FCO and the Treasury".[99]
43. We conclude that the rising
Sterling costs of the UK's subscriptions and other obligatory
contributions to international organisations are placing very
severe strains on the FCO's budget and materially affecting its
ability to continue with other spending. The FCO expects to spend
around 6.1% of its total budget on international subscriptions
in 2009-10. We further conclude that the strain on the FCO's budget
is arising despite the fact that the increase in costs is to a
significant extent beyond the Department's control, as it arises
partly from Sterling's fall and partly from complex multilateral
factors at the organisations concerned.
44. In our Report on the FCO's 2007-08 Annual
Report, we said that we were "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".[100]
We also said that the UK's subscriptions to international organisations
benefit other departments, as well as the FCO. Under these circumstances,
we said that it was "deplorable that the FCO should have
to shoulder" all of the financial burden arising. We recommended
that "additional non-discretionary costs [of the UK's international
subscriptions] should properly be met by the Treasury".[101]
In its response, the FCO told us that our recommendation would
have to be considered in the next Comprehensive Spending Review.[102]
45. In April 2009, after the Foreign Secretary
announced reductions in UK secondments to international civilian
post-conflict missions as a result of Sterling's fall (see paragraphs
101-104), the Chairman of the Committee wrote to the Prime Minister
(copied to the Chancellor and Foreign Secretary) to express our
growing disquiet. The Chairman said that it was:
a matter for great concern that work in critically
important fields such as conflict prevention is being undermined
as a consequence of currency fluctuations which are outwith the
control of the FCO. My colleagues and I are strongly of the opinion
that cuts in conflict prevention could prove very short-sighted
and may lead to heavier burdens on public spending in the future.
We wish to repeat our recommendation that the Government should
pay non-discretionary costs such as subscriptions to international
institutions directly from Treasury funds, and should put in place
a mechanism to ensure that at this time of financial difficulties
the work of the FCO, critical to long-term international stability
and the interests of the UK, can be maintained at its previous
level. We consider it appropriate for such allocations to be made
wholly from the Treasury reserve.[103]
The Chairman received no reply.[104]
46. The Foreign Secretary told us in December
2009 that "in [his] experience, one must always be careful
about suggesting to the Treasury that it should take responsibility
for international subscriptions. What happens is that it allows
you to bear the rise in costs, and then if ever the costs go down,
it will snaffle the gain. There are swings and roundabouts that
have to be handled quite carefully".[105]
47. We suggested to Sir Peter Ricketts that international
civilian missions which support the police and judicial sectors
in vulnerable states bring benefits to the UK which may be felt
by the Home Office, and perhaps the Ministry of Justice, as much
as the FCO or DFID. We wondered whether there might be a case
for asking these Departments also to contribute to the costs of
such missions. Sir Peter said that it was a "fair point"
and that he would "take away [the] idea".[106]
48. We conclude that the UK's
membership of international organisations such as the United Nations
benefits many government departments. We therefore reiterate our
previous recommendation that the costs of the UK's international
subscriptions should be shared more equitably across Government,
rather than falling almost entirely on the budget of the FCO.
We recommend that the Government should agree a stable long-term
mechanism to distribute more widely the costs of the UK's membership
of international organisations as part of the Comprehensive Spending
Review which is expected after the 2010 General Election. We further
recommend that consideration should be given to involving relevant
home departments in supporting international missions in the police
and judicial sectors.
49. The increased international peacekeeping
activities which are increasing the strain on the FCO's budget
can be seen as evidence that the Department is making progress
towards the policy objectives which the Treasury agreed for it.
One of the performance indicators for the Government's Public
Service Agreement 30 (PSA 30) on "Global Conflict",
for which the FCO is the lead Department, is the existence of
"more effective international institutions, better able to
prevent, manage and resolve conflict and build peace".[107]
Similarly, for its Departmental Strategic Objective on conflict
(DSO 6), the FCO aims to encourage a "better-integrated national
and international approach to peace support operations",
"better […] early action to prevent conflict" and
"increased national and international capabilities to tackle
conflict".[108]
Under its Departmental Strategic Objective to develop effective
international institutions (DSO 8), the FCO aims to foster "greater
international institutional capacity to deal with emerging global
crises such as […] conflict".[109]
In one example, the FCO cited to us the EU's new anti-piracy maritime
operation "Atalanta" off the Horn of Africa as evidence
of the Union's increased willingness to tackle security threats,
in accordance with DSO 6.[110]
Sir Peter Ricketts noted that "the growth of UN peacekeeping
is not in itself a bad thing […] but [the] financial burden
on our available money is becoming very serious".[111]
50. Inasmuch as the FCO can
influence the size of the international budgets to which it must
contribute, we conclude that its current policy and budgetary
framework provides it with contradictory incentives—both
to promote reform and an expansion in activities at international
organisations, which might help the FCO to achieve its policy
objectives; and to favour the status quo in order
to keep its own budget down. We recommend that, while maintaining
its strong commitment to international organisations, the FCO
should continue to bear down on their costs—where this is
compatible with the achievement of UK policy objectives—and
pursue the more equitable sharing of costs among Member States
as part of its agenda for international institutional reform.
SPENDING CUTS
51. In March 2009, the Foreign Secretary said
that the FCO was "minimising" the impact of Sterling's
fall on its budget through "delayed activity, by making additional
efficiency savings, and implementing a strategy of forward purchasing
of foreign exchange" (see paragraphs 110-123).[112]
In July 2009, after examining the FCO's first results for the
2009-10 financial year, the FCO Board agreed that the Department
would have to reallocate funds within its budget, including perhaps
to some of the Posts worst affected by Sterling's fall.[113]
By September 2009, the FCO Board felt obliged to agree to "a
package of measures to address the pressures on the FCO budget,
many of which were as a direct or indirect consequence of the
collapse of Sterling".[114]
Sir Peter Ricketts described the measures to the Public Accounts
Committee in October as "pretty drastic", and said that
they had been triggered when it became clear that the FCO was
heading for an overspend on its 2009-10 budget.[115]
52. The NAO told us in November 2009 that the
measures taken by the FCO had "led to wide-ranging cuts to
programmes supporting international priorities, including counter-terrorism".
The NAO said that cuts had been made to security abroad, health
and safety (including essential works in Africa), and "current
and future capability".[116]
53. In his evidence to us in December, Sir Peter
Ricketts confirmed that the FCO was having to "stop a lot
of activity […] in order to come within our parliamentary
control totals". He said that the Department had:
stopped whatever programme activity was not committed,
stopped most of our training and cut into our travel and our hospitality
for posts overseas. […] local staff have not had overtime
payments or, in some cases pay rises, and some are on involuntary
unpaid leave or four-day weeks. We have a real problem within
the budget at the current levels of Sterling.[117]
The NAO told us in November that the FCO regarded
the cuts as "severely impacting on its ability to deliver
frontline diplomacy".[118]
Sir Peter Ricketts told us that the cuts had "not stopped
[the FCO's] diplomats around the world doing the key jobs that
they should be doing" and had not "as yet […] had
an impact on our effectiveness as an organisation. If they continue,
[…] they will".[119]
54. The scale of the cutbacks being implemented
by the FCO gained widespread attention in January 2010, when FCO
Minister Baroness Kinnock told the House of Lords that FCO budget
constraints had led to "staff redundancies, cuts to travel
and training, and reduced programme funding including our work
on counterterrorism and climate change". Baroness Kinnock
went on:
We have had staff redundancies in Argentina, Japan
and across the United States. Counter-narcotics programmes in
Afghanistan, capacity building to help conflict prevention in
Africa, and counterterrorism and counter-radicalisation in Pakistan
have all been cut; the list goes on.[120]
55. Baroness Kinnock's remarks triggered intense
political debate about the level of UK funding for counter-terrorism
work in Pakistan. FCO Ministers told both Houses in answer to
urgent questions that the FCO's overseas counter-terrorism budget
was rising, from £35 million in 2008-09 to £36.9 million
in 2009-10 and around £38 million in 2010-11; and that Pakistan
was receiving the largest share, with counter-terrorism spending
there rising from £6.2 million in 2008-09 to £8.3 million
in 2009-10 and a projected £9.0-9.5 million in 2010-11.[121]
However, Parliamentary Under-Secretary Chris Bryant MP admitted
that the FCO would be "spending less in 2010-11 than [it]
had an ambition to spend".[122]
56. In its 2009 Autumn Performance Report, the
FCO classed as a "risk" to its counter-terrorism work
the fact that "the volume of counter-terrorism-related litigation
is putting increasing pressure on [the FCO's] resources in London".[123]
In subsequent correspondence, the FCO clarified that the costs
of counter-terrorism litigation were not being met from programme
funds but from the Counter-Terrorism Department's administration
budget and from central funds.[124]
57. In November 2009, the FCO Board "agreed
that the cuts imposed at the end of the first quarter were serving
to bring down the projected shortfall, though the impact of foreign
exchange movements over the remainder of the year could not be
predicted". The Board "emphasised the importance of
maintaining downward pressure on spending, but decided that the
organisation could not absorb further cuts to compensate for foreign
exchange pressures".[125]
58. In the course of our current inquiry and
other work in 2009-10, we have been made aware of the impact of
the financial pressures facing the FCO in two areas in particular,
namely spending at its overseas Posts, and secondments to international
civilian peacekeeping missions, particularly in the Western Balkans.
We consider each of these in more detail below.
Overseas Posts
59. The FCO operates a network of over 260 Posts
in over 170 countries. Its Posts comprise sovereign ones, namely
Embassies, High Commissions (to Commonwealth countries) and Missions,
Delegations and Permanent Representations to international organisations;
and subordinate ones, comprising consulates and trade and other
representative offices. There is also the network of Posts in
12 of the 14 Overseas Territories (OTs).[126]
To date, the FCO has set each Post's devolved budget each year
in Sterling.
60. We discussed the state of the FCO's network
of overseas Posts in our Report on the FCO's 2007-08 Annual Report,
in February 2009. We warned then that "bearing in mind the
FCO's tight financial situation, its desire to operate in particularly
difficult places and the prospect of future staff reductions,
[…] there is a serious risk of over-stretch in some areas".[127]
61. In March 2009, the FCO put the pressures
on spending by its overseas Posts arising from Sterling's fall
as amounting to around £60 million in 2008-09.[128]
In evidence which suggested the much greater difficulties being
faced by the FCO, DFID's Permanent Secretary told the International
Development Committee in November 2009 that that Department had
had to purchase only around £3 million in extra foreign currency
for 2008-09 to cover the additional administration costs at its
overseas offices arising from Sterling's fall; and that for 2009-10
the extra purchase amounted to around £2.1 million.[129]
For 2009-10, for the FCO, the Foreign Secretary said in December
2009 that he expected pressures on the overseas network to come
to around £80 million.[130]
Sir Peter Ricketts said in December 2009 that for 2010-11 the
expected figure was around £120 million.[131]
The Foreign Secretary told the House in December that 190 Posts
in the FCO network—that is, over 70%—had faced exchange-rate
and inflationary pressures against which the OPM would previously
have offered protection.[132]
62. We referred to cuts being made at overseas
Posts in paragraphs 52-54 above. In its November 2009 submission
to our inquiry, the NAO confirmed that, in order to remain within
their budgets, Posts were introducing short-time working, requiring
unpaid leave and making redundancies among locally-engaged staff.[133]
The Foreign Secretary has confirmed that programme activity has
been stopped in Berne, Madrid, Reykjavik, Stockholm and Valletta.[134]
Looking ahead, Sir Peter Ricketts told us that "the budgetary
pressures […] put a question mark over whether we can maintain
the number of people we have abroad […] there will have to
be further reductions in the size of Posts".[135]
63. We have been made aware of the effects of
the financial situation at overseas Posts during visits which
we have made in connection with other inquiries, in October 2009
to the United States (New York and Washington) and the Western
Balkans (Belgrade, Pristina and Sarajevo), and in January 2010
to Madrid, Lisbon, Nicosia and Valletta. Our impression is that
the cuts are impacting on both large and small Posts, in different
ways—unsettling remaining staff, demanding significant management
resources, curtailing planned programme and diplomatic work, and
significantly limiting Posts' capacity to respond to unexpected
developments if necessary. At large Posts, such as Washington,
even a small weakening of Sterling can result in large absolute
losses to local budgets; while at small Posts, such as in the
Western Balkans, exchange-rate losses can render nearly unworkable
budgets for small-scale programme projects. In his letter accompanying
the Annual Report of the FCO's Strategic Programme Fund for 2008-09,
the Foreign Secretary noted that the Report "illustrates
how relatively small funds can help us to make a real impact on
policy delivery".[136]
64. We were particularly shocked during our visit
to the US by the scale of the cutbacks being required to the operation
of UK Posts in that country. As it must do its local spending
in Dollars, the US network of Posts is seeing its budget being
particularly badly affected by Sterling's decline against the
US currency. We found that Posts in the US had made locally-engaged
staff redundant, asked staff to take unpaid leave, frozen recruitment,
cut overtime and suspended some employer pension payments; halted
programme spending for the rest of the financial year; cancelled
non-core training; cut travel and entertainment budgets; and halted
all but urgent and essential maintenance work on the estate. Our
impression was that the measures were making the work of the UK's
Posts in the US considerably more difficult. We have pursued the
question of the possible impact of the cuts on the FCO's work
with the US as part of our current inquiry into "Global Security:
UK-US Relations", and will report our detailed findings in
that Report. Sir David Manning, former British Ambassador to Washington,
told that inquiry that "if we keep taking people away and
if, by some chance, we find ourselves apparently deciding on the
numbers of people we have [at Posts in the US] according to the
fluctuations of the exchange rate, we will certainly be in trouble".[137]
65. We assume that other countries' diplomatic
networks will be aware of the cutbacks at overseas Posts that
the FCO is having to make—indeed, we have anecdotal evidence
that this is the case—and that they will read messages into
them, both about the importance which the UK attributes to the
relevant bilateral relationship, and about the UK's capacity to
continue to support its global diplomatic network. We take the
view that diplomatic work to a significant extent involves personal
interactions and contacts, including at what may appear, mistakenly,
to be purely social functions. We also note that the impact of
the cuts on locally-engaged staff will mean that local societies
in the countries concerned are likely to be aware of the reduction
in UK operations.
66. One element in the efficiency savings programme
which the FCO is required to implement under the CSR 07 (see
paragraph 144) is a programme to "reduce the overhead costs
of overseas representation". According to the Department's
2009 Autumn Performance Report, far from yielding savings, this
project is costing money, as it cannot deliver savings large enough
to outweigh the impact of the fall of Sterling on the costs of
overseas Posts. The "overseas representation" efficiency
programme delivered "negative" savings of £5.12
million in 2008-09, a figure which had fallen to a cumulative
"loss" of £2.28 million by the end of the second
quarter of 2009-10, and was expected to deliver "negative"
savings of £0.58 million by the end of the three-year period.[138]
67. We conclude that the FCO's
overseas Posts are facing very severe financial pressures as a
result of the fall of Sterling that in some cases are a significant
strain on their work and in others are unacceptably disrupting
and curtailing it. We further conclude that the cuts that the
FCO is making at its overseas Posts represent a serious reputational
risk to the Department and the UK, and thus a threat to the FCO's
effectiveness.
68. Sir Peter Ricketts told us, in July 2009,
that he was commissioning a review of all allowances for staff
serving overseas, to ensure that they:
provide value for money to the Department and the
taxpayer, support our business needs, fit the family circumstances
of FCO staff in the 21st century, provide the right incentives
to staff to serve in the places where we need them most and offer
a fair and flexible package to enable staff and families to maintain
a UK-level quality of life (or compensation for it) wherever they
serve.[139]
Sir Peter said that the FCO was consulting on this
issue with the MOD and DFID, which were engaged in a similar process.
69. After completion of the review, Sir Peter
told us in December 2009 that the FCO was recommending "reduced
access to business class air fares; less extra leave overseas;
changes to education allowances; and the abolition, simplification
or consolidation of a number of financial allowances". Sir
Peter told us that the Department was negotiating with the trade
unions on the proposals, and hoped to implement many of them by
April 2010.[140] Sir
Peter said that the review "should result in a set of allowances
which are fit for purpose, firmly based on the actual extra costs
or hardships of living and working overseas, and simple to understand
and administer".[141]
The Government's Public Value Programme aims to generate £13
million in savings by 2012-13 from "ensuring payments made
to public servants posted overseas reflect modern lifestyles and
family circumstances".[142]
We consider the possible impact on staff morale of changes to
allowances, plus the other cuts affecting staff serving overseas,
in the next chapter.
70. As of January 2010, the FCO did not appear
to have closed any Posts as a direct result of the financial pressures
arising from Sterling's fall, although we assume that the budgetary
environment always figures in any decision about the shape of
the network. Since 2007, the FCO has closed three High Commission
offices (in St Vincent and the Grenadines, Antigua and Grenada,
countries to which the High Commissioner in Barbados is accredited),
plus the consulate in Nagoya (Japan) and trade offices in Aleppo
(Syria) and southern Taiwan. In the same period, the FCO has opened
Embassy offices in Goma (Democratic Republic of Congo) and Juba
(Sudan), and a British Interests Section in Madagascar.[143]
71. The FCO last closed a sovereign Post, the
Embassy in Dili (East Timor), in October 2006. This was the final
step in implementing the last major round of Post closures, announced
by the FCO in 2004 and 2005 after the publication of the Department's
first formal strategy document in December 2003[144]
and the 2004 Spending Review. The closures implemented at that
time left the UK with no Embassy/High Commission in Paraguay,
the Bahamas, Lesotho, Swaziland or Madagascar.[145]
At the time, we expressed regret at the closures of British sovereign
Posts in Madagascar and the Commonwealth countries of Lesotho
and Swaziland in particular.[146]
We note that a British Interests Section in Madagascar, where
the FCO closed the Embassy in August 2005, is one of the posts
that the FCO has decided recently to open. As regards new sovereign
Posts, after the UK recognised their independence in 2006 and
2008, respectively, the FCO converted non-sovereign Posts into
Embassies in Montenegro and Kosovo.
72. As part of the "Strategy Refresh"
initiated by the Foreign Secretary after he took office in June
2007, the FCO undertook a review of the "role and shape"
of its overseas network.[147]
As a result, the FCO's new Strategic Framework, which was agreed
with the Treasury as the FCO's set of Departmental Strategic Objectives
(DSOs) for 2008-11, included maintenance of a "flexible global
network" as a DSO (DSO 1). Maintenance of a network of Posts
around the world was not mentioned among the FCO's previous strategic
priorities. Moreover, the post-2007 Strategic Framework refers
to the network "serving the whole of the British Government".[148]
Under the post-2007 framework, therefore, overseas Posts are conceptualised
as resources for the whole of the Government, and as platforms
from which departments other than the FCO may operate overseas,
including by basing their staff there.
73. The FCO's assertion of its overseas network
as a key asset came at a time when observers were sometimes questioning
the added value of Embassies abroad, as the advent of instant
global communications allowed all parts of Government to access
their own information about developments overseas and conduct
business directly with counterparts there, without having to go
through Embassies and other Posts. We return to this debate in
paragraphs 328-330 at the end of our Report.
74. The financial pressures facing the FCO have
given rise to renewed press and political speculation about the
possibility of further Post closures.[149]
This is particularly the case because around half the FCO's Posts
have fewer than four members of staff, meaning that there might
appear to be few money-saving options short of closure.[150]
The FCO's 2009 Autumn Performance Report already warned that "if
the current budget pressure [as] a result of the sharp fall in
Sterling continues, we may not be able to sustain our current
global presence".[151]
An internal FCO memo from Sir Peter Ricketts from the turn of
2009-10, of which the FCO gave us sight, said that the resources
which were in prospect for the FCO at that time for 2010-11 would
require the Department to close Posts.[152]
75. We asked Sir Peter Ricketts about the possibility
of Post closures. He said that he thought that:
the [FCO] Board and Ministers would be absolutely
clear that our primary asset is our global network of Embassies
and Consulates—our capacity to reach every country in the
world, either for foreign policy or to help British citizens in
terms of consular assistance. That is what we will seek to preserve.
That is […] our particular asset.[153]
However, Sir Peter also said that, since "the
tightness of the budget […] means we have to look at every
option", he would not rule out the possibility of Post closures,
and it would be one of the money-saving measures which the Department
would be looking at in early 2010. As of December, Sir Peter said
that the Department had not conducted an exercise to identify
where any Post closures would fall, and that there was "no
secret list" of such Posts.[154]
In January, Chris Bryant repeated to the House Sir Peter's denial
that plans existed for Post closures.[155]
76. Given the dispersal around
the world of potential threats and areas of concern to the UK,
and the large numbers of British citizens who travel widely overseas,
closures of FCO overseas Posts risk leaving potentially damaging
gaps in UK information-gathering, provision of assistance and
exercise of influence. Post closures are also costly to reverse
if judged subsequently to have been mistaken. We therefore conclude
that the FCO is correct to identify as its top priority the maintenance
of global UK representation through a network of overseas Posts.
However, we further conclude that, without a marked easing in
the financial pressures which they are facing, the FCO risks maintaining
some Posts which are insufficiently resourced to carry out much
effective work. We recommend that funding for the FCO should be
increased to redress this.
77. The most significant development in the FCO's
overseas network under the post-2007 Strategic Framework so far
has been a major shift of personnel out of continental Europe,
where the FCO considered that work could be carried out by fewer
staff, and into Posts seen as more important for the FCO's global
objectives, primarily in Asia, the Middle East and parts of Africa,
Russia and Latin America. The shift encompasses UK-based as well
as locally-engaged staff.[156]
The FCO has said that 77 policy jobs have been eliminated in continental
Europe, with others being eliminated in London and the Americas,
and 172 created elsewhere.[157]
Sir Peter Ricketts told us that he thought the FCO would have
to continue to shape the network on the basis of these kinds of
considerations.[158]
78. As noted in paragraph 72, under its post-2007
Strategic Framework the FCO has been encouraging other departments
to base their staff working overseas at its Posts. Sir Peter Ricketts
confirmed that the FCO believes "that the Embassy is the
best place normally to have all the different parts of HMG's operations
overseas".[159]
79. When departments other than the FCO base
staff in overseas Posts, the FCO seeks to recover the full economic
costs involved by signing the relevant departments and agencies
up to Service Level Agreements, which set out what the FCO will
provide and the costs it will recover. The FCO expects to recover
£37 million from other departments through such arrangements
in 2009-10, plus a further £161 million from the UK Border
Agency (UKBA).[160]
80. Both the process of reaching Service Level
Agreements with the FCO, and what is seen as the high level of
its charges, continue to be a difficulty for other departments.
According to the FCO's 2009 Survey of Whitehall Partners, unclear
and high costings were the main sources of dissatisfaction with
the Service Level Agreements among other departments and agencies.
The Cabinet Office's 2009 Capability Review of the FCO noted that
"the charging system used in overseas Posts is a particular
frustration for many other government departments".[161]
In its recent report on the FCO's management of its estate, in
February 2010, the NAO found that the charging regime "lack[ed]
transparency and [was] confusing and costly".[162]
Sir Peter Ricketts told us in May 2009 that the FCO had "implemented
a number of initiatives to simplify and streamline" the charging
process,[163] and in
July he said again that the FCO was "working to improve the
arrangements for charging full economic costs to other government
departments".[164]
However, he also acknowledged that "other departments find
[the FCO] expensive as a place to operate from".[165]
This is particularly because FCO buildings overseas have more
burdensome security requirements than those that other departments
might face if operating independently. This is especially the
case since the fatal attack on the British Consulate in Istanbul
in 2003, which continues to shape the FCO's security requirements
for its overseas buildings.
81. The difficulties involved in the FCO's cost-recovery
process with other departments are being compounded by Sterling's
fall and the financial pressures facing all of Government. The
FCO pointed out that "costs directly incurred by the FCO
at overseas Posts on behalf of other departments are passed onto
those departments at the daily exchange rate and the other departments
therefore bear the exchange-rate risk for these costs".[166]
According to Keith Luck, FCO Director General Finance, other relevant
departments are in turn "under the same sort of financial
pressures [as the FCO] and are finding it difficult to find additional
resources to cover the exchange-rate losses".[167]
82. In February 2010, Sir Peter Ricketts told
us that the FCO had decided to retain the existing charging framework
for other departments using FCO Posts for the rest of the CSR 07
period, but that "work [had] begun on identifying how funding
for the overseas platform can be improved for the next Spending
Review with a view to moving away from the current charging framework".[168]
83. We concur with the FCO that
as a general rule all British government departments and agencies
should base their operations in any given overseas city in a single
location. While we appreciate that other departments' use of FCO
buildings may carry unavoidable extra security costs for them,
we conclude that co-location in FCO premises is likely to enhance
cross-departmental co-ordination and the projection of the UK
presence.
84. Where other departments
make use of the FCO's overseas Posts, we conclude that the current
department-by-department system by which the FCO recovers the
associated costs is cumbersome and inefficient. We note that the
numbers of personnel and departments using FCO overseas Posts
may rise, and we therefore welcome indications that the system
may be re-examined as part of the next Comprehensive Spending
Review (CSR) which is expected after the 2010 General Election.
We recommend that the CSR should review the costs of the overseas
network across relevant parts of Government and consider sharing
costs on a more regularised, equitable and ongoing basis.
85. There has been a particular drive for the
FCO and DFID to share overseas offices, in order to reduce the
number of countries in which the two Departments are maintaining
separate representations, and facilitate the joint provision of
corporate services, thereby reducing overall costs. Sir Peter
Ricketts told our inquiry last year that co-location also had
policy benefits.[169]
In October 2009, the FCO told us that since the start of the CSR 07
period FCO-DFID co-locations had taken place in Brasilia, Georgetown,
Harare, Kampala and Lilongwe. Work was underway for co-location
in Dhaka, New Delhi and Jerusalem. However, the FCO noted at the
same time that opportunities for co-location had fallen, because
DFID had closed its offices in some countries as a result of restructuring.[170]
The FCO said that co-location in Abuja, Beijing, Bridgetown and
Pretoria would now be considered in the next CSR period.
86. The FCO and DFID are seeking to harmonise
the pay and conditions of their local staff at Posts where the
two Departments are co-located. In September 2009, the FCO told
us that two of three pilot Posts had nearly completed their reviews
of local staff pay, and that a further ten Posts had started the
process.[171] In January
2010, the Foreign Secretary said that six co-located Posts had
now completed the process.[172]
The aim is for all co-located Posts to complete their joint pay
reviews by mid-2010.[173]
The two Departments are also "exploring collaborative procurement
opportunities".[174]
87. We recommend that in its
response to this Report the FCO should list the number of locations
where there is currently co-location with DFID and set out the
number of co-locations with DFID which it expects will be completed
in the CSR 07 period, confirming whether the number will
be lower than originally planned.
88. In its 2008-09 Annual Report, the FCO noted
the creation of the Nordic-Baltic network, as an innovation aimed
at facilitating the maintenance of even small Posts, by reducing
the costs associated with each one. The FCO described the network
as a "pilot scheme in which one larger Embassy (Stockholm)
provides policy and administrative support to five much smaller
embassies in the region".[175]
The 2009 Cabinet Office Capability Review said that the network
was "pioneering new regional working arrangements that promise
better use of scarce skills and knowledge, more resilience and
greater efficiency".[176]
We had the opportunity to see for ourselves how the Nordic-Baltic
network was operating when we visited Stockholm and Tallinn in
October 2009, during the Swedish Presidency of the EU Council.
We heard that work on particular issues was distributed around
the network (which now involved eight Posts), so that specialist
staff in one Embassy might cover an issue for the whole of the
network. We also heard that the arrangement would allow the Ambassadors
to the Nordic countries in the network, other than Sweden, to
be appointed at a lower grade than previously.
89. The Cabinet Office Capability Review said
that other regions were "keen to learn from the experience"
of the Nordic-Baltic network.[177]
The FCO Annual Report noted that the High Commission in Pretoria
conducts work for several neighbouring states.[178]
In subsequent correspondence, the FCO told us that the High Commission
in Bridgetown acts as a hub for the Eastern Caribbean; the three
posts in the Indian Ocean were already operating as a single network;
posts in the South Pacific were moving towards this; the ten Posts
in the Arabian Peninsula were starting to work more closely together,
"with a view to creating an Arabian Peninsula Network"
in 2010; Posts in the Levant and North Africa were looking at
integrating their work more closely; and other sets of Posts operated
as networks for specific issues. In particular, the FCO noted
that its Iberian Peninsula Posts operate as a network for consular
issues, something which we were able to see for ourselves during
our visit to Madrid and Lisbon in January 2010 (see paragraph
308).[179]
90. Given the severe budgetary
constraints facing the FCO, we conclude that the development of
regional networks of Posts such as the Nordic-Baltic network,
sharing work and resources while retaining representation in each
country, represents a sensible—and potentially beneficial—way
of maintaining the global network while reducing costs, as long
as it does not come to act as "cover" for the downgrading
or closure of British Embassies. We recommend that our successor
Committee should keep this issue under review, and that the FCO
should provide updated information on the development of regional
networks of Posts in its response to this Report.
91. As a further means of reducing the costs
of maintaining a global presence, the FCO has been making increased
use of information technology—such as videoconferencing,
to reduce the need to travel for meetings; and "laptop diplomacy",
to enable staff to work without having to have access to a permanent
office.[180] As part
of the rollout of the FCO's new IT system, Third Generation Firecrest
(F3G), the Department has been deploying laptops compatible with
the new system and able to handle material with a "Restricted"
classification, better enabling staff to work outside the office.[181]
In our previous Report, we largely welcomed the FCO's willingness
to be innovative in this respect, although we expressed some concern
in case "laptop diplomacy" becomes a way of saving money
in the short term while failing to implement worthwhile longer-term
projects.[182]
92. A new factor in the environment for the FCO's
operation of its global network of Posts has arrived with the
establishment of EU Delegations in third countries under the Lisbon
Treaty, which came into force on 1 December 2009. The EU Delegations
will form part of the European External Action Service (EEAS),
which was formally created by the Lisbon Treaty and which is expected
to become operational under the terms of a planned EU Council
Decision which was under very active discussion in Brussels when
we visited there at the beginning of March 2010. Under the Lisbon
Treaty, over 130 EU Delegations in third countries have been established,
by converting the previous European Commission Delegations. Whereas
the previous European Commission Delegations were active only
in limited areas, the new EU Delegations are to have a role across
the full range of EU external activities, including the intergovernmental
Common Foreign and Security Policy (CFSP).[183]
In batches, depending on a number of technical and political factors,
the new Delegations are being given upgraded powers compared to
their Commission-only predecessors, including to chair the meetings
of EU Member State Ambassadors and High Commissioners in the relevant
capital on a permanent basis rather than rotating with the country
having the EU Presidency, and to have Heads of Delegation who
are authorised to speak publicly in the name of the EU, on the
basis of statements pre-approved by all 27 Member States.[184]
It is expected that, as the EEAS develops, EU Delegations may
be established in new locations, and some existing Delegations—for
example, to the UN in New York—may be significantly expanded
in size to handle their larger post-Lisbon responsibilities. A
key issue for the future will be how far individual EU Member
States will, under budgetary pressures, decide to discontinue
their bilateral Embassies and High Commissions in particular countries
in the knowledge of a presence there of an EU Delegation.
93. In our Report on Foreign Policy Aspects
of the Lisbon Treaty in January 2008, we concluded that "the
emergence in third countries of EU Delegations which may be active
in Common Foreign and Security Policy areas will at the least
require careful management by UK Embassies on the ground".[185]
We have also previously raised concerns in case the new EU Delegations
were to begin to encroach on the consular role of British Posts
overseas.[186] In third
countries where their state is not represented, EU Member State
nationals are already entitled to receive consular assistance
from a Member State other than their own. Member States often
currently implement this right through informal agreements amongst
themselves concerning the assistance to be provided to particular
Member States' nationals in specific third countries.[187]
Under the Lisbon Treaty, the new EU Delegations "shall contribute"
to the implementation of citizens' right to consular assistance
in states where they are not otherwise represented.[188]
In the context of the discussion about consular assistance, we
note with concern a parliamentary answer in March 2010 in which
the FCO said that it was no longer collecting data on the numbers
of non-UK nationals being assisted by its Posts overseas, an issue
on which we have previously commented.[189]
94. The FCO has stated consistently that, in
the words of the Foreign Secretary, it sees the new EU Delegations
as "complementary, not substitutive" as regards British
Posts overseas.[190]
As regards the Delegations' impact on the FCO's management of
its global network of Posts and its overseas estate, Sir Peter
Ricketts said that he felt the FCO's budgetary constraints were
a far bigger pressure on the Department's global presence than
the incipient EEAS.[191]
In evidence on 1 March 2010 to the Public Accounts Committee,
Sir Peter suggested that, if anything, the arrival of EU Delegations
around the world might open up new opportunities for the FCO.
Just as states' national diplomatic representations sometimes
share premises in a given location, Sir Peter suggested that EU
Delegations might become potential fee-paying occupiers (or purchasers)
of some of the spare capacity which exists in some FCO buildings
overseas; and that the FCO could co-locate small UK Posts into
EU Delegation premises if this would enable a British presence
where there would otherwise be no UK national diplomatic representation
in the country in question.[192]
Sir Peter said that such co-location "would only be to increase
our coverage in countries where [the UK] is currently not represented".[193]
95. In October 2009, the European Council invited
the EU's new High Representative for Foreign Affairs and Security
Policy, Baroness Ashton, to bring forward her proposed Council
Decision on the operation of the EEAS "with a view to its
adoption by the Council at the latest by the end of April 2010".[194]
The Council must adopt the Decision by unanimity, after consulting
the European Parliament and obtaining the consent of the European
Commission.[195] Chris
Bryant, Minister for Europe, has given an assurance to the European
Scrutiny Committee that Baroness Ashton's proposal will be deposited
in Parliament at least two months before any Council decision,
in line with the new procedures for national parliamentary scrutiny
of EU proposals.[196]
However, our discussions in Brussels at the beginning of March
suggested that, of the two-month and the end-April timetables,
at least one might slip. Discussions are also underway about the
involvement of national Parliaments in the oversight of the EEAS,
given the Service's role regarding the EU's intergovernmental
Common Foreign and Security Policy.[197]
The Chairman of the Committee and of the European Scrutiny Committee
wrote jointly to the High Representative on this issue in December
2009.[198] Scrutiny
of the EEAS and the CFSP by national Parliaments assumes even
more importance given the right of the High Representative under
the Lisbon Treaty to bring forward Common Foreign and Security
Policy proposals.[199]
96. We recommend that in its
response to this Report the FCO should provide updated information
on the number, size and development of the network of EU Delegations
in third countries and at international organisations and on their
relationship with UK overseas Posts, with particular respect to
the future arrangement of the FCO global network, given current
UK budgetary pressures. We also recommend that in its response
to this Report the FCO states whether it is examining the closure
of its Embassy or High Commission in certain countries in the
knowledge of the likely presence there of an EU Delegation and,
if so, in which countries. We further recommend that the FCO should
set out the steps that it is taking to ensure that the High Representative
for Foreign Affairs and Security Policy and the European External
Action Service function within the parameters of the Lisbon Treaty
and do not take over the decision-making and other functions of
national foreign ministries, including with respect to consular
tasks. We further recommend that the FCO should confirm whether
it has ceased collecting data on the numbers of non-UK nationals
being assisted by its overseas Posts, and if so, explain the reasons
for this change of practice, and that it should recommence the
collection of this important data.
97. We recommend that, if it
has not already done so by the time this Report is published,
the FCO should copy to us at the earliest opportunity the High
Representative's proposed Council Decision on the European External
Action Service, since we would wish to consider it and to have
the option of commenting on it prior to the dissolution of this
Parliament. We recommend that our successor Committee in the next
Parliament should continue to take a close interest in the operation
of the External Action Service, through its scrutiny of the FCO
and its Ministers at the national level, and through mechanisms
for the involvement of national Parliaments at the EU level.
Civilian conflict-related work: secondments to
international missions
98. Funding for UK support for international
missions for peacekeeping and other conflict-related activities
takes place under Public Service Agreement 30 (PSA 30), "Global
conflict", for which the FCO is the lead Department. Some
UK funding for such missions is due as obligatory assessed contributions
to the organisations concerned (as discussed in paragraphs 36-41).
Other UK funding is discretionary. For 2009-10, programme funding
for PSA 30 originally comprised £556 million: £109 million
through the Conflict Prevention Pool (CPP), £73 million through
the Stabilisation Aid Fund (SAF) (for non-military activities
in Iraq and Afghanistan), and a call on the Treasury Reserve of
up to £374 million for peacekeeping (both assessed and discretionary).
The CPP and SAF are owned jointly by the FCO, DFID and MOD. As
part of the CSR 07, it was agreed that if peacekeeping costs
rose above £374 million, the CPP would be the first port
of call for the excess.[200]
99. There were signs through the winter of 2008-09
that the FCO was finding it increasingly difficult to fund its
share of peacekeeping activities: it requested an additional £131
million from its DEL reserve at the Treasury for this purpose
in its 2008-09 Winter Supplementary Estimate, and a further £27.6
million in its 2008-09 Spring Supplementary Estimate.[201]
100. On 2 March 2009, the Financial Times
reported that the UK would be withdrawing police personnel
from international missions as a result of funding cuts. The paper
said that the move represented "the first signs of the economic
crisis eroding the UK's foreign policy clout".[202]
The Chairman of the Committee wrote to the Foreign Secretary to
seek clarification.[203]
This came in the form of a Written Ministerial Statement on 25
March (delivered also on behalf of the Secretaries of State for
Defence and International Development) with a covering letter,[204]
followed by a further letter of reply from the Foreign Secretary
in April.[205]
101. In his 25 March statement, the Foreign Secretary
confirmed that assessed peacekeeping costs in 2009-10 were set
to rise substantially, owing to increased peacekeeping activities
by the EU and UN and the decline of Sterling (as discussed in
paragraphs 38-41). As a result, £456 million of the total
£556 million PSA 30 funding for the year was having to be
allocated for assessed peacekeeping costs—i.e. all of the
relevant Treasury Reserve, plus £82 million of the £109
million in the CPP, leaving only £100 million in total for
all discretionary activity under PSA 30 (including discretionary
peacekeeping). The FCO, DFID and MOD between them found an additional
£71 million to add to the £100 million. However, the
Foreign Secretary said that £171 million was insufficient
to fund all planned activities, and that cuts were therefore being
made to "prioritise UK discretionary conflict expenditure
more tightly on countries where the risk and impact of conflict
is greatest".[206]
102. The Foreign Secretary announced that the
Stabilisation Aid Fund was to be merged into the Conflict Prevention
Pool, and that the CPP was henceforth to have five programmes.
This represented a further consolidation of the Government's conflict-related
funding streams, after the CPP had itself incorporated the previously
separate Africa Conflict Prevention Pool. Under the new arrangements,
levels of CPP activity would be sustained in Afghanistan, as part
of a South Asia programme of £61.3 million (36% of the total).
Activity would be reduced in Africa (£43 million, 25%), Europe
(£33 million, 19%) and the Middle East (£18 million,
11%), and ended in Latin America. As the fifth strand, there would
be a £6.5 million thematic programme supporting the work
of international organisations on conflict-related issues. The
three Departments also felt obliged to keep back a reserve of
£9.2 million in case of further Sterling weakening and/or
increases in assessed contributions.[207]
Sir Peter Ricketts summarised the changes as meaning that UK conflict-related
funding was "focused on the UN peacekeeping contributions
and our contributions to Afghanistan".[208]
103. We have been made especially aware of the
impact of the FCO's spending cuts on EU civilian missions in the
Western Balkans. In his April 2009 letter, the Foreign Secretary
provided a table showing expected numbers of UK civilian secondees
to international missions in 2009-10 compared with 2008-09. This
showed the number of police seconded to the EU's new rule-of-law
mission in Kosovo, EULEX, falling from 45 to 17, and the number
of other civilian secondees to the mission down from 18 to 15;
and the number of police seconded to the EU police mission in
Bosnia-Herzegovina down from 9 to 3. The number of civilians seconded
to missions of the Organisation for Security and Co-operation
in Europe (OSCE) was also expected to be down from 15 to 6. The
Foreign Secretary highlighted that the numbers of UK civilian
secondees to the EU police mission in Afghanistan and the EU monitoring
mission in Georgia were being maintained.[209]
104. Our impression is that both the suddenness
and the scale of the reduction in the UK presence in EULEX, in
particular, caused considerable embarrassment and personal inconvenience
for the staff involved. During our visit to the region in October
2009, we heard concerns that the UK's reduced participation in
the mission might weaken its influence in Kosovo, in the key early
stage of the country's existence as an independent state. We heard
similar concerns about the UK's reduced presence in Bosnia-Herzegovina.
Leaving aside the scale of its presence in international missions,
the UK has otherwise been a committed supporter of Kosovo independence
and taken a prominent role in seeking to rescue Bosnia-Herzegovina's
troubled reform and European integration processes.[210]
105. In its March report, the Financial Times
suggested that the reductions in UK participation would be "a
humbling setback for Gordon Brown, […] who has made expanding
civilian reconstruction efforts a top policy priority".[211]
For example, according to its 2008 National Security Strategy,
the Government "advocate[s] the development of a stronger
international capacity, including through the EU and UN, to deploy
civilian stabilisation experts, including judges, lawyers and
police, at short notice and in larger numbers and to make them
available for multilateral deployment".[212]
As regards the EU in particular, in his Warsaw speech in June
2009 the Foreign Secretary said with respect to the Union's response
to crises that its "ability to draw upon civilian expertise
[...] [was] critical for dealing with fragile and failing states".[213]
In a letter to us in December 2009 in connection with the Western
Balkans, Mr Miliband reiterated that "the UK remains fully
committed to civilian missions under the European Security and
Defence Policy as a key tool to manage international crises and
to prevent and resolve conflict".[214]
106. The Foreign Secretary also told us in December
that it was "highly unlikely" that funding would be
found in 2009-10 for additional UK secondments to civilian missions.
He said that he was not yet able to give numbers for UK secondments
in 2010-11.[215]
107. In December 2009, DFID announced the launch
by the joint FCO-DFID-MOD Stabilisation Unit of a Civilian Stabilisation
Group comprising 1,000 civilian personnel potentially deployable
to post-conflict missions overseas.[216]
The personnel consist of 200 civil servants and 800 external experts.
The Group is managed by three Stabilisation Unit staff.[217]
As a result of the creation of the Group, the Government expects
the number of civilians that the Stabilisation Unit could deploy
at any one time to rise to 200 if required.[218]
The FCO confirmed that no additional funding was accompanying
the creation of the Group, which would continue to be funded from
discretionary monies in the Conflict Prevention Pool.[219]
108. We conclude that, as a
result of the need for spending cuts, the FCO has made reductions
to the numbers of UK secondees to international civilian missions
in the Western Balkans which are deeply regrettable. As regards
support for secondees, we recognise that the UK must prioritise
among a large number of international civilian missions, and that
the UK continues to have a large presence in some cases. However,
the UK has a significant interest in the success of the international
post-conflict effort in the Western Balkans. We conclude that
the message sent by the reduction in UK participation in these
high-profile missions sits uncomfortably with the Government's
stated commitment to the region and to the development of effective
international civilian post-conflict capabilities.
109. We conclude that the creation
of the Civilian Stabilisation Group under the joint FCO-DFID-MOD
Stabilisation Unit is to be welcomed, as potentially increasing
the UK's ability quickly to deploy a wide range of civilian experts
to post-conflict missions overseas. However, we further conclude
that a major constraint on UK civilian deployments has been funding,
and that the creation of the Civilian Stabilisation Group does
not in itself address this. We recommend that the FCO should inform
us, in its response to this Report or earlier if the information
is available, of the funding that will be available for peacekeeping
and other post-conflict and conflict prevention activities in
2010-11, and of the numbers of UK secondees to international civilian
missions that it expects to be able to support in that year. We
further recommend that our successor Committee may wish to consider
inquiring into the UK's capacity to deploy civilians to post-conflict
missions overseas.
MANAGEMENT OF EXCHANGE-RATE RISK
110. We outlined in our Report last year the
FCO's initial efforts to mitigate the effects of exchange-rate
risk, following the withdrawal of the OPM, through the forward-purchasing
of foreign currencies.[220]
The NAO explained these efforts more fully in its submission to
our current inquiry.[221]
The NAO told us that the FCO began considering how to manage its
exposure to exchange-rate risk immediately after receiving confirmation
that the CSR 07 settlement would involve the withdrawal of
the OPM. The FCO decided to start to forward-purchase at least
some of its foreign currency needs, and received Treasury approval
for this strategy. The FCO further decided to forward-purchase
a substantial share, rather than all of its requirements, in major
currencies, in order to allow for error.
111. In April 2008, the FCO contracted a specialist
foreign exchange trading company, HiFX Intelligent, to provide
it with advice. HiFX made recommendations for derivative-based
hedging strategies, which the FCO initially approved. However,
the Treasury has a stated policy of refusing any proposals to
speculate, and it therefore rejected the FCO's proposed strategies.
The FCO then submitted revised proposals for straightforward forward-purchasing,
which the Treasury approved. The FCO went ahead in May 2008 with
the forward-purchase of 80% of its US Dollar and Euro requirements
for 2008-09. The FCO has subsequently started also to forward-purchase
some of its requirement for Japanese Yen. The Treasury agreed
in August 2008 that the FCO could proceed with forward-purchases
for its 2009-10 requirements, and it has subsequently given approval
for forward-purchases into the post-2011 period. In December 2008,
rather than simply buying a given month's exposure one year in
advance as it had been doing, the FCO began to buy each month
one-twelfth of each of the following 12 months' exposure, as a
means of gaining greater budget certainty and spreading the risk
of sudden exchange-rate fluctuations.
112. The FCO pays HiFX a fee of £41,400
a year.[222] Explaining
the FCO's decision to take professional advice from the company,
Sir Peter Ricketts told us that the Department wanted to be "very,
very careful" about engaging in forward-purchasing, especially
in order to avoid any suspicion that it was speculating.[223]
Keith Luck, the FCO's Director General Finance, also told us that
the Department had originally lacked the specialist skills required.
However, the NAO told us that on-the-job training had since been
provided and that there had been no need to recruit additional
staff.[224] Mr Luck
said that HiFX's contract was now "tiny" and consisted
of "making sure that our Treasury Management policy documents
are up to date, that we are complying and that our people have
somebody they can go to—the two or three individuals who
work on this area—if they need particular advice".[225]
The NAO confirmed that the FCO regards the ongoing in-house staff
costs of operating its forward-purchasing regime as "relatively
small".[226]
113. Apart from the overall costs occasioned
by the fall of Sterling since 2007, the FCO confirmed that it
lost money specifically as a result of the fact that it only placed
its first forward contract for its 2008-09 foreign currency needs
in May 2008 (rather than sooner after the conclusion of the CSR
07 in October 2007), and Sterling had by then already fallen compared
to the rates assumed in the CSR 07. The FCO suggested that the
delay arose partly because the withdrawal of the OPM was only
confirmed late in the CSR process, and partly owing to its own
need to develop a response and the capacity to implement it. The
FCO told us that:
The timing of the decision meant that we had only
a short time to build up the technical skills to implement an
operation to forward purchase our foreign currency requirements
and we are still improving the skills required. We also incurred
additional costs from the need to build and buy in exchange rate
management capacity at short notice. By the time we had developed
sufficient skills and agreed how to operate, Sterling had started
to decline from the levels it had occupied in 2007.[227]
114. The NAO noted that, while the day-to-day
costs of operating the forward-purchasing regime are small, the
FCO "considers [that] the indirect costs of managing the
broader consequences of the withdrawal of the OPM have been far
greater, with a considerable amount of senior management time,
including that of the FCO Board, Heads of Mission and Management
Officers, taken up in managing the impact of currency fluctuations".[228]
The Foreign Secretary told us in December 2009 that he would "prefer
to spend all [his] time on policy questions, but […] can't
when there are financial and management issues" of the kind
raised by the impact of the OPM's withdrawal.[229]
115. In June 2009, the NAO published a report
on Financial Management in the FCO, in which it noted that
"foreign exchange is new territory for the Department"
but said that, as of that time, the FCO had "taken appropriate
action to seek to manage this risk".[230]
The NAO also told us that the FCO's Director of Finance had commissioned
external consultants to review the Department's foreign currency
management arrangements. In their report, completed in September
2009, they concluded that progress had been made in a number of
areas but that there was a need for a formal guidance document.
They noted that a formal Treasury policy was being drafted, and
recommended that the Treasury should supplement this with a procedures
manual.[231]
116. We conclude that, because
Sterling weakened between the conclusion of the 2007 Comprehensive
Spending Review (CSR 07) in October 2007 and the time at which
the FCO placed its first forward contracts for foreign currency
purchases in May 2008, the FCO incurred direct extra costs as
an immediate consequence of the withdrawal of the Overseas Price
Mechanism (OPM) under the CSR 07, and as a result of the timing
of the decision. We further conclude that the failure to put mitigating
arrangements in place by the time the withdrawal of the OPM was
put into effect, at the start of the 2008-09 financial year, suggests
a lack of effective joint working between the FCO and the Treasury,
and that this amounts to poor management of the withdrawal.
117. We conclude that as a result
of the OPM's withdrawal, managers throughout the FCO network,
including those at the most senior level, have spent considerable
amounts of time since late 2007 seeking to manage and mitigate
the effects of currency fluctuations. We do not consider that
senior FCO staff are the most appropriate personnel to be carrying
out this work, nor that this is the best use of their time and
skills.
118. The FCO's forward-purchasing activity was
one of the factors which helped it to remain within budget in
2008-09. The FCO did not, in the end, need to draw the full £15
million in 2008-09 End-Year Flexibility which the Treasury had
authorised to compensate for exchange-rate losses, as the Department
made gains under its early forward-purchase contracts.[232]
In the 2008-09 Spring Supplementary Estimate, the FCO was able
to transfer £29 million which it had gained through forward
contracts towards peacekeeping in Africa.[233]
According to the NAO, the FCO's forward-purchasing operations
gained it some £40 million overall in 2008-09, compared to
the situation which would have prevailed had the Department continued
only to make spot purchases.[234]
119. As long as Sterling remains below the levels
assumed in the CSR 07, forward-purchasing cannot provide
complete protection from the effects of Sterling decline.[235]
The NAO pointed out that, as Sterling was largely weaker in 2009-10
than in 2008-09, the gap between the CSR assumptions and the rates
available in forward-purchase contracts would be wider, resulting
in a greater loss of purchasing power.[236]
At the same time, the FCO said that it had entered into some forward
contracts in December 2008-January 2009 when Sterling was at its
weakest, and that inasmuch as Sterling subsequently strengthened,
these contracts would result in an exchange-rate loss for the
Department.[237] In
addition, the FCO has not considered it cost-effective to forward-purchase
any currencies other than US Dollars, Euros and Yen. It has exposure
of over £4 million in only another three currencies, and
its exposure in 14 currencies is below £2 million a year.[238]
Forward-purchasing is in any case not available for the majority
of the 120 currencies in which the FCO operates, as they cannot
be purchased in the UK.
120. Rather than protection against losses, under
current circumstances forward-purchasing mainly provides certainty.
In a letter to us of October 2009, the FCO summarised the situation
thus:
although the forward purchasing strategy we developed
for US Dollar/Euro/Japanese Yen helped us plan our activity in
these currencies around our known costs, […] it has done
nothing to help us manage the long term impact of, and the additional
costs generated by, Sterling's collapse in the autumn of 2008
against nearly all currencies. […] Forward purchasing cannot
solve this.[239]
121. We commend the FCO for
developing, after an uncertain start, a forward-purchasing operation
which reduced the scale of the losses that would otherwise have
arisen from Sterling's fall and helped the Department to remain
within budget in 2008-09. However, we conclude that forward-purchasing
in a limited number of foreign currencies, as the FCO has done,
whilst providing greater foreign exchange certainty, cannot protect
the Department's non-Sterling purchasing power from the basic
fact of Sterling depreciation. We deplore the fact that the policy
of the Treasury and the ending of the Overseas Price Mechanism
in 2007 have made forward-purchasing by the FCO necessary.
122. The FCO suggested in January 2009 that forward-purchasing
could help it to achieve the savings it requires in 2009-10, perhaps
to the tune of £90 million in total over the two years 2009-10
and 2010-11, although the Department warned that "the reality
of course could be very different".[240]
By October 2009, the FCO said that the forecast net gain over
the two years had fallen to £19.3 million, because Sterling
had strengthened compared to the rates fixed in its forward contracts.
The expected net gain arose from a forecast gain of £36.4
million in 2009-10 and a forecast loss of £17.1 million in
2010-11.[241]
123. We recommend that in its
response to this Report the FCO should set out how it is weighing
the increased certainty which is achieved through forward-purchasing,
on the one hand, against the risk, on the other, that forward
contracts could be less favourable than spot purchases if Sterling
strengthens. We further recommend that in its response to this
Report, or earlier if possible, the Department should provide
an update on its foreign currency management plans for the 2010-11
financial year.
124. In an evidence session with the Public Accounts
Committee (PAC) in October 2009, Sir Peter Ricketts discussed
possible co-operation between departments in the management of
exchange-rate risk.[242]
Our understanding is that the MOD has used relatively long-term
forward-purchasing for many years, to secure the foreign currency
needed to make fixed-date payments on major capital projects.[243]
As of early 2010, DFID has not felt a need to make forward-purchases
of foreign currency, and its witnesses indicated to the International
Development Committee in November 2009 that the Department could
probably continue to manage without doing so, with the exception
of its Euro-denominated contribution to the European Development
Fund, for which it might forward-buy its currency requirement.[244]
Sir Peter told the PAC that he "would see lots of value in
other departments clubbing together" with the FCO to forward-purchase
foreign currencies.[245]
The PAC recommended that "with input from the Treasury, [the
FCO] should work alongside other Departments, such as the Ministry
of Defence and Department for International Development, to identify
the most effective way to manage exchange-rate risk for the Government
as a whole".[246]
125. We recommend that in its
response to this Report the FCO should update us on any discussions
which it is having with other government departments about the
possible joint management of exchange-rate risk, and on the development
by the Treasury of cross-government guidance on foreign currency
management.
PROSPECTS FOR 2010-11 AND BEYOND
126. The figure currently given for the FCO's
expected 2010-11 DEL budget is £1.69 billion.[247]
However, this includes no spending on conflict prevention and
thus appears to represent an artificially large drop (21%) compared
to the FCO's budget for 2009-10. The FCO told us in February 2010
that conflict prevention allocations for 2010-11 had not yet been
confirmed.[248]
127. In February 2009, the FCO Board minutes
already described the Department's budgetary prospects for 2010-11
as "sombre".[249]
In her January 2010 parliamentary answer, Baroness Kinnock said
that the FCO expected its projected budget shortfall of £110
million in 2009-10 to "increase slightly" in 2010-11,[250]
although in his subsequent Written Ministerial Statement of 10
February the Foreign Secretary put the expected figure for 2010-11
back at £110 million.[251]
Once the effects of Sterling's fall are factored in, the minutes
show that as of December 2009 the FCO Board was expecting the
Department's budget for 2010-11 to be "8-9% lower than the
one for 2009-10, due mostly to the continued fall of Sterling".
The Board said that coping with this would require "difficult
decisions".[252]
The FCO confirmed in February 2010 that the 8-9% figure was "indicative
of the likely reductions in planned spending needed to stay within
our parliamentary control totals and CSR settlement in the light
of our exchange-rate pressures".[253]
128. As we prepared this Report in late January
and February 2010, departments' discussions with the Treasury
over the details of their 2010-11 budget settlements remained
underway.[254] In 2008-09,
late internal allocation of budgets within the FCO caused problems
at the start of the financial year, but the FCO issued its 2009-10
budgets in March 2009, and for 2010-11 it planned to do so in
February.[255] Sir
Peter Ricketts also told us that he wanted to "get to a position
as soon as [he could] where Posts have certainty about their budgets
in local currency for the year ahead, so that they are in a sense
protected from movements of sterling during that year".[256]
This was confirmed in an internal FCO memo from Sir Peter of which
the FCO gave us sight, in which Sir Peter also referred to plans
to "create a central fund to manage in-year currency fluctuations".[257]
If the FCO plans to convert Posts' budgets into local currencies
before the start of the financial year, and put new internal arrangements
in place to protect the Department against subsequent Sterling
weakening, this suggests another reason to try to reach a 2010-11
budget settlement with the Treasury relatively early.
129. Given the way in which
the FCO has recently improved the timeliness of its budgetary
processes, and especially if it seeks to allocate Posts' budgets
in local currencies rather than Sterling for the first time, we
recommend that the Department should do all it can to ensure that
it reaches a 2010-11 budgetary settlement with the Treasury in
good time to allow it to allocate internal budgets before the
start of the 2010-11 financial year.
130. The FCO told us that in a letter to the
Foreign Secretary of 22 November 2007, after the announcement
of the CSR 07 settlement, the then Chief Secretary to the
Treasury had said that "if there were a sudden and extreme
pressure on the FCO relating from exchange-rate fluctuations [sic],
the [Chief Secretary] would consider a Reserve claim if the alternative
would be that the FCO would breach its DEL and Estimates".[258]
131. The FCO has been frank in its responses
to our questions about its finances, but in general the Department
seems to have preferred to take a relatively discreet and low-key
approach to its negotiations with the Treasury, rather than "go
public" about the scale of the threat to its budget and the
reasons for its difficulties. The Foreign Secretary told us in
December 2009 that he had "not found that waving bleeding
stumps in public is the way to impress one's colleagues".[259]
We find the Foreign Secretary's choice of metaphor telling as
an indication of the potential severity of the cuts facing the
FCO.
132. On 10 February 2010, the Foreign Secretary
announced that, as a result of an agreement with the Treasury
aimed at helping to manage exchange-rate pressures, in 2010-11:
- an additional £25 million
from asset sales would be recycled into the FCO's budget;
- a further £35 million would be made available
to the FCO from the Reserve, of which £20 million would form
a "foreign exchange adjustment account", to be drawn
on in agreement with the Treasury; and
- a further £15 million would be made available
in End-Year Flexibility, "focussed on restructuring and modernisation
costs subject to a business case being made".[260]
In subsequent written answers, the FCO explained
that the "foreign exchange adjustment account" would
be a Departmental Unallocated Provision (DUP), and said expressly
that it did not represent a return to the OPM.[261]
As regards the asset sales, Sir Peter Ricketts clarified in evidence
to the Public Accounts Committee on 1 March that the additional
£25 million represented an increase in the maximum annual
amount of funds which the Treasury allows the FCO to retain for
itself from its own asset sales.[262]
In his 10 February statement, the Foreign Secretary also said
that he had agreed with FCO Services Trading Fund (for which,
see paragraph 147) that it would make an additional contribution
towards helping the main FCO budget in 2010-11, a contribution
which has been identified subsequently as a dividend payment of
£3 million.[263]
The Foreign Secretary also said that the FCO itself would implement
"a broad programme of streamlining and cost-savings"
to further reduce its budgetary shortfall.[264]
133. In his 10 February statement, the Foreign
Secretary also said that he had agreed with the British Council
and the BBC World Service that they would make additional contributions
towards helping the main FCO budget in 2010-11. Both organisations
provided further details in subsequent submissions to us. The
BBC World Service told us that its projected underspend of £4
million in 2009-10 would be offset against the FCO's projected
overspend, in line with normal practice. For 2010-11, as an "exceptional
measure", £3.7 million of World Service funding was
being made available to the FCO "with the express understanding
that this will not be a permanent reduction in the BBC World Service
baseline". The World Service said that, for the period beyond
2010-11, the FCO would "make every effort in the forthcoming
Spending Review to support [it] in negotiating satisfactory funding".[265]
For its part, the British Council is to provide £5 million
to the FCO budget in 2010-11. Under plans approved by the Board
of Trustees on 23 February 2010, the British Council is to raise
£1.1 million from operating budget cuts, and £1.5 million
by "refocusing" programme activity under its Reconnect
initiative, which provides leadership training to young people
in Muslim states, while seeking to "maintain impact in Pakistan
and Afghanistan". A cut of £1.5 million represents half
of the planned budget for the "Reconnect" initiative
in 2010-11. The British Council will also pass on the net surplus
raised from the sale of its Mumbai office, estimated at £2.4
million.[266]
134. The Foreign Secretary said in his 10 February
statement that the package of measures agreed with the Treasury
would "substantially offset the foreign exchange pressures
on the FCO budget" in 2010-11.[267]
The measures costed as of mid-February 2010 totalled £90.7
million, which remained less than the FCO's expected shortfall
for 2010-11 of around £110 million, but represented over
10% of the FCO's core budget of around £830 million. The
remainder of the shortfall was presumably to be found from the
FCO's own programme of cost savings, which remained to be finalised.
135. We conclude that recent
public statements by the Foreign Secretary and Baroness Kinnock
are evidence that the FCO is "going public" about the
scale of its financial difficulties. We welcome the agreement
with the Treasury for additional financial resources for 2010-11
which appears to have resulted. We welcome in particular the Treasury's
implicit acknowledgement that the management of the exchange-rate
pressures which face the FCO requires support from the Treasury
Reserve. We conclude that the measures announced in February 2010
should substantially reduce the pressures on the FCO budget in
2010-11 arising from the withdrawal of the Overseas Price Mechanism
and the fall of Sterling, although we note that the currently
costed plans do not make up all the expected shortfall. We regard
it as unacceptable that as a result of Treasury policy the FCO's
operations came to be under such strain before agreement on some
financial relief was reached. We recommend that in its response
to this Report the FCO should provide further details of the expected
operation of the measures announced in February 2010, as well
as its estimate of the cash increase to the FCO's 2010-11 budgeted
income which is likely to be realised as a result.
136. We are concerned that the
agreement announced in February 2010 between the FCO and the Treasury
on the FCO's finances for 2010-11 breaches the ring-fencing of
funding for the British Council and BBC World Service. We recommend
that in its response to this Report the FCO should provide an
assurance that this will not be repeated.
137. For the period beyond 2010-11, Departments'
budgets are expected to be determined in a new Comprehensive Spending
Review following the 2010 General Election. The Foreign Secretary
appeared to imply that, in principle, he favoured adhering to
a three-year settlement rather than seeking major changes during
a spending round period.[268]
The minutes of the January 2010 meeting show that the FCO Board
is already planning on having to reduce the FCO's headcount by
10% over the next five years;[269]
and Sir Peter Ricketts indicated that, if necessary, the FCO would
continue to raise the difficulties it was facing with the Treasury
into the new spending round.[270]
138. We note that the agreement
with the Treasury which was announced by the FCO in February 2010
comprises a set of one-off measures which apply only to the 2010-11
financial year and which do not address the impact of the withdrawal
of the Overseas Price Mechanism (OPM) on a longer-term basis.
We recommend that the OPM should be re-established, or an alternative
mechanism put in place to protect the FCO, with its unique degree
of exposure to currency fluctuations, from suffering severe financial
consequences as a result of such fluctuations.
139. The expected 2010 CSR will follow two spending
rounds which were relatively tough for the FCO. We have noted
previously that what Sir Peter Ricketts described to us as the
FCO's "flat or less than flat"[271]
real-terms budget under the 2004 and 2007 spending rounds contrasted
with the increases enjoyed by some other departments and agencies.
For example, the average real-term reduction in the FCO's budget
under the CSR 07 which we identified in our Report two years
ago, of 0.2% a year, contrasted with an average real increase
for other departments of 2.1%.[272]
140. Figures 1 and 2 show the real-term change
in the Total Departmental Spending of the FCO, DFID, MOD and the
Security and Intelligence Agencies (SIA) for the CSR 07 and
2004 Spending Review periods, using 2007-08 and 2004-05, respectively,
as the reference years. The FCO's spending is shown both including
and excluding conflict prevention spending, to enable comparison
of plans for 2010-11 (for which conflict prevention funding is
not yet allocated) with spending in previous years. The figures
show that, whether for the post-2004 or post-2007 spending period,
the FCO's expected spending for 2009-10 and 2010-11 is in real
terms only slightly, if at all, above its level at the start,
whereas the spend for DFID and the intelligence agencies is between
20% and 70% higher, depending on the basis used. Figure
1: Real-term change in Total Departmental Spending of FCO, MOD,
DFID and SIA,
2007-08 - 2010-11
Figure 2:
Real-term change in Total Departmental Spending of FCO, MOD, DFID
and SIA,
2004-05 - 2010-11
SIA - Security and Intelligence Agencies. The two
Figures show the real-term percentage change in the respective
bodies' Total Departmental Spending for the post-2007 Comprehensive
Spending Review and post-2004 Spending Review periods, using 2007-08
and 2004-05 prices, respectively. Prices have been calculated
in real terms using the HM Treasury Gross Domestic Product deflators;
see http://www.hm-treasury.gov.uk/data_gdp_index.htm.
Sources for Total Department Spending figures:
FCO, Departmental Report and Resource Accounts, 1 April 2008-31
March 2009, Vol. 2, HC 460-II, pp 14-15; DFID, Annual Report and
Resource Accounts 2008-09, Vol. 1, HC 867-I, p 61; MOD, Annual
Report and Accounts 2008-09, Vol. 1, HC 467-I, pp 20-21; Cabinet
Office, Annual Report and Accounts 2008-09, HC 442, pp 125-126
141. The Foreign Secretary suggested that departments'
relative influence should not be judged by "the respective
size of [their] cheque books", because the FCO exercised
influence not by programme spending but by its "diplomatic
and political links".[273]
142. We conclude that the FCO
has been losing out relative to other departments and agencies
in the allocation of government spending, in a consistent trend
over the last two spending rounds. In real terms, the FCO's Total
Departmental Spending excluding conflict prevention (in Sterling
terms) is expected to be around 3% above the 2004-05 baseline
in 2009-10 and 0% above the same baseline in 2010-11, whereas
the figures for DFID, for example, are around 50% and 70% higher,
respectively. We agree with the Foreign Secretary that there is
no absolute correlation between budgets and influence. Nevertheless,
we recommend that the trend whereby the FCO has been losing out
relative to other departments in the allocation of government
spending should be reversed.
143. We appreciate that all
government departments face a major squeeze on public spending,
and that protecting the work done by the FCO may not be at the
top of the British public's list of priorities. Nevertheless,
we conclude that the FCO has a strong case to make about the value
of its work in the national interest, about the extent to which
it has already made cuts, and about the severity of the budgetary
situation in which it finds itself, largely for reasons beyond
its control.
Efficiency savings
144. Under the CSR 07, the FCO was set a
target of 3% annual efficiency savings, like other government
departments. For the FCO, this is equivalent to £144 million
in net cash-releasing savings over the three-year period. In the
Government's 2009 budget, it was announced that the FCO and its
associated public bodies would be required to find additional
savings of £20 million by 2010-11. The FCO has established
a range of efficiency or value-for-money (VFM) programmes aimed
at delivering its overall savings targets. We have commented in
detail on several of these in previous Reports.[274]
145. At the time of our Report on the Department's
2007-08 Annual Report, the FCO was forecasting that its efficiency
programmes should yield £155 million in savings over the
CSR 07 period. The Department thus deliberately built in
a buffer to increase its prospects of achieving the £144
million target, even if projects failed to deliver fully or on
time.[275] In its 2008-09
Annual Report, the FCO said that it was now running efficiency
programmes which should yield £167.4 million in savings by
2010-11.[276] By the
time of the 2009 Autumn Performance Report, the FCO was reporting
that its efficiency savings programmes should save a cumulative
total of £172.6 million over the CSR 07 period.[277]
146. In 2008-09, the FCO's efficiency programmes
delivered £85.8 million in savings (including £12.1
million by the BBC World Service and British Council), against
£75.5 million forecast in the 2008 Autumn Performance Report.[278]
As of the end of the second quarter of 2009-10, the FCO's cumulative
savings since the start of the CSR 07 period amounted to
£120.6 million. The FCO said that if it maintained its performance,
it would be "on track" to achieve the CSR 07 target.[279]
The FCO reaffirmed this expectation in letters to us in February
2010, when it said that the forecast was supported by initial
indications from the 2009-10 third-quarter figures.[280]
147. In our Report last year, we considered in
particular detail the organisation FCO Services, which provides
a range of services including logistics, IT, language services,
biometrics, vetting and physical security, and which became a
Trading Fund on 1 April 2008, with the aim of generating increasing
revenues from non-FCO customers.[281]
We concluded last year that "FCO Services [had] made a promising
start following its transformation to a Trading Fund" but
that "there must be concerns about its ability to expand
into wider markets under current economic conditions".[282]
In the event, FCO Services posted 15.3% growth in wider market
revenue in 2008-09, above its 10% target. Sir Peter Ricketts told
us that FCO Services' performance had "enabled it to play
an important role in enabling [the FCO] to meet [its] overall
efficiency saving obligations under the CSR".[283]
148. The FCO told us in October 2009 that some
of its efficiency projects were having to find more savings than
planned, in order to compensate for exchange-rate fluctuations.[284]
Similarly, the Department's 2009 Autumn Performance Report noted
that "if exchange rates remain at their current level or
fall further, the FCO is likely to have to exceed its efficiency
targets in order to maintain delivery of its DSO and PSA targets".[285]
149. The FCO commissioned an internal audit of
its value-for-money programme, to assess compliance with Treasury
guidance, which was completed in January 2009. The audit rated
risk management of the programme as being "satisfactory".
The FCO told us that the audit had made only five recommendations,
all of which had been implemented by the end of the 2008-09 financial
year.[286] The audit
report also noted that "the FCO has received praise from
[…] HMT for being proactive in its approach to the CSR 07
VFM process and is seen to be ahead of other HMG Departments".[287]
150. The FCO's CSR 07 programme of efficiency
savings follows a similar programme established under the 2004
Spending Review, under which the FCO exceeded its savings target,
achieving £132 million in savings against a target of £120
million.[288] Given
the efficiencies that the FCO has implemented in recent years,
Sir Peter Ricketts described as "limited" its scope
to make further such savings in order to recoup its current budget
shortfall.[289] Sir
Peter said that the FCO had "been living on pretty thin rations
for at least a couple of spending rounds" and had therefore
already "got rid of the fat".[290]
151. We conclude that in the
last two spending round periods the FCO has consistently taken
seriously the Government's efficiency savings requirements, and
has met or exceeded savings targets. We recommend that the FCO
should continue to make a sustained effort to reduce costs where
it reasonably can, in line with the requirements of the Comprehensive
Spending Review 2007—but that it should resist the temptation
to seek savings over-aggressively in order to make up the Department's
budgetary shortfall, at the risk of cutting into its substantive
operations and capabilities.
152. In his quarterly management letter for January-March
2009, Sir Peter Ricketts told us that the FCO was looking especially
to the Corporate Services Programme (CSP) to "save significant
money from the next financial year onwards".[291]
The FCO approved the CSP in September 2008 as a replacement for
the Shared Services Programme, which had received a "red"
rating from the Office of Government Commerce and which the FCO
effectively admitted was flawed, although it also said that it
had made some useful contributions. The CSP is intended to improve
the Department's corporate services such as financial processing,
facilities management, procurement and human resources, with a
view in particular to providing more of such services from single
centres to several overseas Posts at once, so that individual
Posts can stop having to carry out all such functions.[292]
A new FCO UK Corporate Services Centre opened in Milton Keynes
in September 2009. The CSP is also running a project called "10,000
days", which is aimed at eliminating unnecessary bureaucracy;
the FCO told us in May 2009 that the project had by that stage
saved over 9,000 days of management time, and in February 2010
that it had now "removed over 50,000 days of processes from
[the Department's] systems".[293]
153. We recommend that in its
response to this Report the FCO should set out the basis for its
claims regarding the amount of management time being saved by
the "10,000 days" project, with examples of the kinds
of bureaucracy that have been eliminated. We further recommend
that the FCO should provide details of the work which is planned
under the Corporate Services Programme for 2010-11, including
information on the savings which the programme is expected to
generate over the year. We further recommend that the FCO should
provide us with an assessment of the initial operation of the
new Corporate Services Centre in Milton Keynes.
Financial management
154. As we noted in paragraph 115, the NAO carried
out an inquiry into "Financial Management in the FCO"
which reported in June 2009.[294]
We also have taken a close interest in the FCO's efforts to improve
its financial management, which we said two years ago "continue[d]
to need improvement".[295]
Following the 2005 Collinson Grant review and the first Cabinet
Office Capability Review of the Department in 2006-07,[296]
the FCO's efforts to improve its finance function have been a
prominent feature of its recent management activities, especially
since the launch in July 2007 of a major reform programme known
as "5 Star Finance". Under the programme, "5 Star"
status is achieved when an organisation meets top NAO standards
for the accuracy and timeliness of its financial information.
Performance may be assessed both by the organisation concerned
and by external bodies.
155. We detailed some of the steps which the
FCO was taking under the "5 Star Finance" programme
in our Report last year, in which we welcomed the reforms.[297]
Among further steps taken since publication of our Report, the
FCO recruited a further seven accountancy trainees to join the
Department in September 2009, following the eight who joined in
2008-09. The trainees pursue a dedicated career track aimed at
equipping them to occupy senior management positions. The FCO
has also continued to provide specialist financial training for
existing finance staff.[298]
The Department refers to these schemes as "growing its own"
accountants (the FCO's Director General Finance, Keith Luck, was
recruited externally in February 2007). The proportion of FCO
finance staff with professional qualifications rose from 8% at
the time of the NAO Report to 12% by September 2009;[299]
this remained below the Whitehall average of 14%, but the FCO
expected the figure to rise to 17% by the end of the financial
year.[300] The FCO
has also continued to provide financial training for general staff,
including at senior management and Board levels.[301]
156. We recommend that in its
response to this Report the FCO should state whether it achieved
its forecast of having 17% of its financial staff with professional
qualifications by the end of the 2009-10 financial year.
157. In its 2009 report, the NAO noted the use
of a large number of consultants and contractors in the FCO Finance
Directorate, and recommended that the Department should set targets
for a reduction.[302]
The FCO has subsequently set a target for a reduction of 45-50%
in these temporary staff,[303]
and it is recruiting onto its permanent staff a number of specialists,
to allow it to achieve the cut.[304]
The FCO also told us that it was implementing an Office of Governance
Commerce Consultancy Value Programme to ensure that it was "bearing
down" on consultancy costs, and that it expected to achieve
£2 million in savings through this means.[305]
The FCO's 2008-09 Annual Report said that consultancy spend in
the year was an estimated £60 million, up from £30 million
in 2007-08, but the Department said subsequently that the two
figures were not comparable, as the 2008-09 figure included "managed
service provision" which had not been included in 2007-08,
and that the Department's actual spend on consultancy 'proper'
in 2008-09 was £29.9 million.[306]
158. We recommend that the FCO
should continue to bear down heavily on its consultancy costs.
We further recommend that the FCO should provide an estimate of
its spending on consultancy in 2009-10 in its response to this
Report.
159. The 2009 Cabinet Office Capability Review
of the FCO reported that "a number of stakeholders noted
that [the] FCO underperforms when required to run programmes and
projects", and that there was "a need to ensure that
staff understand the importance of good programme and project
management skills and apply them to deliver work on the ground".[307]
The FCO told us that it had commissioned an action plan from the
Office of Government Commerce for improving the Department's programme
and project management capability, and was enhancing its training
and information provision in this area.[308]
160. We recommend that in its
response to this Report the FCO should update us on the implementation
of its action plan for improving programme and project management
capability, including information on its plans for assessing the
impact of the project.
161. The Office of Government Commerce carried
out a Procurement Capability Review of the FCO in September-November
2008 which was largely critical, noting a number of weaknesses
in the FCO's procurement capabilities and practices.[309]
In response to the review, the FCO has established an improvement
plan, which is to be completed by February 2011. The Department
told us in October 2009 that the plan had 39 elements, of which
11 were slipping from their original timescales.[310]
The FCO said that four of these were related to work which needed
to be carried out by the new Commercial Director, who arrived
in post in August 2009. Through improved procurement, the FCO's
aim is to make £11 million in savings during the CSR 07
period; it forecasts that it will in fact achieve £13.2 million.[311]
162. We conclude that there
appears to be significant scope for the FCO to improve its procurement
practices. We recommend that in its response to this Report the
FCO should update us on its progress in implementing its procurement
improvement plan, and in particular set out whether all elements
are now back on track for completion on time by February 2011.
We further recommend that the FCO should provide its estimates
for the savings achieved so far and likely to be achieved by the
end of the project.
163. A key indicator of weak financial management
in the FCO in the past has been a consistent tendency to underspend.[312]
In 2007-08, the FCO underspent by around 6%. In 2008-09, the Department's
total underspend was 3.1%,[313]
and Sir Peter Ricketts told us that the underspend on the main
administration and programme budget was just 0.14%. This was below
the 1% target set by the FCO Board at the start of the financial
year. Sir Peter said that the reduced underspend was partly the
result of the financial pressures facing the FCO, which had helped
to "cure" the problem,[314]
but that it was also "concrete evidence that the 5 Star Finance
programme [was] delivering sustained improvement throughout the
year in [the FCO's] financial management".[315]
The FCO explained that, under the programme, budget holders are
now required to report monthly on their expected spend for the
year, and to identify activities which can be "switched on"
or "switched off" at short notice, in order to increase
the Department's prospects of avoiding both underspend and overspend.[316]
In its June 2009 Report, the NAO said that more frequent and detailed
internal scrutiny of budget forecasts appeared to be proving effective.[317]
164. The FCO has been among the first of the
major Departments to lay its Resource Accounts for two years in
succession, 2008 and 2009. The NAO took this as evidence for its
conclusion that the FCO had "improved the accuracy, reliability
and timeliness of financial information reported both externally
and internally".[318]
165. We conclude that the way
in which the FCO picked up on its likely overspend early in the
2009-10 financial year reflects the effectiveness of its efforts
to improve its in-year budgetary monitoring.
166. When it launched the "5 Star Finance"
programme in mid-2007, the FCO assessed itself as being at "2½
stars". It aimed originally to achieve "5 Star"
status by April 2009. It has not met this target. In our Report
last year we noted that in late 2008 the FCO had encountered difficulties
in achieving "4 Star" standards, and that the Department
had modified its target date for the achievement of "5 Star"
status to the 2009-10 financial year.[319]
In its response to our Report, the FCO said that it was aiming
for "5 Star" status by May 2010, but this subsequently
slipped further to July 2010.[320]
The FCO assessed itself as having achieved "4 Star"
status in December 2009.[321]
In November 2009, the FCO Board agreed to "consolidate"
at that level, "before pushing on to 4½ in the summer
of 2010".[322]
167. We reported last year that the delay in
achieving "5 Star" status had arisen partly because
the FCO had toughened the detailed criteria involved, as standards
of financial management had risen across Whitehall. We commended
the FCO for resisting the temptation to "gild the lily"
in its self-assessment.[323]
In its June 2009 Report, the NAO judged that the FCO's then "3½
Star" self-assessment was "reasonable and soundly based".[324]
168. Overall, in its June 2009 Report the NAO
concluded that "the FCO has made significant progress in
developing its financial management capability",[325]
a conclusion which was endorsed by the Public Accounts Committee.[326]
The NAO subsequently told that Committee that the FCO had "responded
positively" to the recommendations for further improvements
which it had made in its Report.[327]
The 2009 Cabinet Office Capability Review concluded similarly
that the "5 Star Finance" programme had had "a
significant impact on the quality of financial information and
on budgetary control".[328]
169. The FCO told us that, as "5 Star"
status and thus the end of the "5 Star Finance" programme
approached:
a transition plan will be drawn up to move the transformation
in financial management performance from being a step change programme
activity to being an on-going business development activity within
the FCO's normal scope of business. Consideration will be given
at that point as to whether there is a need for further intensive
activity through a new transformation programme to build on the
progress made through the 5 Star Programme.[329]
170. We conclude that the FCO's
failure to complete its "5 Star Finance" programme during
the 2009-10 financial year is disappointing. However, we further
conclude that there is no evidence that the delay reflects any
deterioration in FCO financial management. Rather, we concur with
the National Audit Office and the Public Accounts Committee that
the FCO's financial management has improved significantly in recent
years. We conclude that the FCO's elimination of its underspending
habit in 2008-09 is especially to be welcomed. We further conclude
that the delay in achieving "5 Star" status largely
reflects the high standards which the FCO is setting for itself;
and that the fact that the Department too recognises that there
remains scope for important improvement is to be welcomed. We
recommend that in its response to this Report the FCO should provide
its current estimated completion date for the "5 Star Finance"
programme.
Estate management
171. On the basis of the figures in the Department's
2008-09 Annual Report, the FCO's total estate was worth £2.2
billion at the end of March 2009 (including assets owned, leased
and forming part of PFI arrangements).[330]
According to the NAO, the FCO's overseas estate—defined
as FCO-owned properties only—was worth £1.6 billion
at open-market value.[331]
The overseas estate comprises just over 4,000 properties.[332]
172. Under the CSR 07, the Treasury required
the FCO to deliver a minimum of £54 million from asset sales
over the three-year period.[333]
After the FCO delivered this amount early in the first year of
the settlement, following some successful sales, the target was
raised in-year to £60 million. In our Report last year, we
expressed some concern in case the increased target placed extra
pressure on the FCO to make sales which were not well-founded,
especially at a time of international economic downturn and therefore
depressed property prices.[334]
We have consistently taken the view that sales of FCO properties
around the world should take place solely on the merits of each
case, rather than as a revenue-raising measure.[335]
173. Sir Peter Ricketts includes details of the
FCO's asset sales and purchases in each of his quarterly management
letters to us.[336]
The FCO generated £61.5 million from asset sales in 2008-09,
of which almost £40 million accrued from the sale of the
Embassy site in Madrid.[337]
In the financial year, the FCO also sold properties in Abidjan,
Amsterdam, Buenos Aires, Cape Town, Durban, Lilongwe, Manila,
Montserrat, Ottawa, Stockholm and Wellington, and land in Tallinn.
The final sale of Marlay Grange in Dublin, the intended but never-occupied
new Residence, also fell in the 2008-09 year; we have commented
extensively on the dispiriting Marlay Grange saga in previous
Reports.[338] The property
in Durban was the only other Residence of a Head of Mission to
be sold in 2008-09. As regards purchases, in 2008-09 the FCO bought
land in Dushanbe, and properties in Antalya, Montserrat, Washington
and Panama, the last being a new Residence.[339]
174. For 2009-10, the FCO's asset sales target
is £8 million. As of December 2009, it had delivered £5.6
million, with a further £3 million under offer.[340]
175. The financial pressures facing the FCO have
prompted renewed speculation about the possibility of asset sales
to raise cash. The Government's December 2009 Operational Efficiency
Programme: Asset Portfolio publication identified a cross-government
target of £16 billion to be delivered from asset and property
sales by 2013-14.[341]
In October 2009, Sir Peter Ricketts answered "no" when
asked by the Public Accounts Committee if the FCO was going to
"sell off cheaply Residences that do so much for our image
just to meet some Treasury demand".[342]
We requested and received the same assurance from Sir Peter in
December; he told us that any sale would "be justified and
make sense on its merits".[343]
However, Sir Peter noted that "there will always be opportunities
to sell buildings that are underused, obsolete or extremely valuable
when compared with the benefit they bring us", and he confirmed
that the FCO would "look to sell more of those in line with
the Government's policy on greater asset disposals".[344]
Sir Peter also confirmed that the FCO could use the vast majority
of the proceeds from asset sales to invest back into its own estate.[345]
In October, he told the Public Accounts Committee that driving
asset sales would be part of the remit of the FCO's new Director
of Estates, Alan Croney, who took up his post in June 2009.[346]
176. In December 2009, the Foreign Secretary
confirmed to the House that the FCO intended to sell 106 properties
between 2010-11 and 2013-14, with a book value of £71 million.
The list includes six Residences.[347]
In his evidence to us in December 2009, Sir Peter Ricketts promised
to keep the Committee "closely informed" when the FCO
was planning to sell assets,[348]
although the FCO has stated publicly that it does not reveal details
of planned asset sales in advance, for commercial reasons and
in order to realise the maximum possible value from disposals.[349]
As noted in paragraph 132, revenue from asset sales forms a key
element in the agreement reached between the FCO and the Treasury
in February 2010 aimed at plugging the gap in the FCO's finances
in 2010-11.
177. Despite the FCO's need
to plug its budget shortfall, we reiterate our previous conclusion
that sales of FCO properties should take place on their merits,
rather than purely to raise revenue. We continue to recommend
that the FCO should keep us and our successor Committee closely
informed about the FCO's plans for asset sales.
178. Sir Peter Ricketts told the Public Accounts
Committee in October 2009 that there was an "instruction
from the top" of the FCO to "sweat the asset" as
regards the FCO estate—that is, to use the Department's
buildings to generate income.[350]
Sir Peter confirmed to us that "a lot" of Ambassadors
were now hiring out their Residences and appropriate Embassy spaces
for commercial functions.[351]
However, he also noted that the revenues raised from such activities
"will never be more than quite a small proportion of what
it cost[s] to run these buildings".[352]
179. We conclude that the FCO's
new strategy of seeking to exploit its estate for greater financial
return is to be welcomed, but subject to the proviso that such
efforts do not generate conflicts of interest or compromise the
Department's reputation or policies. We recommend that in its
response to this Report the FCO should list a sample of non-FCO
events for which the Department hired out its premises in 2009-10
and provide an estimate of the income generated from such activities.
180. We have previously expressed concerns where
the FCO has appeared to be mismanaging estate projects. This has
applied in recent years both to asset sales, such as that of Marley
Grange, and to estate development projects.[353]
Following our criticisms last year of the FCO's management of
a residential project in Pakistan, Sir Peter Ricketts copied to
us the "action plan" arising from the review which was
conducted of the project, which appeared to include a number of
important potential improvements to FCO project management procedures.[354]
181. In the context of our previous concerns,
we note that the cost of the new Embassy building in Harare—opened
in March 2009—came in at £27 million, against an initial
estimate of £17.5 million. The FCO attributed the overshoot
to "difficult local conditions", highlighting that the
project had been implemented during a period of "political
upheaval and economic collapse" in Zimbabwe. The FCO said
that it was conducting a full review of the project, "to
establish whether those on the FCO side […] took all possible
steps to keep costs down".[355]
Among other recent estate projects, new Embassy buildings in Algiers
and Warsaw also came in over-budget, partly owing to unfavourable
exchange-rate movements.[356]
182. We recommend that the FCO
should give us sight of its review of the Harare Embassy project,
or otherwise report to us in its response to this Report on the
findings of the review.
183. In February 2010, Sir Peter Ricketts informed
the Public Accounts Committee and ourselves that work had had
to be suspended at an early stage on the FCO's new Embassy offices
in Damascus, after evidence came to light that the security of
the site may have been compromised. Sir Peter told the PAC that
he thought the case represented a "failure" on the FCO's
part.[357]
184. We were particularly dismayed during our
inquiry this year to hear that the project for the renovation
of the Residence in Moscow had not been completed on schedule
by December 2007/spring 2008, and was only finished in time for
the Ambassador to be expected to move in during March 2010; and
that the cost of the project was expected to come in at £13.8
million, compared to an original forecast of £10.6 million.[358]
We pursued further details of the project from the FCO. The Department
told us that the delays had arisen partly because of a failure
to keep to schedule by the main contractor and partly because
the Russian authorities had made unexpected demands regarding
standards for—and their own involvement in—the work,
on what is a historic building. The delays in turn pushed up costs.
In September 2009, the main contractor applied for protection
from its creditors. The FCO told us that it was "assessing
the implications" of this.[359]
185. With regard to the Moscow
Residence renovation project, we conclude that the Russian authorities
may well have made unexpected demands, but that it appears that
elements of the project may also have suffered from poor planning
and management on the FCO side. We recommend that in its response
to this Report, the FCO should state whether the new estate project
management procedures which were introduced as a result of the
recent troubled residential project in Pakistan would have prevented
at least some of the difficulties which have been encountered
with the Moscow Residence project; and if not, whether the Moscow
experience will lead to any further strengthening of FCO practices.
186. One of the FCO's recent high-profile estate
developments was the opening of new Embassy offices in Madrid.
We had the opportunity to see the new offices for ourselves during
a visit there in January 2010, at the start of the Spanish Presidency
of the EU Council. Sir Peter Ricketts had told us that the new
premises comprised open-plan offices in a "fantastic, modern
office tower in a wonderful position", and that the move
had generated a "tangible" lift in staff morale and
effectiveness.[360]
During our visit, we were indeed impressed with the new premises,
although we noted that they were well outside the centre of the
city. However, following our visit, there was a serious flood
in the premises, apparently caused by a faulty water sprinkler
system. The incident may present the FCO with as-yet unknown financial
liabilities.[361]
187. In addition to the Algiers, Harare, Madrid
and Warsaw projects, since 2008 the FCO has opened new Embassy
and High Commission buildings in Basra, Boston, Mumbai and Podgorica,
and a new housing complex in Bangkok.[362]
The bilateral Embassy to Belgium has also moved into the same
premises as the UK's Permanent Representation to the EU, an arrangement
which we were able to see for ourselves during our visit to Brussels
in March 2010.[363]
To set alongside the over-budget projects which we have noted,
several others—such as in Brussels—came in on (or
under-) budget.[364]
188. In connection with the opening in October
2009 of the new Embassy building in Warsaw, designed by Tony Fretton
Architects, the specialist publication Building Design
said that the FCO had been an "enlightened client" which
believed that "buildings matter and good design is the only
worthwhile option". However, the publication said that the
Warsaw Embassy was now viewed within the FCO as "lavish"
and that it "could be the last of its kind, thanks to a new
cost-cutting drive" which was being established under the
FCO's new estates strategy, which was itself being developed by
Alan Croney, the FCO's new Director of Estates, Security and Facilities
Management.[365]
189. The Civil Service Capability Review in March
2009 had already indicated that the FCO was due to bring forward
an estates management strategy for "making better use of
the Department's assets", something which the Review saw
as "an opportunity to improve efficiency".[366]
The minutes show that the FCO Board "discussed a paper on
the outlines of a new estates strategy" at its September
2009 meeting;[367]
and Sir Peter Ricketts told the Public Accounts Committee on 1
March 2010 that the Board discussed the full draft strategy at
its February 2010 meeting and expected to finalise it "very
rapidly".[368]
In a letter, Sir Peter shared with the PAC and ourselves the principles
which will be applied to all future FCO estate projects, and he
told PAC that he would send that Committee a copy of the new estates
strategy when it was finalised.[369]
190. We recommend that the FCO
should send us or our successor Committee, as well as the Public
Accounts Committee, a copy of its new estates strategy as soon
as it is finalised.
191. Mr Croney was recruited externally through
an open competition; he followed Keith Luck, Director General
Finance, in joining the FCO from the Metropolitan Police. Mr Croney
heads a newly unified team covering estates, security and facilities
management.[370] His
appointment is part of the major effort which the FCO is now making
to strengthen its estates management. Sir Peter Ricketts told
us in May 2009 that the FCO was "looking at how to improve
the governance and budgeting of future estate projects to ensure
spend is tightly controlled and the taxpayer gets the best value
for money".[371]
192. The NAO published a major report on the
FCO's estate, Adapting the FCO's global estate to the modern
world, in mid-February 2010. The NAO found that the FCO's
current estate strategy had only "scant" underpinning
detail and did not constitute a "clear framework to assess
estate performance and drive change". The NAO also found
that the FCO's data on the cost and use of the estate was poor,
and that this was one of the factors behind the existence of significant
unused space and a failure to take up some potential opportunities
for co-location with other government departments and agencies.
As regards the management of estate projects, the NAO found that:
the FCO does not have an effective system for bringing
together the information necessary to manage its programme of
capital projects around its estate. Poor information hinders the
FCO's ability to monitor effectively project costs against budget,
or to identify the systemic causes of delays and cost overruns.[372]
The NAO also found that FCO management and incentive
structures regarding the estate hampered its more effective use,
and that there was no drive from above the Department for better
cross-government use of FCO properties. Overall, the NAO concluded
that "to date the [FCO] has not secured value for money in
the way it manages its global estate as a whole".[373]
193. We conclude that the Department's
new drive to strengthen its estates management is to be welcomed.
This is especially the case given our previous criticisms of some
FCO estate projects and the shortcomings identified by the National
Audit Office in its recent Report on the FCO's management of its
estate. We recommend that the FCO's new estates management strategy
should give due weight to the non-financial, 'prestige' value
of some FCO properties, which we conclude can bring material benefits
in terms of projecting the UK presence.
30 Departmental Expenditure Limit (DEL) budget i.e.
Resource plus Capital DEL, net of depreciation; Foreign Affairs
Committee, First Report of Session 2007-08, Foreign and Commonwealth
Office Annual Report 2006-07, HC 50, para 20 Back
31
Foreign Affairs Committee, First Report of Session 2007-08, Foreign
and Commonwealth Office Annual Report 2006-07, HC 50, para
21 Back
32
DEL budget; calculated from FCO, Departmental Report and Resource
Accounts 1 April 2008-31 March 2009, Volume 2, HC 460-II,
pp 14-15, Table 4. The DEL figures are lower than those for Total
Departmental Spending (also known as Total Public Spending), which
also include Annually Managed Expenditure (AME). Back
33
Calculated from HM Treasury, Pre-Budget Report, Cm 7747,
December 2009, p 194, Table B17. These DEL figures understate
total MOD spending, in particular, of which an especially large
share is AME. Back
34
Ev 134 [NAO] Back
35
Q 9; Foreign Affairs Committee, Developments in the European
Union, Oral and written evidence, 9 December 2009, HC (2009-10)
144, Q 4 [David Miliband]; HL Deb, 20 January 2010, col 993; HC
Deb, 21 January 2010, col 439; the budget referred to is the DEL
budget. Back
36
Q 9; HC Deb, 8 December 2009, col 240-1W; HC Deb, 21 January 2010,
col 439 Back
37
Q 45 Back
38
Q 45 Back
39
International Development Committee, Fourth Report of Session
2009-10, DFID's Performance in 2008-09 and the 2009 White Paper,
HC 48-II, Q 51 Back
40
Ev 134 [NAO] Back
41
Q 45 Back
42
Ev 131 [NAO]; Public Accounts Committee, Third Report of Session
2009-10, Financial Management in the FCO, HC 164, Q 7 [Sir
Peter Ricketts] Back
43
Ev 130 [NAO] Back
44
Ev 130 [NAO] Back
45
Ev 130 [NAO]; HC Deb, 8 December 2009, col 240-1W Back
46
Ev 130 Back
47
Ev 130-31 Back
48
Ev 131 Back
49
Ev 131 Back
50
HC Deb, 11 March 2009, col 421W Back
51
Ev 131 Back
52
Q 44 Back
53
Comparison of spot rates, 1 November 2007 versus 22 January
2010; information provided by the House of Commons Library. Back
54
The same applies whether volatility is measured as the ratio of
the highest to lowest spot rate during the period, or as the coefficient
of variation; information provided by the House of Commons Library.
Back
55
Q 43 Back
56
Foreign Affairs Committee, Second Report of Session 2008-09, Foreign
and Commonwealth Office Annual Report 2007-08, HC 195, para
57 Back
57
FCO, Second Report from the Foreign Affairs Committee Session
2008-09: Foreign and Commonwealth Office Annual Report 2007-08:
Response of the Secretary of State for Foreign and Commonwealth
Affairs, Cm 7585, April 2009, para 10 Back
58
Ev 29-30 [FCO] Back
59
Ev 134 [NAO] Back
60
Q 9 Back
61
Ev 20 Back
62
Ev 29, 32 Back
63
Ev 88 Back
64
Ev 109-110 Back
65
HC Deb, 9 March 2010, col 10WS Back
66
HC Deb, 2 March 2009, col 1237-8W; HC Deb, 8 December 2009, col
240-1W Back
67
Ev 133 Back
68
Summary minutes of FCO Board meeting, 23 July 2009, via www.fco.gov.uk;
FCO, Departmental Report and Resource Accounts 1 April 2008-31
March 2009, Volume 2, HC 460-II, p 86 Back
69
Foreign Affairs Committee, Second Report of Session 2008-09, Foreign
and Commonwealth Office Annual Report 2007-08, HC 195, paras
211-213 Back
70
Ev 29 Back
71
FCO, Autumn Performance Report, December 2009, p 5 Back
72
Ev 79 Back
73
HC Deb, 2 March 2009, col 1239-40W Back
74
Ev 134; HC Deb, 8 December 2009, col 240-1W Back
75
HL Deb, 20 January 2010, col 992 Back
76
Q 49 Back
77
Ev 134 Back
78
See Ev 103. Back
79
Q 22 Back
80
FCO, Departmental Report and Resource Accounts 1 April 2008-31
March 2009, Volume 1, HC 460-I, p xxii Back
81
HC Deb, 2 March 2009, col 1238-9W Back
82
Foreign Affairs Committee, Fourth Report of Session 2008-09, Global
Security: Non-Proliferation, HC 222, paras 73-82 Back
83
Foreign Affairs Committee, Global Security: Non-Proliferation,
paras 40-44 Back
84
Q 51 Back
85
Q 21 Back
86
Ev 78 Back
87
Foreign Affairs Committee, First Report of Session 2007-08, Foreign
and Commonwealth Office Annual Report 2006-07, HC 50, para
15 Back
88
Foreign Affairs Committee, Foreign and Commonwealth Office
Annual Report 2006-07, para 15 Back
89
Ev 78 Back
90
Ev 103-104 Back
91
Ev 103; these figures differ slightly from those given by the
Department at HC Deb, 27 February 2009, col 1199-200W and FCO,
Departmental Report and Resource Accounts 1 April 2008-31 March
2009, Volume 2, HC 460-II, p 128 Back
92
HC Deb, 26 March 2009, col 600-1W, 604-5W Back
93
HC Deb, 2 February 2009, col 1238-9W; HC Deb, 26 March 2009, col
600-1W, 604-5W; Ev 103 Back
94
Calculated from FCO, Departmental Report and Resource Accounts
1 April 2008-31 March 2009, Volume 2, HC 460-II, pp 33-36,
Table 13 Back
95
HC Deb, 26 March 2009, col 598W, 602W; HC Deb, 2 April 2009, col
1307W Back
96
Ev 78 Back
97
Ev 32, 78, 113 Back
98
Ev 78 Back
99
Ev 78 Back
100
Foreign Affairs Committee, Second Report of Session 2008-09, Foreign
and Commonwealth Office Annual Report 2007-08, HC 195, para
214 Back
101
Foreign Affairs Committee, Second Report of Session 2008-09, Foreign
and Commonwealth Office Annual Report 2007-08, HC 195, para
214 Back
102
FCO, Second Report from the Foreign Affairs Committee Session
2008-09: Foreign and Commonwealth Office Annual Report 2007-08:
Response of the Secretary of State for Foreign and Commonwealth
Affairs, Cm 7585, April 2009, para 41 Back
103
Ev 119 Back
104
Although we were separately in correspondence with the Foreign
Secretary about UK secondments to international post-conflict
missions; see para 100 and Ev 42-44. Back
105
Foreign Affairs Committee, Developments in the European Union,
Oral and written evidence, 9 December 2009, HC (2009-10) 144,
Q 2 Back
106
Q 21 Back
107
FCO, Departmental Report and Resource Accounts 1 April 2008-31
March 2009, Volume 2, HC 460-II, p 47 Back
108
FCO, Departmental Report and Resource Accounts 1 April 2008-31
March 2009, Volume 2, HC 460-II, pp 66-67 Back
109
FCO, Autumn Performance Report, December 2009, p 25 Back
110
Ev 74 Back
111
Q 22 Back
112
HC Deb, 2 March 2009, col 1239-40W Back
113
Summary minutes of FCO Board meeting, 23 July 2009, via www.fco.gov.uk Back
114
Summary minutes of FCO Board meeting, 25 September 2009, via www.fco.gov.uk Back
115
Public Accounts Committee, Third Report of Session 2009-10, Financial
Management in the FCO, HC 164, Q 106 Back
116
Ev 134 Back
117
Q 10 Back
118
Ev 134 Back
119
Q 41 Back
120
HL Deb, 20 January 2010, col 992 Back
121
HC Deb, 21 January 2010, col 439; HL Deb, 21 January 2010, cols
1105-7; see also Ev 102. Back
122
HC Deb, 21 January 2010, col 442 Back
123
FCO, Autumn Performance Report, December 2009, p 16 Back
124
Ev 102 Back
125
Summary minutes of FCO Board meeting, 27 November 2009, via www.fco.gov.uk Back
126
See Foreign Affairs Committee, Seventh Report of Session 2007-08,
Overseas Territories, HC 147-I, para 9. Back
127
Foreign Affairs Committee, Second Report of Session 2008-09, Foreign
and Commonwealth Office Annual Report 2007-08, HC 195, para
75 Back
128
HC Deb, 2 March 2009, col 1239-40W; see also HC Deb, 8 December
2009, col 240-1W. Back
129
International Development Committee, Fourth Report of Session
2009-10, DFID's Performance in 2008-09 and the 2009 White Paper,
HC 48-II, Q 52 Back
130
Foreign Affairs Committee, Developments in the European Union,
Oral and written evidence, 9 December 2009, HC (2009-10) 144,
Q 4; HC Deb, 8 December 2009, col 240-1W; Ev 80 Back
131
Q 9 Back
132
HC Deb, 8 December 2009, col 240-1 Back
133
Ev 134 Back
134
HC Deb, 26 January 2010, col 835W Back
135
Q 26 Back
136
Ev 84 Back
137
Foreign Affairs Committee, Developments in the European Union,
Oral and written evidence, 2 December 2009, HC (2009-10) 114-i,
Q 142 Back
138
FCO, Autumn Performance Report, December 2009, pp 27-28 Back
139
Ev 62 Back
140
Ev 93; see also Ev 103. Back
141
Ev 93 Back
142
HM Treasury, Pre-Budget Report, Cm 7747, December 2009,
p 110 Back
143
HC Deb, 9 July 2009, col 948-9W Back
144
FCO, UK International Priorities: A Strategy for the FCO,
Cm 6052, December 2003 Back
145
FCO, Foreign and Commonwealth Office Departmental Report 1
April 2004-31 March 2005, Cm 6533, June 2005, p 158; HC Deb,
15 December 2004, col 137-140WS; HC Deb, 11 October 2005, col
21-3WS; HC Deb, 2 February 2009, col 883-4W Back
146
Foreign Affairs Committee, Second Report of Session 2005-06, Foreign
and Commonwealth Office Annual Report 2004-05, HC 522, paras
110-118 Back
147
Foreign Affairs Committee, Second Report of Session 2008-09, Foreign
and Commonwealth Office Annual Report 2007-08, HC 195, para
68 Back
148
Foreign Affairs Committee, Foreign and Commonwealth Office
Annual Report 2007-08, paras 51, 67 Back
149
HC Deb, 26 February 2010, col 780W; "War of words over cut
in terror budget", Financial Times, 22 January 2010 Back
150
HC Deb, 26 January 2010, col 245 WH Back
151
FCO, Autumn Performance Report, December 2009, p 8 Back
152
Ev 114 Back
153
Q 13 Back
154
Qq 23-24 Back
155
HC Deb, 21 January 2010, col 439; HC Deb, 26 January 2010, col
244-245WH Back
156
Foreign Affairs Committee, Second Report of Session 2008-09, Foreign
and Commonwealth Office Annual Report 2007-08, HC 195, paras
69-72 Back
157
FCO, Second Report from the Foreign Affairs Committee Session
2008-09: Foreign and Commonwealth Office Annual Report 2007-08:
Response of the Secretary of State for Foreign and Commonwealth
Affairs, Cm 7585, April 2009, para 13 and Annex A; HC Deb,
28 January 2009, col 598-600W; Ev 66 Back
158
Q 16 Back
159
Q 46; see also the uncorrected transcript of oral evidence taken
before the Public Accounts Committee on 1 March 2010, HC (2009-10)
417-i, Q 30 [Sir Peter Ricketts]. Back
160
Q 46; Ev 98 Back
161
Cabinet Office, Foreign and Commonwealth Office: Progress and
next steps, Civil Service Capability Review, March 2009, p
11 Back
162
NAO, Adapting the Foreign and Commonwealth Office's global
estate to the modern world, HC (2009-10) 295, 11 February
2010, p 11 Back
163
Ev 55 Back
164
Ev 61 Back
165
Q 46; on the full cost recovery issue, see also the uncorrected
transcript of oral evidence taken before the Public Accounts Committee
on 1 March 2010, HC (2009-10) 417-i, Qq 60-64, 87-90 [Sir Peter
Ricketts]. Back
166
Ev 98 Back
167
Q 46; see also Ev 98. Back
168
Ev 105 Back
169
Foreign Affairs Committee, Second Report of Session 2008-09, Foreign
and Commonwealth Office Annual Report 2007-08, HC 195, para
86 Back
170
Ev 76 Back
171
Ev 68 Back
172
HC Deb, 26 January 2010, col 835W Back
173
Ev 68; see also Q 27. Back
174
Ev 76 Back
175
FCO, Departmental Report and Resource Accounts 1 April 2008-31
March 2009, Volume 1, HC 460-I, p 3 Back
176
Cabinet Office, Foreign and Commonwealth Office: Progress and
next steps, Civil Service Capability Review, March 2009, pp
11-12 Back
177
Cabinet Office, Foreign and Commonwealth Office: Progress and
next steps, p 12 Back
178
FCO, Departmental Report and Resource Accounts 1 April 2008-31
March 2009, Volume 1, HC 460-I, p 3 Back
179
Ev 95-96 Back
180
Foreign Affairs Committee, Second Report of Session 2008-09, Foreign
and Commonwealth Office Annual Report 2007-08, HC 195, paras
76-77 Back
181
Ev 62 Back
182
Foreign Affairs Committee, Foreign and Commonwealth Office
Annual Report 2007-08, para 78 Back
183
Foreign Affairs Committee, Third Report of Session 2007-08, Foreign
Policy Aspects of the Lisbon Treaty, HC 120-I, paras 195-199 Back
184
"EU Commission 'embassies' granted new powers", euobserver.com,
21 January 2010 Back
185
Foreign Affairs Committee, Third Report of Session 2007-08, Foreign
Policy Aspects of the Lisbon Treaty, HC 120-I, para 199 Back
186
Foreign Affairs Committee, Foreign Policy Aspects of the Lisbon
Treaty, paras 200-203 Back
187
Foreign Affairs Committee, First Report of Session 2007-08, Foreign
and Commonwealth Office Annual Report 2006-07, HC 50, paras
176-178; oral evidence taken before the European Scrutiny Committee
on 28 October 2009, HC (2008-09) 1076, Qq 16-18 [Chris Bryant
MP] Back
188
Treaty on European Union, Article 35 Back
189
HC Deb, 1 March 2010, col 839W; Foreign Affairs Committee, First
Report of Session 2007-08, Foreign and Commonwealth Office
Annual Report 2006-07, HC 50, paras 176-178 Back
190
Foreign Affairs Committee, Foreign Policy Aspects of the Lisbon
Treaty, para 199; see also Q 26 [Sir Peter Ricketts]. Back
191
Q 26 Back
192
Uncorrected transcript of oral evidence taken before the Public
Accounts Committee on 1 March 2010, HC (2009-10) 417-i, Qq 46,
65, 76-81; on the issue of spare capacity in the FCO's global
estate, see NAO, Adapting the Foreign and Commonwealth Office's
global estate to the modern world, HC (2009-10) 295, 11 February
2010, p 28, Figure 11. Back
193
Uncorrected transcript of oral evidence taken before the Public
Accounts Committee on 1 March 2010, HC (2009-10) 417-i, Q 80 Back
194
Presidency Conclusions, European Council, 29-30 October 2009 Back
195
Treaty on European Union, Article 27 Back
196
Oral evidence taken before the European Scrutiny Committee on
28 October 2009, HC (2008-09) 1076, Qq 6, 8, 36-48 Back
197
In particular, in light of Article 10 of the Lisbon Treaty's Protocol
on the role of national parliaments in the EU, which provides
that "a conference of Parliamentary Committees for the Affairs
of the Union may submit any contribution it deems appropriate
for the attention of the European Parliament, the Council and
the Commission [...] [and] may also organise interparliamentary
conferences on specific topics, in particular to debate matters
of common foreign and security policy, including common security
and defence policy". Back
198
See letter in reply from the High Representative (EU 118, 22 February
2010), published by the Committee at http://www.publications.parliament.uk/pa/cm200910/cmselect/cmfaff/memo/eudevelop/contents.htm Back
199
Foreign Affairs Committee, Third Report of Session 2007-08, Foreign
Policy Aspects of the Lisbon Treaty, HC 120-I, para 97 Back
200
HC Deb, 25 March 2009, col 17-9WS Back
201
Ev 21, 33 Back
202
"Civilian role in foreign missions faces cuts", Financial
Times, 2 March 2009 Back
203
Ev 42 Back
204
Ev 43 Back
205
Ev 44 Back
206
HC Deb, 25 March 2009, col 17-9WS Back
207
HC Deb, 25 March 2009, col 17-9WS; see also HC Deb, 3 June 2009,
col 511-2W; Ev 43, 45. Back
208
Q 21 Back
209
Ev 45 Back
210
The UK was among the first states to recognise Kosovo, on 18 February
2008, the day following its declaration of independence. On Bosnia-Herzegovina,
in July 2008, for example, the Foreign Secretary wrote jointly
with his Czech counterpart to all other EU Foreign Ministers,
to "flag up Bosnia as a big issue"; Foreign Affairs
Committee, Developments in the European Union, Oral and
written evidence,10 December 2008, HC (2008-09) 70-i, Q 56 Back
211
"Civilian role in foreign missions faces cuts", Financial
Times, 2 March 2009 Back
212
Cabinet Office, The National Security Strategy of the United
Kingdom, Cm 7291, March 2008, para 4.47 Back
213
"European Renewal Amidst Global Adversity", Warsaw,
23 June 2009, text at http://www.davidmiliband.info/speeches/speeches_09_07.htm Back
214
Letter to the Chairman (EU 107, 6 December 2009), published by
the Committee at http://www.publications.parliament.uk/pa/cm200910/cmselect/cmfaff/memo/eudevelop/contents.htm
Back
215
Ibid. Back
216
HC Deb, 16 December 2009, col 139WS Back
217
HC Deb, 29 January 2010, col 1135W Back
218
HC Deb, 16 December 2009, col 139WS; Ev 101 Back
219
Ev 101 Back
220
Foreign Affairs Committee, Second Report of Session 2008-09, Foreign
and Commonwealth Office Annual Report 2007-08, HC 195, para
212 Back
221
Ev 129 Back
222
HC Deb, 8 December 2009, col 240-1W Back
223
Q 48 Back
224
Ev 132 Back
225
Q 48 Back
226
Ev 133 Back
227
Ev 79 Back
228
Ev 133 Back
229
Foreign Affairs Committee, Developments in the European Union,
Oral and written evidence, 9 December 2009, HC (2009-10) 144,
Q 4 Back
230
NAO, Financial Management in the Foreign and Commonwealth Office,
HC (2008-09) 289, 3 June 2009, para 2.70 Back
231
Ev 133 Back
232
Ev 79, 133 Back
233
Ev 33 Back
234
Ev 133 Back
235
Ev 29 [FCO], 133 [NAO] Back
236
Ev 134 Back
237
Ev 80 Back
238
Ev 131 [NAO] Back
239
Ev 79 Back
240
Ev 29 Back
241
Ev 80 Back
242
Public Accounts Committee, Third Report of Session 2009-10, Financial
Management in the FCO, HC 164, Q 21 Back
243
Ev 134 [NAO] Back
244
International Development Committee, Fourth Report of Session
2009-10, DFID's Performance in 2008-09 and the 2009 White Paper,
HC 48-II, Q 53 Back
245
Public Accounts Committee, Financial Management in the FCO,
Q 21 Back
246
Public Accounts Committee, Financial Management in the FCO,
Conclusions and recommendations, para 6 Back
247
DEL budget, calculated from FCO, Departmental Report and Resource
Accounts 1 April 2008-31 March 2009, Volume 2, HC 460-II,
pp 14-15, Table 4 Back
248
Ev 101 Back
249
Summary minutes of FCO Board meeting, 27 February 2009, via www.fco.gov.uk Back
250
HL Deb, 20 January 2010, col 992 Back
251
HC Deb, 10 February 2010, col 53WS Back
252
Summary minutes of FCO Board meeting, 18 December 2009, via www.fco.gov.uk Back
253
Ev 100 Back
254
HC Deb, 21 January 2010, col 439-444 Back
255
Public Accounts Committee, Financial Management in the FCO,
para 8 Back
256
Q 61 Back
257
Ev 114 Back
258
Ev 80 Back
259
Foreign Affairs Committee, Developments in the European Union,
Oral and written evidence, 9 December 2009, HC (2009-10) 144,
Q 3 Back
260
HC Deb, 10 February 2010, col 53WS Back
261
HC Deb, 22 February 2010, col 213W Back
262
Uncorrected transcript of oral evidence taken before the Public
Accounts Committee on 1 March 2010, HC (2009-10) 417-i, Q 97;
see also paragraph 175 below. Back
263
HC Deb, 22 February 2010, col 214W Back
264
HC Deb, 10 February 2010, col 53WS Back
265
Ev 141 Back
266
Ev 142 Back
267
HC Deb, 10 February 2010, col 53WS Back
268
Foreign Affairs Committee, Developments in the European Union,
Oral and written evidence, 9 December 2009, HC (2009-10) 144,
Q 5 Back
269
Summary minutes of FCO Board meeting, 29 January 2010, via www.fco.gov.uk Back
270
Q 20 Back
271
Q 4 Back
272
Foreign Affairs Committee, First Report of Session 2007-08, Foreign
and Commonwealth Office Annual Report 2006-07, HC 50, paras
18-21 Back
273
Foreign Affairs Committee, Developments in the European Union,
Oral and written evidence, 9 December 2009, HC (2009-10) 144,
Q 8 Back
274
Foreign Affairs Committee, First Report of Session 2007-08, Foreign
and Commonwealth Office Annual Report 2006-07, HC 50, paras
77-93; Foreign Affairs Committee, Second Report of Session 2008-09,
Foreign and Commonwealth Office Annual Report 2007-08,
HC 195, paras 204-208 Back
275
FCO, Autumn Performance Report, December 2008, p 26 Back
276
FCO, Departmental Report and Resource Accounts 1 April 2008-31
March 2009, Volume 2, HC 460-II, p 3 Back
277
FCO, Autumn Performance Report, December 2009, p 27 Back
278
FCO, Autumn Performance Report, December 2008, p 26; FCO,
Autumn Performance Report, December 2009, p 26 Back
279
FCO, Autumn Performance Report, December 2009, p 26 Back
280
Ev 103, 105 Back
281
Foreign Affairs Committee, Second Report of Session 2008-09, Foreign
and Commonwealth Office Annual Report 2007-08, HC 195, paras
125-149 Back
282
Foreign Affairs Committee, Foreign and Commonwealth Office
Annual Report 2007-08, para 141 Back
283
Ev 62 Back
284
Ev 74 Back
285
FCO, Autumn Performance Report, December 2009, p 26 Back
286
Ev 51 Back
287
FCO, Autumn Performance Report, December 2009, p 30 Back
288
Foreign Affairs Committee, Second Report of Session 2008-09, Foreign
and Commonwealth Office Annual Report 2007-08, HC 195, para
205; FCO, Autumn Performance Report, December 2009, p 26 Back
289
Q 12 Back
290
Qq 14-15 Back
291
Ev 53 Back
292
Foreign Affairs Committee, Foreign and Commonwealth Office
Annual Report 2007-08, paras 215-218 Back
293
Ev 52, 104 Back
294
NAO, Financial Management in the Foreign and Commonwealth Office,
HC (2008-09) 289, 3 June 2009 Back
295
Foreign Affairs Committee, First Report of Session 2007-08, Foreign
and Commonwealth Office Annual Report 2006-07, HC 50, para
106 Back
296
See Foreign Affairs Committee, Foreign and Commonwealth Office
Annual Report 2006-07, paras 97-105. Back
297
Foreign Affairs Committee, Second Report of Session 2008-09, Foreign
and Commonwealth Office Annual Report 2007-08, HC 195, paras
196-202 Back
298
Ev 53 Back
299
NAO, Financial Management in the Foreign and Commonwealth Office,
HC (2008-09) 289, 3 June 2009, p 5; Public Accounts Committee,
Third Report of Session 2009-10, Financial Management in the
FCO, HC 164, para 5 Back
300
NAO, Financial Management in the Foreign and Commonwealth Office,
p 17; Public Accounts Committee, Financial Management in the
FCO, Q 65 Back
301
Ev 53 Back
302
NAO, Financial Management in the Foreign and Commonwealth Office,
Summary, para 16c Back
303
Public Accounts Committee, Third Report of Session 2009-10, Financial
Management in the FCO, HC 164, Ev 13 Back
304
Ev 81 Back
305
Ev 78; FCO, Autumn Performance Report, December 2009, p
28 Back
306
FCO, Departmental Report and Resource Accounts 1 April 2008-31
March 2009, Volume 2, HC 460-II, p 39; HC Deb, 14 July 2009,
col 320W; HC Deb, 29 January 2010, col 1115W Back
307
Cabinet Office, Foreign and Commonwealth Office: Progress and
next steps, Civil Service Capability Review, March 2009, p
12 Back
308
Ev 82 Back
309
Office of Government Commerce, Procurement Capability Review Programme,
FCO Review Report, September-November 2008, http://www.ogc.gov.uk/documents/FCO_PCR_Report.pdf Back
310
Ev 82 Back
311
FCO, Autumn Performance Report, December 2009, p 28 Back
312
NAO, Financial Management in the Foreign and Commonwealth Office,
HC (2008-09) 289, 3 June 2009, paras 1.25-1.28 Back
313
Information provided by the House of Commons Department of Chamber
and Committee Services Scrutiny Unit. On a different basis, the
NAO put the figure at 2.5%; Public Accounts Committee, Third Report
of Session 2009-10, Financial Management in the FCO, HC
164, Ev 13. See also FCO, Departmental Report and Resource
Accounts 1 April 2008-31 March 2009, Volume 2, HC 460-II,
p 86. Back
314
Q 49 Back
315
Ev 60 Back
316
Ev 81 Back
317
NAO, Financial Management in the Foreign and Commonwealth Office,
HC (2008-09) 289, 3 June 2009, Summary, para 12 Back
318
NAO, Financial Management in the Foreign and Commonwealth Office,
Summary, para 13; see also Ev 60 [FCO]. Back
319
Foreign Affairs Committee, Second Report of Session 2008-09, Foreign
and Commonwealth Office Annual Report 2007-08, HC 195, paras
198-200 Back
320
FCO, Second Report from the Foreign Affairs Committee Session
2008-09: Foreign and Commonwealth Office Annual Report 2007-08:
Response of the Secretary of State for Foreign and Commonwealth
Affairs, Cm 7585, April 2009, para 40; Ev 80, 105 Back
321
Ev 105 Back
322
Summary minutes of FCO Board meeting, 27 November 2009, via www.fco.gov.uk;
see also Ev 105. Back
323
Foreign Affairs Committee, Foreign and Commonwealth Office
Annual Report 2007-08, paras 200-202 Back
324
NAO, Financial Management in the Foreign and Commonwealth Office,
HC (2008-09) 289, 3 June 2009, Summary, para 4 Back
325
NAO, Financial Management in the Foreign and Commonwealth Office,
Summary, para 4 Back
326
Public Accounts Committee, Third Report of Session 2009-10, Financial
Management in the FCO, HC 164, Conclusions and recommendations,
para 1 Back
327
Public Accounts Committee, Financial Management in the FCO,
Ev 13 Back
328
Cabinet Office, Foreign and Commonwealth Office: Progress and
next steps, Civil Service Capability Review, March 2009, p
11 Back
329
Ev 81 Back
330
Net book value; FCO, Departmental Report and Resource Accounts
1 April 2008-31 March 2009, Volume 2, HC 460-II, p 131, Table
12 Back
331
NAO, Adapting the Foreign and Commonwealth Office's global
estate to the modern world, HC (2009-10) 295, 11 February
2010, p 13, Figure 2 Back
332
Ibid. Back
333
Ev 77 Back
334
Foreign Affairs Committee, Second Report of Session 2008-09, Foreign
and Commonwealth Office Annual Report 2007-08, HC 195, paras
92-93 Back
335
Foreign Affairs Committee, First Report of Session 2007-08, Foreign
and Commonwealth Office Annual Report 2006-07, HC 50, para
161 Back
336
Ev 27, 55, 63-64, 107 Back
337
Ev 77 Back
338
Foreign Affairs Committee, First Report of Session 2007-08, Foreign
and Commonwealth Office Annual Report 2006-07, HC 50, paras
162-166; Foreign Affairs Committee, Second Report of Session 2008-09,
Foreign and Commonwealth Office Annual Report 2007-08,
HC 195, paras 101-105 Back
339
Ev 64 Back
340
HC Deb, 8 December 2009, col 236W Back
341
HM Treasury, Pre-Budget Report, Cm 7747, December 2009,
p 111 Back
342
Public Accounts Committee, Third Report of Session 2009-10, Financial
Management in the FCO, HC 164, Q 9 Back
343
Q 53 Back
344
Q 53 Back
345
Qq 58-60 Back
346
Public Accounts Committee, Financial Management in the FCO,
Q 8 Back
347
HC Deb, 8 December 2009, col 236W Back
348
Q 54 Back
349
HC Deb, 22 February 2010, col 213W; Ev 114 Back
350
Public Accounts Committee, Third Report of Session 2009-10, Financial
Management in the FCO, HC 164, Q 53 Back
351
Q 54 Back
352
Q 54 Back
353
Foreign Affairs Committee, Second Report of Session 2008-09, Foreign
and Commonwealth Office Annual Report 2007-08, HC 195, paras
94-105 Back
354
Not printed; see Ev 54. Back
355
Ev 54 Back
356
Uncorrected transcript of oral evidence taken before the Public
Accounts Committee on 1 March 2010, HC (2009-10) 417-i, Qq 12-13
[Sir Peter Ricketts] Back
357
Uncorrected transcript of oral evidence taken before the Public
Accounts Committee on 1 March 2010, HC (2009-10) 417-i, Q 18 Back
358
Ev 61, 93 Back
359
Ev 96 Back
360
Q 53 Back
361
Uncorrected transcript of oral evidence taken before the Public
Accounts Committee on 1 March 2010, HC (2009-10) 417-i, Qq 21-24 Back
362
Ev 26, 105-106 Back
363
Ev 106 Back
364
Ev 106 Back
365
"Foreign Office U-turn over embassy costs" and "End
of an era for Embassies", Building Design, 16 October
2009 Back
366
Cabinet Office, Foreign and Commonwealth Office: Progress and
next steps, Civil Service Capability Review, March 2009, p
12 Back
367
Summary minutes of FCO Board meeting, 25 September 2009, via www.fco.gov.uk Back
368
Uncorrected transcript of oral evidence taken before the Public
Accounts Committee on 1 March 2010, HC (2009-10) 417-i, Q 2; see
also summary minutes of FCO Board meeting, 26 February 2010, via
www.fco.gov.uk. Back
369
Uncorrected transcript of oral evidence taken before the Public
Accounts Committee on 1 March 2010, HC (2009-10) 417-i, Q 2 Back
370
Ev 61 Back
371
Ev 54 Back
372
NAO, Adapting the Foreign and Commonwealth Office's global
estate to the modern world, HC (2009-10) 295, 11 February
2010, p 6 Back
373
NAO, Adapting the Foreign and Commonwealth Office's global
estate to the modern world, p 9 Back
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