Adapting the Foreign and Commonwealth Office's global estate to the modern world - Public Accounts Committee Contents


Examination of Witnesses (Question Numbers 80-99)

FOREIGN AND COMMONWEALTH OFFICE

  Q80  Mr Carswell: So where we are represented you see no advantage in us pooling resources with the European Commission?

  Sir Peter Ricketts: No. As of now I have got no plan to do that. I cannot immediately envisage why we would do that. I think it would only be to increase our coverage in countries where we are currently not represented. I do not know whether Mr Bevan has got anything to add.

  Mr Bevan: The only thing I would add is that there is a slightly different scenario which is where we own a building, or we co-rent a building, where we are very keen to have the European Union or another national embassy in the building because it reduces the costs. In Dar es Salaam, for example, we share a nice tower block with the European Commission delegation, the Dutch and a few others. The same is true in a place like Astana in Kazakhstan. That is not "pooling", that is us sharing an office block with a range of different actors.

  Q81  Mr Carswell: If you do have to share costs, are you keener to have the EU as a partner or other Anglosphere partners? Is there a preference as to who to team up with in the FCO?

  Sir Peter Ricketts: We are in hypothetical territory because I do not think we have seen opportunities like that. No, I think we would look case-by-case to see where it made sense. I would be delighted to co-locate with Australians, New Zealanders or Canadians, or indeed French or Germans, if that made sense in the individual place concerned.

  Chairman: Mr Curry has a supplementary.

  Q82  Mr Curry: Just a couple of things. On asset sales, are they sold in the currency of the place where they exist?

  Sir Peter Ricketts: Yes.

  Q83  Mr Curry: Do you then try and use those to reinvest in that same currency area? What is the accounting principle? I assume you do not have to translate everything back into pounds for accounting purposes and then if you want to invest overseas you have to translate them back into dollars or renminbi or whatever it is.

  Sir Peter Ricketts: We might have to come back to you with the detail of that. An example was our embassy in Madrid, which we have already discussed. We sold our old embassy in Madrid and used some of the money to put ourselves into the new tower block of famous memory. I would need to tell the Committee whether that involved us repatriating the money into pounds and then taking it out again in euros, I do not know.

  Q84  Mr Curry: Then, first, you are exposing yourself to foreign exchange costs and, secondly, to charges.

  Sir Peter Ricketts: Yes, indeed.

  Q85  Mr Curry: If you do not have to repatriate the value of your sales and can reinvest in that same currency area you get more bang for your buck presumably.

  Sir Peter Ricketts: Indeed.

  Q86  Mr Curry: I would be interested to know what the accounting principle is there. Last time you were here we talked about the foreign exchange implications, did we not, and that is still a significant issue.

  Sir Peter Ricketts: If we may we will write on that subject.[4]

  Q87  Mr Curry: I am sorry to come back to full economic cost, but the water bill is the water bill is the water bill. You mentioned that you made a charge for the services you provide. Do you have the autonomy to determine how that cost is arrived at or does the Treasury have some form of parameter model by which you calculate the cost of the services that you provide? Is there some flexibility at that end of the market?

  Mr Gallaher: There is a fees and charges guide which is issued by the Treasury which sets out all the factors that should be taken into account by any department in reaching a figure called the full economic cost. That can include pay costs, overheads, procurement costs, all sorts of costs.

  Q88  Mr Curry: We were talking about what you might call invisibles, were we not? We were talking about advice, the presence of security.

  Mr Bevan: There are three components of the costs that we charge other government departments. One is the water bill, so the direct costs. The second is the local management and support that we provide for them, so the time of the management officer who helps.

  Q89  Mr Curry: Those are management charges.

  Mr Bevan: Then there is a central overhead, which is the third component, which is an imputed cost of the amount of time that the Foreign Office in London spends administering the system.

  Q90  Mr Curry: That imputed cost is formula-based, is it?

  Mr Bevan: Yes. As our Treasury colleague has said, we have to calculate all of those within the principles.

  Q91  Mr Curry: What would be interesting is to see whether we agree with those costs, would it not? I remember we had a public sector comparator when we did the London Underground, Chairman, and we never, ever managed to get to the bottom of how anybody had calculated the public sector comparator. Do you remember that? In a much smaller way this is something else it might be worth trying to deconstruct, I think.

  Sir Peter Ricketts: We can certainly send you further information. May I show the Committee one exhibit, Chairman, if you will allow me just in terms of the repatriation of funds and so on. When I went to Harare just after the completion of our embassy build there I was given a note which was where the Zimbabwe currency got to right at the end of inflation, $100 trillion, which is 14 noughts, and is worth almost nothing.

  Q92  Chairman: You are not trying to bribe the Committee, are you!

  Sir Peter Ricketts: I am not trying to bribe the Committee, Chairman, I am simply saying it is quite difficult sometimes to operate in some cases—

  Chairman: A bit of light relief! There are a couple more supplementaries from Mr Mitchell and then Mr Bacon.

  Q93  Mr Mitchell: Paragraph 3.7 indicates that of 42 capital projects completed since 2002, 29 were late and 14 exceeded their initial budget approval by 14%. Did you use British contractors on these or locals?

  Sir Peter Ricketts: Do you want to answer that, Mr Croney?

  Mr Croney: The situation as to what contractors we use will vary country-by-country dependent on the security situation. In many countries we will use UK-based contractors, but in some we will subcontract non-sensitive areas to local contractors. That is judged on a case-by-case basis. Invariably we will be contracting in local currency, but the comparison and the feedback to the accounts goes back to the point that when it hits us in London it will always be in sterling. There is a whole situation around how one measures contract performance, around variables that occur in-country and ones that occur with foreign exchange. I hope that helps.

  Q94  Mr Mitchell: Which is more likely to overrun and be more expensive, the locals or British contractors?

  Mr Croney: It is difficult to judge. I think there is just as much overrun with local contractors as there is with British contractors.

  Q95  Mr Mitchell: Exchange rate fluctuations could be part of this?

  Mr Croney: Yes.

  Sir Peter Ricketts: Also, I think it depends on the difficulty of where we are building. Of that £57 million overrun since 2002 in the Report, £40 million of it is accounted for by building in Baghdad, Basra and Harare, all of which are very difficult places to build in. It is not satisfactory but part of the reason we have had this overrun is because we are building in some of the world's most challenging places.

  Mr Bevan: The Harare embassy was such a difficult project that the Chinese, who were building a similar embassy in Harare, gave up and did not complete their embassy. We decided that ours was worth doing and we went on and completed it.

  Mr Mitchell: That is unusual.

  Q96  Mr Bacon: Is there a cheap uncompleted building that you could buy there?

  Mr Bevan: Half completed.

  Q97  Mr Bacon: I would just like to ask about the rescue package that the Chancellor of the Exchequer offered the Foreign Office three weeks ago, which was reported as being £75 million made up of £35 million of cash from the Treasury Reserve and £25 million from the ability to keep capital receipts. I understood you to say earlier that you kept your capital receipts anyway to reinvest them. Is that not wholly true?

  Sir Peter Ricketts: That is true, but there was a limit. The Treasury put a ceiling on annual capital receipts that we were allowed to realise and the Chancellor lifted that by another £25 million, so he offered us the chance, if we could sell another £25 million of assets, that we could then keep that for our capital needs.

  Q98  Mr Bacon: What was the limit beforehand?

  Sir Peter Ricketts: There was a three year limit applied in the Spending Round of, I think—I would have to confirm to you—something in the area of £50 million or £60 million.[5]

  Q99  Mr Bacon: Perhaps you could write to us. What is being said here is that if you can sell an extra £25 million worth of property you can keep that money, not to reinvest in better capital assets and modern offices but to pay for the foreign exchange costs you have encountered. That is right, is it not?

  Sir Peter Ricketts: I think we are entitled to keep it for whatever we judge we need.


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