House of Commons - Financial Management in the Foreign and Commonwealth Office

Financial Management in the Foreign and Commonwealth Office - Public Accounts Committee Contents

2 Managing performance and expenditure

8. The Department concedes that there had been delays in delegating 2008-09 budgets to budget holders within Director General commands, but reported that 2009-10 budgets were issued in March 2009, before the start of the financial year. For 2010-11, the Department will be allocating budgets a month earlier again so that people can focus and kick-off activity much earlier in the year.[18]

9. It is not always clear to budget holders where all the accounting entries relating to the expenditure against their budget have come from. The Department acknowledges that it encountered difficulties with how PRISM, its Oracle based financial accounting system, was originally set up. However budget holders now understand their budgets, directors review them and Director Generals now sign off financial information monthly.[19] Budget holders are now in a position to challenge items charged to budgets and make corrections as necessary.[20]

10. The Department has acknowledged the unclear linkages between business planning and resource allocations, and the lack of financial information in the business planning process. Its starting point for improvement is to develop better management information, in particular through activity recording.[21] Only by making clear progress in this area will the Department develop a clear picture of the full cost of all its various activities.[22] The Department reported that it has got better at costing accurately all projects so it can make informed cost reduction decisions and this is increasingly becoming part of how it manages its activities. Using activity recording, the Department confirmed that it knows the costs of each of its overseas posts.[23] This enables it to identify where there are examples of good value for money and where to go to find cost savings, where the costs are high but the activity is of a lesser priority.[24]

11. One of the FCO's objectives is to "provide a flexible global network for the whole of the British Government". The Department would like other departments to see its embassies around the world as representing them, as well as being places where they put their people if they want to operate abroad, rather than setting up "their own shop". Other departments have told FCO that they like to work from its embassies but they find embassies expensive.[25]

12. The Department confirmed that there was a good correlation between staff placement and where Britain's financial and economic interests rest around the world. UK Trade and Investment's strategy is to concentrate on the 20 or so largest markets in the world. Following its strategy refresh in early 2007, the Department reviewed whether diplomats were in the right places in relation to where British economic and foreign policy interests now lie. As a result, the Department has moved a significant number of people from Europe towards other fast-growing economies, such as China, and conflict areas such as Afghanistan.[26]

13. The Department's history of under-spends suggests that previous arrangements to embed accurate financial forecasting, a fundamental element of good financial management, have not worked.[27] Part way through 2007-08, a projected overspend led to a request from the Department to the Treasury for additional resources. As the financial year-end approached, however, forecast resource and capital expenditure outturn reduced to an eventual under-spending of £128 million.[28] The Department agreed that the £118 million under-spend on its overall resource budget in 2007-08, which represented 5.7%, was absolutely unacceptable. Some of the under-spend came from being able to save money on security costs in the Middle East and UN subscriptions being lower because sterling was strong at that time. Half of the under-spend related to Annually Managed Expenditure, which the Accounting Officer considered he had no control over. This related to where the valuation of buildings abroad was higher than expected.[29]

14. In 2008-09, the Department's total under-spend was down to £69 million in total, 3.2%, and almost entirely related to an under-spend on anticipated impairments in the value of fixed assets, again under the heading of Annually Managed Expenditure. Departmental expenditure on the 'controllable' element, was very close to 100% of budget. The Department considers that it has stopped being an under-spending department as a result of better financial management and taking into account the pressures arising from weaker sterling.[30]

15. One of the biggest challenges the Department is now facing in terms of forecasting expenditure and managing its budget is the significant fluctuation in foreign exchange valuations. Historically, the Department's budgets have been protected from exchange rate movements and differential inflationary pressures by the Treasury, but with effect from 2008-09 this protection was withdrawn. That year, sterling's value fell by about 20% against most of the major currencies; it has been very volatile since then.[31] Uniquely in Whitehall, more than half of the Department's budget is spent in foreign currencies and so it is vulnerable to the effect of foreign exchange rate movements.[32]

16. To provide budget certainty and to smooth out effects for the following year, the Department enters into a 12 month rolling programme of forward purchases of dollar, euro and yen each month, based on latest estimates of cash flow requirements. The Department confirmed that in so doing it is not speculating, nor is it taking a view on the future of sterling. Whilst this arrangement provides certainty over the amount of foreign currency the Department will have one year hence, it does not protect FCO from falls in the value of sterling.[33] As a result, the Department has had to absorb a large shortfall in its budget which has meant, both in 2008-09 and 2009-10, having to re-prioritise expenditure and to find efficiency savings to live within this significantly lower purchasing power of sterling.[34]

17. In terms of volumes, in 2009-10, the Department expects to purchase some £500 million in US dollars, in addition to purchases of euro and yen. Beyond that, the Department spends lesser amounts in a further 120 currencies, where no forward purchases are made. If sterling falls against a particular currency, the Department has to absorb the hit directly.[35] The Department is aware that the Ministry of Defence has entered into forward purchases of US dollars for many years, but confirmed that there is no joint purchasing authority across departments. The Department has set up its own arrangements because it is covering a spread of currencies, but over time there would be value in other departments combining together with the FCO.[36]

18. Management of its sizeable asset base across a large global estate presents a significant financial management challenge to the Department.[37] The Department confirmed that it had no plans to sell off historic or prestigious overseas residences. It only sells where properties are no longer needed, are less prestigious buildings or, just very occasionally, if there is a property which is extremely high value but low on the Department's priority list.[38] The Department has issued an instruction from the top to "sweat the asset", that is to make the maximum use of all embassy buildings and houses. It is standard practice now to use the residences for a range of commercial events.[39]

19. The Department has to maintain a programme of building and enhancing embassies in locations where security is challenging and current embassies are not secure, and also keep up to date and maintain a very large spread of embassy and residence buildings around the world on a limited budget. Although the Department considers it is managing this activity competently at the moment, it considers it could do this better with professional help. To bring further expertise into the management of estates, the Department has recently appointed a qualified estates professional as its Director of Estates, whose remit will include helping to drive asset sales to yield more capital to invest in the estate,[40] as the amount of capital available to buy new accommodation is very small.[41]

20. The Committee took evidence from the Department on the 2004-05 Resource Accounts on 15 February 2006, with a specific focus on the C&AG's Report on the fraud at the British Embassy, Tel Aviv,[42] together with consideration of emerging details of a further fraud concerning the theft and misuse of satellite phones in Iraq. The C&AG issued a further report on the 2005-06 Resource Accounts providing additional details on the outcome of the investigation into the satellite phones.[43] The Department set out how there are now better financial controls in place so that similar frauds could not happen now. For example, proper arrangements are now in place to authorise purchases, receipt goods and to check bills to confirm that they are legitimate and proper expenses, before passing them for payment.[44]

21. Figure 1 shows that the total amount of fraud identified each year by the Department has fallen from just under £1 million in 2004-05 down to a historic low of £20,000 in 2008-09.[45] The Department considers that this significant reduction correlates with the introduction of the PRISM system, which requires staff to follow a rigorous procedure, obtaining the right permission before purchasing items. The Department confirmed that it had not had a major fraud for some time and, whilst not being complacent, it considered the direction of travel is positive.[46]Figure 1: Fraud identified and recovered 2004-05 to 2008-09

Source: C&AG's Memorandum

22. Whilst acknowledging that the previous generation of FCO recruits was not as representative of modern Britain as this intake generation now is, the Department considers that its workforce has become more representative of modern Britain, through its recruitment practices over a number of years.[47] Of the 11 members of the current Board, seven are state-educated.[48] The Department acknowledges, however, that at some grades its UK workforce does not yet fully reflect modern Britain. In particular, women, black and minority staff and people with disabilities are currently underrepresented at senior and middle management level and its Diversity and Inclusion Strategy for 2008-2013, "Fairness for All", aims to redress the balance.[49] The Department does not consider itself to be socially exclusive[50] but, although it monitors the diversity of its staff by gender, ethnicity and disability, it does not collect data on social origins, by educational background or by geography, to substantiate this view.[51]