Examination of Witnesses (Question Numbers
40-59)
SIR PETER
RICKETTS KCMG, JAMES
BEVAN AND
KEITH LUCK
9 DECEMBER 2009
Q40 Sir Menzies Campbell: And
recruitment, just to finish?
James Bevan: Recruitment remains
good. We have no problem attracting people. The survey also showed
that despite these difficulties, the vast majority of our staff
want to carry on working for us.
Chairman: We do have some questions that
we would like to put on the staffing issue, but rather than jumping
in now I would rather we carried on where we were.
Q41 Sandra Osborne: Apart of the
effect on staff morale of all these cutbacks and efficiencies,
there must be an impact on the actual service and our standing
as a country in terms of our foreign policy. How would you say
that has been affected?
Sir Peter Ricketts: I do not think
that there has been that impact. I think the reductions and cutbacks
this year have not stopped our diplomats around the world doing
the key jobs that they should be doing. It has not stopped our
consular people being able to offer their support to British citizens,
so I do not think, as yet, it has had an impact on our effectiveness
as an organisation. If they continue, I am sure that it will.
Q42 Sandra Osborne: There is a
current inquiry into US-UK relations. It has been clear from several
witnesses that they would regard any further cutbacks—for
example, in the US—as having a major impact on relations
in that regard. Would you agree with that?
Sir Peter Ricketts: I think the
more we cut back, the more there will be an impact. Yes, I accept
that. But I do not believe there is evidence that what we have
had to do so far this year has had a significant impact, and I
think that is again a tribute to the way staff have responded
to these pressures and kept up the key work, and made sure that
has not fallen off.
Q43 Mr. Illsley: Just coming back
to your Treasury colleagues' priorities, as you mentioned to my
colleague, John Horam, the implication of the paper that the Committee
has received from the National Audit Office is that the Treasury
thinks that the Foreign Office should decide where to allocate
its resources partly by assessing where the exchange rate risk
may be lower. Would you say that that is the case?
Sir Peter Ricketts: That may be
their view. I find that quite hard to turn into operational effect.
Q44 Mr. Illsley: Are you of the
opinion that you are going to have to look at areas where the
risk is low rather than where your priorities lie, or are you
still going to try and attempt to meet the priorities?
Sir Peter Ricketts: The second
of those. I am quite sure the Foreign Secretary, with our advice,
will want to put his resources where he thinks the priorities
are. The exchange rate movements are something we have to take
into account. I do not think you can allow foreign exchange to
drive foreign policy.
Q45 Mr. Illsley: You have mentioned
already that you are in negotiations with the Treasury, and I
think you hinted that those negotiations could go on for some
considerable time. Are you alone in this or are you in negotiations
with the Treasury and other Departments that have a non-sterling
spend? Is there a group discussion on this, or is each Department
being treated individually?
Sir Peter Ricketts: There is a
group discussion on some aspects. I think the Foreign and Commonwealth
Office budget is probably particularly badly hit by the fall in
sterling because we have got the largest exposure. We have more
than 50% of our budget in foreign currency. Other Departments—DFID—tend
to make their programme allocations in sterling, so they are less
affected. The Ministry of Defence is affected, but it obviously
has a much bigger budget and its exposure is mainly to dollars.
So I think we are particularly affected by the overseas price
movement issue, but we are working together with DFID and the
MOD, for example, to be as effective as we can in our support
services abroad. We are also working with the British Council
on that. The international Departments are working together to
try to be as efficient as possible abroad. I think the particular
sterling weakness issue impacts us more.
Q46 Mr. Illsley: Is there any
scope for involvement of the Departments in the charges that you
allow before the use of overseas posts by perhaps passing some
of the increased cost on to those Departments?
Sir Peter Ricketts: That is also
an area we have been doing a lot of work on. Mr. Luck might want
to comment on that.
Keith Luck: Indeed, we do try
to pass some of these costs on to other Departments. Excluding
the UK Border Agency, we have recovered some £37 million
from other Government Departments that sit on our platform. But
actually they are under the same sort of financial pressures and
are finding it difficult to find additional resources to cover
the exchange rate losses and the impact of the loss of the OPM
that we are suffering as well.
Sir Peter Ricketts: Other Departments
find us expensive as a place to operate from, because they have
to pay their share of security costs and other costs. Equally,
we believe that the embassy is the best place normally to have
all the different parts of HMG's operations overseas, and so we
have a lively discussion with Departments about sharing the costs.
We are expected to apply the Treasury's full economic cost formula,
which other Departments tend to find is very expensive, although
it does reflect the genuine costs that we have. It is an ongoing
debate.
Q47 Mr. Illsley: One of the suggestions
from the NAO paper is that security costs could be one of the
areas that are a risk, so the idea that other Departments should
pay extra in that respect is not unreasonable.
Sir Peter Ricketts: Well, no,
exactly. The security of our staff has to come first, and that
is expensive. Threats in many countries have risen, so that has
to be factored in.
Q48 Chairman: May I ask about
your financial management? The proportion of your finance staff
with professional qualifications is expected to increase, but
it is going up to only 17% by the end of this year, against a
Whitehall average of 14%. You contracted an outside company to
provide advice on exchange rate management options. Why did you
do that? Was it because you felt that you lacked the necessary
expertise or was it for other reasons?
Sir Peter Ricketts: I will ask
Mr. Luck to comment on our financial management issues more generally,
on which we've recently been examined by the Public Accounts Committee
as well. The reason for taking professional advice on foreign
exchange is that we want to be very, very careful in using public
money and making forward purchases of foreign currency. We have
all along approached this in a very cautious way. We do not want
to find ourselves in front of the Committee being asked about
speculation or having made poor decisions on these very important
things. We actually pay a relatively small amount to a professional
company to make absolutely sure that we have professional advice
on forward purchasing, which involves big sums. I don't know whether
Mr. Luck wants to add anything.
Keith Luck: To add to that, I'm
pleased that you've noticed the increase in the number of people
training as accountants in the organisation and in broader financial
management. But Treasury Management skills are a particular specialism,
and we didn't have that in the organisation, so we have asked
an external organisation to work with us. The NAO report described
the various proposals that we put to the Treasury and the mechanism
for mitigating the loss of the overseas price movements mechanism.
Actually, that organisation's contract with us is now tiny. It
consists 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 at a particular
time. But the contract is quite tiny now.
Q49 Chairman: In previous years,
there was a tendency sometimes to underspend at the end of the
financial year. Recently, however, you seem to have dealt with
that problem. Is that because of the major financial pressures
that you are under, which mean that you can't underspend because
you can't even provide enough resources for what you've got to
do?
Sir Peter Ricketts: I think there
are two things at work, Mr. Chairman. One is that we have better
financial management information—definitely. One of the
reasons why we were traditionally an underspending Department
was that we didn't have good, effective financial management numbers,
so everyone tended to play safe and underspend a bit to avoid
the worse crime of overspending. The culmination of that was that
we underspent every year. A combination of improved financial
data, which allow us to take decisions in year—if one part
of the organisation is underspending, we can see that and move
money to another part—and, on top of that, the huge pressures
that we have talked about has cured the problem of our being an
underspending Department. Last year, we just came in more or less
on a full spend. This year, we are struggling.
Q50 Chairman: The House of Commons
scrutiny unit suggests that your underspend in 2008-09 will be
about £69 million or just over 3%, compared with 6% the previous
year. Does that mean that you might run out of money in February
next year?
Sir Peter Ricketts: Of that 3%,
a very large part is annually managed expenditure, which Mr. Luck
can explain better than me. It relates to things such as dilapidations
on our buildings—it is not our cash, core budget. On our
core budget, we came within a whisker of a full spend, so that
shows, partly, the pressure that the organisation is under. We
will do our level best to come up with a full spend this year
as well. However, that 3% underspend was largely money that we
were not able to control, I think it's fair to say.
Keith Luck: It is. I've very little
to add to that, Mr. Chairman. In fact, that 3% includes things
like the revaluation of some of our assets and losses or gains
on the disposal of those assets. It is not really items within
the budget that the board, management and Ministers can control.
It is Annually Managed.
Q51 Andrew Mackinlay: It seems
to me that there are others who will perhaps listen to our deliberations
this morning. I do not think that you and your colleagues have
amplified the problem you have with subscriptions to big organisations
such as the United Nations. You are simply not the masters of
those and they are not even in line with inflation, regardless
of moves on sterling. There are simply higher subs that you have
to meet. Can I invite you to place on the record your position
on that?
Sir Peter Ricketts: Thank you,
Mr. Mackinlay. We do face upward pressures, particularly on our
UN and NATO budget subscriptions, which go up by more than inflation.
The UN subscription is payable in dollars, so that brings a heavier
load on us. We have an agreement with the Treasury to share the
cost, with 60% from the Treasury and 40% from the FCO above a
certain baseline. There is therefore cost-sharing with the Treasury.
None the less, the inexorable rise of UN subscriptions puts further
pressure on our budget. There is little we can do about it. We
participate as one of around 191 countries in the annual UN budget
negotiations. I am sure that we weigh heavily in those discussions,
but in the end it is a consensus decision.
Q52 Andrew Mackinlay: It wouldn't
just be the UN. You do not have to list them, but it includes
the Organisation for Security and Co-operation in Europe and presumably
NATO.
Sir Peter Ricketts: There is a
NATO budget element.
Andrew Mackinlay: There are probably
things I have never heard of.
Sir Peter Ricketts: The Commonwealth.
Andrew Mackinlay: The Council of Europe.
It goes on. In a sense, we need to understand that and the public
need to understand it.
Q53 Ms Stuart: Buildings. In 2008-09,
the FCO generated £61.5 million by selling land and buildings.
Almost £40 million came from the sale of the embassy in Madrid.
Given that times are hard and, as Ming Campbell said, we are cutting
into the bone rather than just dealing with the fat, can this
Committee have the same assurance that you gave the National Audit
Office that you will not contemplate the sale of any premises
in order to save money, but that such decisions will be based
on the needs of our foreign representation?
Sir Peter Ricketts: I can certainly
give you the assurance that anything we do will be justified and
make sense on its merits. I certainly don't foresee us selling
major iconic British buildings in major capitals, which are so
useful to us in projecting Britain. However, there will always
be opportunities to sell buildings that are underused, obsolete
or extremely valuable when compared with the benefit they bring
us. We will look to sell more of those in line with the Government's
policy on greater asset disposals. That will help give us money
to put into, for example, health and safety works, security works
and modernising our buildings around the world. As far as possible,
we would like to move towards buildings that are more flexible,
that can be adapted more easily to changing needs and the changing
requirements of other Departments, and that move away from the
rather inflexible buildings we have. You mentioned Madrid. I happened
to be there last Friday. We sold a rather old and tired building
in the centre of town just before property prices declined sharply.
We have provided the embassy now in the top floors of a fantastic,
modern office tower in a wonderful position. The lift in staff
morale and effectiveness is tangible. People are really happy
to be in open-plan, modern office accommodation. That shows what
can be done by careful asset disposal and re-providing.
Q54 Ms Stuart: But in terms of
the overall strategy, can you say a little bit more? I fully accept
that some buildings become inappropriate to use and incredibly
expensive. The Public Accounts Committee commended you for a policy
of hiring out premises in Italy for functions and so on. How much
are you thinking about using embassy buildings for non-embassy
purposes in order to raise revenue?
Sir Peter Ricketts: We do that
a lot. A lot of ambassadors hire out their residences or the entertaining
space in their embassies for British companies doing product launches
or promotions. We charge them for it, so we do get some revenue.
It will never be more than quite a small proportion of what it
cost to run these buildings, but we will maximise our revenues
from that. We will certainly make sure that the buildings are
used to full extent for promoting Britain. Where we identify the
buildings that we have been talking about, where we can make a
sale and use money for higher priorities, we will do so. In the
current climate and in line with the Government's policy on asset
disposal, we will be doing more of that, but we shall obviously
keep the Committee closely informed.
Q55 Ms Stuart: I have a very specific
question on Moscow. If you want to give a written answer, that
is fine. I gather that the work has been completed, but that the
main contractor is now fighting bankruptcy. What is the final
position on how much that is costing us?
Sir Peter Ricketts: That is roughly
the position. This is the renovation of the residence in Moscow.
An historic 19th-century building is being completely renovated.
I think that the ambassador is moving back in shortly. A Turkish
company has been doing the works on it. It has now completed but,
as you say, it has gone into liquidation since then.
Q56 Ms Stuart: What is the final
bill for that work?
James Bevan: It is about £13
million, but we can write to the Committee as soon as we can provide
the figures.
Q57 Ms Stuart: About £13
million—against a £10.6 million estimate?
Sir Peter Ricketts: There has
been an increase in the cost and that is partly because when we
began to restore the old building, we found that more work was
needed than was originally anticipated. But let us send the Committee
a note on that.[2]
Q58 Mr. Purchase: On the question
of the sale of property to bring you new resources, what arrangements
are there with the Treasury for the use of those funds that come
from a sale producing capital? Are you just allowed to use the
capital without further reference to the Treasury, or is there
some arrangement whereby you have to get agreement for how you
might use that funding? Is there any pressure now to pay the whole
of the sale proceeds into the Treasury?
Sir Peter Ricketts: No, there
is not. The Treasury accepts that, when we sell assets, we can
recycle the money for our own uses—up to a certain ceiling,
which is a relatively high ceiling.
Q59 Mr. Purchase: Can you recall
what it is?
Sir Peter Ricketts: It has recently
increased, I think.
Keith Luck: The target set for
the current spending review period is £50 million. We have
actually exceeded that already. The idea is that, every time it
is more than 20% of the original target, we go back to the Treasury.
As Sir Peter has said, there has been no problem in being allowed
to recycle those extra proceeds, but it goes up by 20%, in effect.
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