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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