Examination of Witnesses (Question Numers
1-19)
FOREIGN AND
COMMONWEALTH OFFICE
21 OCTOBER 2009
Q1 Chairman: Good afternoon and welcome
to the Committee of Public Accounts. Today we are considering
the Comptroller and Auditor General's Report, Financial Management
in the Foreign and Commonwealth Office and we welcome Sir
Peter Ricketts and his colleagues. Would you like to introduce
your two colleagues, Sir Peter?
Sir Peter Ricketts: Thank you,
Chairman. Keith Luck is our Director General of Finance and Tim
Gardner is our Finance Director; two qualified accountants.
Q2 Chairman: Thank you. The Report
highlights weaknesses in the Department's financial management
track record but recognises the considerable work that the Department
has done to improve the accuracy, reliability and timeliness of
financial information as well as to align financial and operational
reporting. I would like to welcome, by the way, the Kenyan delegation
visiting us today as part of their work with the Crown agents,
so all our friends from Kenya are very welcome today and I hope
they find our hearing interesting. Sir Peter, we do not often
say this in this Committee: it is a good Report and clearly you
were one of the weaker departments before and you have made considerable
progress. One of the things you have done is to appoint a qualified
finance director, and the qualified finance director has been
in post since 2007. We have always argued that all departments
should have a qualified finance director and I helped ensure that
when we appointed this year a new Comptroller and Auditor General
he was the first ever qualified chartered accountant. This is
part of what we have been campaigning for for years, so what difference
has it made having a qualified finance director?
Sir Peter Ricketts: It really
has made a difference, Chairman, not just because I speak in both
their presences but it has helped us to drive up financial skills
and a sense of the importance of the numbers in the Department.
You are right, we were not as good as we should have been, people
did not have confidence in the numbers that came to us and therefore
we had a consistent record of under-spending. As confidence has
grown in our numbers we have been able to make our money work
harder, drive the under-spend down, more actively manage our budgets
and also ensure that we have better quality accounts at the end
of the year. We have been able to lay our accounts before Parliament
more rapidly than most other government departments, and in good
shape I think, and that is also part of a stronger financial culture
that these gentlemen have brought to the Department.
Q3 Chairman: Do you want to comment
at all on your experience coming into the Department?
Mr Luck: Just to add to that,
Chairman, Sir Peter is perhaps being modest because of course
as you implied the mere fact of appointing a qualified finance
director or director general in my case shows how committed Sir
Peter is to getting the numbers right and, indeed, right across
the board finances are taken very seriously. I have to say there
is plenty of support from our non-executive director colleagues
on the board as well here.
Q4 Chairman: How are you going to
maintain the momentum now, Sir Peter? You have got this Five Star
Finance project; it ends next July so presumably you have got
plans to keep things going and get better.
Sir Peter Ricketts: Absolutely,
we have. We have first of all got to get to the end of this project
and get it absolutely complete, and we are well on the way to
doing that, but then what I would really like is for it to become
not a special project that we have to work away on but the way
the department runs normally, that there should be a culture of
high quality numbers where people get the data right, where they
follow all the appropriate procedures and we can manage with reliable
performance data without having to put in quite the resources
we have had to to get to this point.
Q5 Chairman: Are you confident that
you know how to accurately cost all your projects so that you
can make good cost reduction decisions?
Sir Peter Ricketts: We have certainly
got better at that and we have had to put that into practice in
the course of this year in cost reductions, as I hope we can go
on to talk about. We have now got costed activity recording which
means we know what our people cost wherever they are abroad, we
know what our embassies cost and we can follow more closely where
there is good value for money, so where we have to come to find
cost savings we know where to go, where there is high cost but
perhaps less priority. It is increasingly becoming part of how
we manage, yes.
Q6 Chairman: One of the FCO's objectives
is "To provide a flexible global network for the whole of
the British Government." Big words, but how is all this going
to make a difference in that?
Sir Peter Ricketts: The point
there really is that we want other departments to see our embassies
around the world as representing them as well and as being the
places where they put their people if they want to operate abroad,
so that rather than setting up their own shop somewhere else in
the city they come to the embassy and they use the embassy platform.
For that we have got to offer them a good, secure, effective place
to work from and make it as cheap as possible, and what we hear
from departments is that they like coming and working in embassies
but they find us expensive by the time there have been the security
costs and other things. By getting better data, by seeing where
the costs are, we can look to drive them down and we are trying
to do that by cutting the back office and reducing the management
costs so that the cost of departments sending people to our embassies
gets less.
Q7 Chairman: How are you going to
manage the movement in exchange rates that you are affected by
in terms of a threat to your resources?
Sir Peter Ricketts: It has been
a really difficult problem, Chairman. The way that it was done
previously was that the Treasury provided us a mechanism so that
if sterling was stronger we gave money back, if sterling was weaker
they gave us money. That was withdrawn, as the NAO Report says,
in the CSR in 2007. In the year after that we saw sterling fall
by around about 20% against most of the major currencies and it
has been very volatile since then. We put in place arrangements
to do forward purchasing of currencies and we have extended that
out prudently because we wanted to be absolutely sure that we
were not open to any criticism for speculation. It covers dollar,
euro and yen which are the three biggest currencies, but not all
the other 120 currencies that we operate in around the world,
and forward purchasing can smooth out currency fluctuations but
it cannot help you if sterling drops 20% because then the forward
purchasing you do over time will be 20% down as well. We are,
therefore, having to absorb a very large shortfall in our budget
which has meant, both last year and now this year, working really
hard to find efficiency savings and, frankly, cuts to live with
a lower purchasing power of sterling. We are managing that but
I will not hide from you that it has been pretty difficult.
Q8 Chairman: The NAO are preparing
a report on the management of your overseas estate and that will
come to this Committee, Sir Peter, in the New Year or the early
Spring, so you have got this new systematic approach that you
developed for financial management. How are you going to spread
it around the rest of your business, for instance how you manage
your estate?
Sir Peter Ricketts: We have been
managing this very large global estate for many years. We can
do it better and we have recently taken on a qualified estates
professional as our director of estates to bring qualified expertise
to this. We have both got to maintain a programme of building
new embassies in places where security is really difficult 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. Getting a professional in
to help us do that and also to help drive asset sales, to yield
some more capital to invest in our estate—that is his remit.
We are managing competently at the moment but we could do better
with professional help.
Q9 Chairman: You are not going to
sell off cheaply residences that do so much for our image just
to meet some Treasury demand?
Sir Peter Ricketts: No, Chairman.
Q10 Chairman: Often residences were
bought very cheaply after the war or even donated to us and they
serve this country very well. There are no plans to do that.
Sir Peter Ricketts: There are
no plans to do that. Where we sell is where we have got properties
that we no longer need or just very occasionally if there is something
which is extremely high value but low on our priority list, but
mainly it is where we no longer need properties. I do not plan
to sell wonderful historic residences that do so much for the
UK, no.
Q11 Chairman: That is very good news.
We are not penny-pinchers in this Committee we hope.
Sir Peter Ricketts: Very good.
Q12 Chairman: Treasury, talking of
that, can I ask you a question: how are you going to spread this
excellent good practice that we have been hearing about so far
around the rest of Whitehall?
Mr Gallaher: Within the Treasury
there is a Financial Management Reporting Group which disseminates
guidance and best practice across all Whitehall departments and
public sector organisations, and certainly we look with great
interest at what is going on in the Foreign Office. I will certainly
take the message back to the Treasury that this has been commended
to some extent by the Committee and that we should forward this
message across all departments to look at what is going on in
the Foreign Office.
Chairman: Thank you. David Curry.
Q13 Mr Curry: Especially those buildings
bought after the Napoleonic War, if I can say so.
Sir Peter Ricketts: Indeed, Mr
Curry; they were particularly good value at that time.
Q14 Mr Curry: Tell me a bit more
about your foreign exchange activities. How much do you buy forward
in each currency and how far forward do you buy them? Of course,
if you buy forward you are by definition taking a view on the
performance of sterling. How do you do that without people saying
the Foreign Office thinks sterling is going to fall—quite
a good bet over the last few years. Mr Luck, tell me about the
mechanism, what volume do you buy and how far forward do you buy?
Have you got a mechanism to hedge those purchases?
Mr Luck: Actually, Mr Curry, it
is really forward purchase, it is as simple as that. It is a simple
outright purchase in so many months time. We now extend out for
a full 12 months and, based on our latest cash flow, we will put
in place one-twelfth every month until if one moves forward a
year you would then have twelve small rates stacked up when those
contracts mature. As Sir Peter has said, that smoothes out the
effect.
Q15 Mr Curry: In a sense you are
doing a yearly contract each month.
Mr Luck: Exactly.
Sir Peter Ricketts: We are doing
a rolling programme. We absolutely do not want anyone to be able
to say we are speculating or we are taking a view on the future
of sterling, so every month we buy forward 12 months. What we
are interested in is budget surpluses.
Q16 Mr Curry: One understands why
you do it, because of the position you are in, but is there a
penalty in doing that? There is bound to be, is there not?
Sir Peter Ricketts: There is a
fee, there is a cost of doing it and it gives you budget certainty
for the following year because you know what you will get in foreign
currency a year hence, but it does not protect you from falls
in the value of sterling because that comes through in a delayed
way.
Q17 Mr Curry: It is only three currencies,
dollar, yen and euro you say.
Sir Peter Ricketts: Yes, our three
biggest effectively.
Mr Luck: You asked about volumes.
Q18 Mr Curry: In a country like South
Africa where you have got a significant operation and it will
get even more significant with the sporting events coming up,
how do you deal with that?
Sir Peter Ricketts: We are exposed
to the currency risk there, or in a country like Brazil, and if
sterling falls against that currency we have to absorb the hit.
Q19 Mr Curry: You have told me how
far forward; what sort of volumes are we talking about?
Mr Luck: In US dollars now it
is £500 million for the current financial year and for yen
it is £7 million. The yen is our third largest currency,
so once you get beyond the yen you are into another 120 currencies
which are relatively small.
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