FCO Performance and Finances - Foreign Affairs Committee Contents

Examination of Witnesses (Questions 113-225)

Simon Fraser CMG, James Bevan, Keith Luck

24 November 2010

  Q113 Chair: I welcome members of the public to this session of the Foreign Affairs Committee. It is the second and last evidence session of the Committee's inquiry into the Foreign and Commonwealth Office's performance and finances.

  Our witnesses today from the Foreign Office are the Permanent Under-Secretary of state, Mr Simon Fraser; the Director General of Finance, Mr Keith Luck, and the Director General of Change and Delivery, Mr James Bevan. I give a warm welcome to you all and thank you very much for coming along. Apologies for the delay, but there was a Division in the House at 2 o'clock, which set us back by 15 minutes.

  Can I open the batting? Mr Fraser, is there anything that you want to say by way of an opening statement?

  Simon Fraser: No, Chair, unless you would like me to. I think that it would be easier to move on to questions.

  Q114 Chair: So you're quite happy to go straight into questions. Thank you.

  What is described as the FCO family will face an overall cut of 24%. However, if the BBC World Service is excluded, that falls to 10%, and if the cuts to the British Council are excluded, that falls to 6%. So why has the focus been more around 24% and 10%, rather than the actual 6% cut that it will really be?

  Simon Fraser: I think that the situation is, in fact, that 24% is the figure for the overall cut for the FCO family, which are the FCO, the British Council and the World Service. However, in the fourth year of this spending round the World Service will be taken out of the FCO family, and therefore an amount that would have been spent on the World Service in that year will no longer be relevant. So that is 14%, hence the difference between 24% and 10%. That figure of 10% is the real cut at the end of four years for the FCO family, which will then be the FCO and the British Council. The British Council figure is part of the overall figure.

  Q115 Chair: But you do agree that if you take away the British Council, which is a bit of a compartment on its own, the Foreign Office and the diplomatic effort will only be cut by 6%?

  Simon Fraser: No, Chair. It is cut by 10%. In effect, the settlement is flat cash over the four-year period. We will get the same in cash terms over the four-year period as we have now, if you exclude the World Service in year 4. That flat cash translates—on the expectation of UK inflation—to about a 10% real cut over the four-year period. The British Council element is part of that overall figure.

  Q116 Chair: I haven't got a calculator with me, but the net FCO budget for 2010-11 is £981 million and, in 2011 prices, for 2014-15 it is £925 million, which I am advised is a 6% reduction.

  Simon Fraser: Shall I ask Mr Bevan to respond to that, as he was involved directly in the negotiations and may be able to give a clearer explanation that I have given?

  James Bevan: I think the first thing to say is that the thrust of your question, Chair, is absolutely right. There are different settlements for the three members of the FCO family, so the overall effect, taking into account inflation, is a real cut of 25% in the Foreign Office's allocation to the British Council by year 4. The effect on what we would grant the World Service in year 4, although it is being taken over by the BBC, will be a 16% real cut. The underlying point of your question, which is that the core Foreign Office is being cut in real terms by less than that, is absolutely right. There are good reasons for that, which the Foreign Secretary took into account when he made his decisions.

  Q117 Chair: Are the two figures I gave you—£981 million and £925 million—correct?

  James Bevan: I'm afraid I don't recognise those figures. The figures I have, which come from the settlement—

  Chair: The figures come from the resource DEL budgets for the Foreign Office, but let's not dwell on this now. Will you confirm to us in writing whether I have got that right or wrong?

  James Bevan: Of course.

  Q118 Mike Gapes: Following the Chair's original question, the presentation of this, certainly in the Daily Mail and a number of other newspapers, was that the FCO cut would be 24%. Was that a deliberate exercise that you employed to try to take the heat off when other Departments were being cut by big amounts? Did you give the impression that the FCO would be cut by 24%, even though in reality it will be cut by either 6% or 10%?

  Simon Fraser: The 24% figure was the figure the Chancellor himself used on the day.

  Mike Gapes: I am aware of that, but presumably he did so in consultation with the FCO and the Foreign Secretary.

  Simon Fraser: The 24% was the figure that the Chancellor himself used on the day, Mr Gapes, and there were discussions and negotiations over a period of weeks leading to that day. Of course, the discussion on the handling of the BBC World Service came relatively late in that negotiation. The 24% figure was the figure that the Chancellor himself identified at the end of that negotiation.

  Q119 Mike Gapes: Okay, but clearly some parts of the family have been more badly treated than other parts of the family, to use that phrase.

  Simon Fraser: As Mr Bevan has said, decisions were made by the Foreign Secretary on how to apportion the cuts in the overall budgets between the different elements. It is true to say that the Foreign Office budgets themselves, in the period before the spending round, came under very severe pressure as a result of, for example, the loss of exchange rate protection. It is also true that over recent years, because of ring-fencing, the proportion of the overall FCO family budget that went to the World Service and the British Council grew as a proportion of the whole. In fact, what we have done through that arrangement is bring it back into line with what it was before. So, there are a number of reasons why the decisions were taken.

  Q120 Mike Gapes: You have mentioned the Overseas Price Mechanism. You'll be aware that in the last Parliament the Committee was very critical of the previous Government's abolition of the Overseas Price Mechanism and actually recommended in a report produced just before the election that it should be re-established or that an alternative mechanism should be put in place to protect the FCO from suffering severe financial consequences as a result of exchange rate fluctuations. Personally, I am pleased that something has been done on that, but I am unclear about whether it is equivalent to what was there before. Will you give us some more detail about this new foreign currency mechanism and how it will work?

  Simon Fraser: I'll ask Mr Bevan to give you the details on that.

  James Bevan: What's happened is that we have secured the restoration of the most important part of the old Overseas Price Mechanism. It is a new mechanism that will protect the purchasing power of our budget against foreign exchange fluctuations. It protects a greater part of the Foreign Office's budget against foreign exchange fluctuations than the previous Overseas Price Mechanism. In that sense, it is a significant improvement on what we had before. What this mechanism does not do, which the old Overseas Price Mechanism did, is protect us against differential inflation overseas—inflation over and above UK inflation happening abroad that eats into the value of our budget. The old overseas price mechanism protected us against some, but not all, of that. Again, that was part of the negotiation and we settled on what we thought was overall a very good outcome for the organisation.

  Q121 Mike Gapes: So therefore if inflation in some other countries—perhaps in some important partners of ours that have growing economies, such as India, Turkey or Brazil—goes up faster than UK inflation, you are still going to have a problem, because that won't be compensated for.

  James Bevan: Yes. That's one reason why dealing with this budget will be more challenging than it might appear from the 10% overall figure in year 4.

  Q122 Mike Gapes: Is it particularly difficult because sterling is at a very low value at the moment internationally, or does that make no difference?

  James Bevan: The most important thing for us is to have a degree of planning stability in terms of the overall value of our budget overseas. One of the things that hurt us most when we lost the overseas price mechanism was not the loss in actual value of the Foreign Office budget that resulted from sterling declining; it was the inability to predict what the value of our budget would be on any given day, because the exchange rate moved.

  Q123 Mike Gapes: Are you still purchasing foreign currencies in advance?

  James Bevan: Perhaps Mr Luck can say a word about that.

  Keith Luck: The answer to that is no. In October, the Treasury did advise that we should cease purchasing any more forward currency or entering into any more arrangements. Indeed, that was with the knowledge that the foreign currency mechanism was coming into place.

  Q124 Mike Gapes: Do you still have some past contracts that you've got to get rid of?

  Keith Luck: We do, indeed. From October—a couple of months ago—the contracts extend out to what would have been a full year's worth of forward purchase. If you recall, we did a 12th every month—ramping down for almost two years' time. Those contracts will now be allocated to the peacekeeping budget. The foreign currency mechanism doesn't cover the peacekeeping budget. That's been moved off our baseline, but those contracts, in so far as they support dollar or currencies that the peacekeeping budget will find useful, will novate across to that particular budget.

  Q125 Mike Gapes: You'll still be purchasing foreign currency for the peacekeeping budget for the foreseeable future?

  Keith Luck: We won't. In terms of managing it, the arrangement is that it has moved off our baseline, so it's nothing to do with the Foreign Office.

  Q126 Mike Gapes: So who will?

  Keith Luck: The MOD has the capability and the capacity. It will carry on doing that and managing the foreign currency implications for the peacekeeping budget.

  Q127 Mike Gapes: Presumably you are now able to set budgets in local currencies without as much worry. Does that give you any benefits?

  Simon Fraser: That is exactly the benefit that we have now achieved. Our posts can budget in local currency, and we know that we can cover that budget, because if sterling depreciates against their currency, we would get compensation. The other side of the coin is that if sterling appreciates, we would repay money to the Treasury. Therefore, coming back to your earlier point about whether it matters at what level sterling is when the scheme is introduced, it does not matter because it works symmetrically both ways.

Q128 Mike Gapes: When we went to Washington, for example—about 18 months or a year ago—we were very shocked, because locally engaged staff were being told to go on to a four-day week. Will that be less likely now because of this change?

  Simon Fraser: I think that the particular circumstance then was that the Foreign Office was seeking to make some very dramatic short-term savings for two reasons. First, we didn't have the overseas exchange mechanism in place when sterling devalued—depreciated—and secondly, we were asked to make additional savings in-year in this financial year. So there were some fairly acute circumstances. One of the consequences was, indeed, that local staff were asked, I think, not to work a four-day week but to take some unpaid leave—a furlough arrangement. That is a reasonably normal arrangement—it is not unusual in the United States, although it is not desirable. Yes, it is indeed our hope that, now we have the new settlement, we will have more stability in our planning around the network. That will enable us to avoid having to take short-term and unforeseen measures of that sort.

  Q129 Mr Watts: When you were asked about the 24%—I think it was on three occasions—you quoted the Chancellor. What figure would you put as a departmental reduction in the budget?

  Simon Fraser: I think that the Chancellor's figure was the correct figure. If you look at the budget, at the end of four years there is a 24% cut. It is important to note that part of that relates to the removal from the Foreign Office's budget of the World Service in the fourth year. Therefore, it is fair to say that the effective real cut in the Foreign Office budget overall, which includes the British Council, is a 10% real-terms cut. That is a rather indicative figure because, as we have already said, there will be additional costs that we will have to meet. We are not covered for differential inflation. There are additional costs, including, for example, the cost that we would incur to help fund the Olympics, which we will have to meet from within that budget. We will, in fact, have to do more. Therefore, we will have to find a significant level of savings.

  Q130 Mr Watts: But you do accept that, if you take out the BBC figure and the British Council figure, your figure drops to 6%?

  Simon Fraser: I'd like to work through the figures exactly. It is true that the British Council figure is a 25% cut in its budget but, of course, that is a relatively small part of our overall budget. So I am not sure that it leads to a 6% conclusion for the FCO. We would need to give you a precise version of that figure, which I do not have in front of me.

  Q131 Mr Watts: So it would have been better and clearer had those figures been broken down in the way that I have suggested rather than give the impression that your Department's reduction was 24%.

  Simon Fraser: On the day that the announcement was made, the figure of 24% was used. If you take out the BBC World Service, the figure that we are working with is an effective 10% cut. Within that, there is a 25% cut for the British Council, but that is a relatively small part of the whole so I do not think that the consequence of that is to bring us down to 6%. I do not have the precise figure of what the FCO core minus the British Council is.

  Q132 Mr Watts: Can you let us know?

  Simon Fraser: Yes. I am happy to.

  Q133 Chair: We'll supply you with the little graph of figures that we have in front us. It will explain how we arrive at 6%.

  Q134 Mr Roy: In relation to the transaction costs that have been incurred in various countries, how would the Committee know how much the costs were in various countries? I ask that because today I have received a written reply to a written answer that said that I could not be told because the costs were prohibitive. How therefore would the Committee as a whole be able to judge and see what those costs were?

  Simon Fraser: The costs of?

  Q135 Mr Roy: The actual transaction costs. Obviously there are various costs in various countries. When I asked what those costs were, the written answer said that it was cost prohibitive to tell me. Therefore, how will the Committee be able to find out the costs?

  Simon Fraser: I'm sorry. I do not think that I fully understood the question. This is in relation to a FOI request?

  Q136 Mr Roy: Yes. Therefore, if I as a Member cannot find out the individual costs in a country, how would this Committee be able to find out?

  Simon Fraser: We are able to provide you with figures on the costs of our operations in different countries. But if it is the cost to find the answer to a specific question, that is calculated in the UK. If it exceeds a certain amount, according to the rules, we do not pursue it. That is the case whether it is in the UK or overseas.

  Q137 Mr Roy: Perhaps I'll write to you because that was not the answer that I got to my written question today. They told me quite clearly that it was cost prohibitive to answer. Therefore, as a member of this Committee, I would like to find out.

  Simon Fraser: I'm very happy to come back on paper, if you would like to set it out.

  Q138 Mr Roy: Thank you very much.

  Can I carry on in relation to official development assistance, and the cost? Vernon Ellis, the Chair of the British Council, told the Committee that at present £40 million of the British Council grant is classified as ODA, but that that could be increased—his words—still further. How much of the increase in the FCO family's contribution to the ODA will come from the British Council and the BBC World Service?

  Simon Fraser: Part of our settlement is that we agreed to increase the amount of our spending across the Foreign Office that will be contributing to ODA, and therefore to the national target to increase our overall ODA contribution. We are going to be doubling that contribution from the FCO. That will come from a number of areas of activity: partly from our programme activity in the Foreign Office; partly from subscriptions to international organisations that are counted against ODA; partly from some aspects of our front-line diplomatic activity in developing countries; and partly, indeed, from activities of the British Council. All those activities have to be eligible to be counted as ODA spending, according to the OECD rules. We are now looking at how we are going to put that overall amount together. Mr Bevan might want to comment further on the composition of that.

  James Bevan: As the Permanent Secretary said, what the settlement does is require the Foreign Office family effectively to double the amount that we score as official development assistance. At the moment, the answer to your question is that the Foreign Office family currently scores about £130 million a year as ODA, of which roughly £90 million is from the Foreign Office and £40 million is, as I think you said, from the British Council. We need to double that and we anticipate doing that by working with the British Council, so that it moves from around £40 million to between £90 million and £100 million a year ODA spend, starting next financial year. We will move from our current £90 million to about £150 million.

  Q139 Mr Roy: Can I just clarify? How much additional spending on new activity is required to meet the ODA target, outwith the World Service and the British Council?

  James Bevan: The Foreign Office core, outwith the British Council and the World Service, has to go from our current ODA spend of about £90 million this year, to about £150 million ODA spend, starting next financial year, and maintain that for the four years of the spending review. As the Permanent Secretary said, the way we are going to do that is partly by maintaining existing Foreign Office activities that already count as ODA, of which the main one is our programme activity—money that pays, for example, for our low-carbon high-growth programme for scholarships for students from developing countries. We will maintain those programmes, with some adjustments, and we will do some additional ODA activity that we have not done previously, which will probably include some more programme activity. There will be a proportion, which we have not yet finalised, where we will reclassify as ODA activity that we have not previously scored as ODA. We will do that by agreement with the OECD, which decides what does or does not qualify.

  Q140 Mr Roy: So there will be that reclassification, but will there be any extra spending?

  James Bevan: Yes, there will be three elements. There will be sustained spending on many of the things we already spend on, which do count as ODA. There will be increased spending on things that we currently score as ODA, but where we will do more activity: the best example, I think, is spending on programmes. The third category is some reclassification as ODA of activity that we have not previously classified as such, but which the OECD tells us we can legitimately classify as ODA.

  Q141 Mr Roy: On that point, why has the FCO family failed to categorise accurately its ODA spend in the past?

  James Bevan: Partly because we have been a very small player. The Foreign Office spends about 2% of the UK's ODA spend. Obviously, the vast bulk of that comes from DFID. As it became clear when we went into the negotiation that a likely requirement would be that we should increase our own ODA spend, we wanted to make absolutely sure that the way that we did that was legitimate. That meant talking to the OECD, which is the body that decides what is and isn't legitimate; and talking to DFID, which is the key player in the UK.

  Together we came to the conclusion that there were areas of our existing spend, of which the main one is diplomats in developing countries directly contributing to development, which we could legitimately score as ODA and had not been, and which, as we now understand, various other countries already classify as ODA. It seemed to us right that we should include that in future—right, both in terms of telling the UK's story, which is a good one, and in terms of the UK taxpayer, ensuring that every penny that they're spending is being properly classified.

  Q142 Mike Gapes: Can I just clarify this? Does this mean that expenditure that was previously done by the FCO is now paid for from the DFID budget, or does it mean that DFID's budget spend, and therefore the 0.7% target, will not need to be increased as much to meet the international OECD definition and that, therefore, in effect, what would have been DFID's spend on poverty reduction programmes or other things—for example, in Africa—will no longer be needed to meet that target, because your expenditure on other areas, and the British Council's expenditure, is now counting towards meeting that target?

  James Bevan: No, I think—

  Q143 Mike Gapes: No to both?

  James Bevan: The overall picture is that the Government are committed to meeting the 0.7% GNI target by 2013. The main way that they are going to do that is by a very substantial increase in DFID's budget—an extra £3 billion or so by 2013. In addition, the Foreign Office will contribute a little bit more than it previously had, which will help get us to that target. But the additional ODA that we are contributing will go from about £90 million to about £150 million, so you just need to—

  Q144 Mike Gapes: Can I put it another way? If you had not changed your definitions of FCO spending, presumably the DFID budget would have had to increase by more to meet the UN target.

  James Bevan: If we were not doing legitimately additional ODA from next year, then yes, DFID would have needed to spend more.

  Mike Gapes: Thank you.

  James Bevan: But most of what we are doing next year is additional ODA activity—new activity—with a small proportion of reclassification.

  Q145 Mike Gapes: I understand that, but I think you gave me an answer—

  Simon Fraser: Of course, the target is a Government target, not a DFID target.

  Mike Gapes: I understand that.

  Q146 Mr Ainsworth: I find it quite extraordinary. I know the pressure that has been on for some long time to ensure that all ODA spending was properly classified, therefore meaning that targets could be reached, because we've been struggling to reach the target that we set ourselves. Yet we can continue, after all this time, to find new ways of reclassifying money. Don't you think that I'm entitled to feel that that's a bit extraordinary?

  Simon Fraser: I don't know if Mr Bevan wants to comment further. I think that the issue here is that we have a clear desire to contribute as much as we can.

  Q147 Mr Ainsworth: And you didn't have that previously?

  Simon Fraser: In the context of this spending review, there was a particular discussion relating to the FCO's contribution and that target. In that context, we are examining carefully all the ways that we can meet the requirement that has been laid on us in this spending round to increase our contribution. That's where we are.

  James, do you want to add anything about where we were previously, prior to this spending round?

  James Bevan: I think all I'd add is that the OECD defines ODA. It does that in a clear way. It's essentially financial flows to developing countries in cash or in kind, which directly contribute to development. But the way that different countries have interpreted that has varied widely and still does. As I said, some countries score a lot more of their activity as ODA than others. The UK has always had a pretty restrictive definition, for good reasons.

  I think what happened was that, when we had the conversation with OECD and DFID about how we would score additional ODA if we were to get that mandate from the appropriate spending review, we established that there were ways that we could score things that we are currently doing that we had not previously been doing.

  Q148 Mr Ainsworth: Moving on, can I understand what's happened with regard to the conflict pool? We've separated out the conflict pool from the FCO bottom line and it is £178.5 million. Is that right?

  Simon Fraser: The conflict pool has indeed been increased in this spending round. It sits, as I understand it, on DFID's baseline. It draws the money down from the Treasury and then allocates the money to the MOD and the FCO, which are other participating Departments, to fund the activities in the pool. So, it remains a tripartite pool, and DFID is the primary responsible Department.

  Q149 Mr Ainsworth: It's been separated out from the FCO baseline, then.

  Simon Fraser: It's not on the FCO baseline.

  Q150 Mr Ainsworth: Why was that done?

  Keith Luck: I was just going to add, that's no change. That is as under the previous spending review. The significant change for us—which, as a result, will reduce the exposure and the risk that the Foreign Office is open to in terms of managing its budget—is that the peacekeeping budget has been removed from our baseline, so there'll be no Request for Resources 2 in the coming spending review.

  Q151 Mr Ainsworth: So, the peacekeeping budget is a separate amount of money.

  Keith Luck: It is indeed.

  Q152 Mr Ainsworth: How much is it?

  Keith Luck: It's nominally £374 million, and it is held by the Treasury. It comes directly out of the Treasury reserve and is then allocated to whichever Department—MOD, DFID or us—to spend.

  Q153 Mr Ainsworth: Conflict prevention and stabilisation are due to rise to more than £300 million. Does that include spending from the stabilisation unit?

  Simon Fraser: I believe it does.

  Q154 Mr Ainsworth: So, what percentage increase are we planning in conflict prevention and stabilisation over the period?

  Simon Fraser: The totals over the period go from £256 million to £309 million, which is an increase of £50 million. It is quite a considerable increase in percentage terms.

  Q155 Mr Ainsworth: When are we going to allocate that to the four separate programmes? Is there any proposal on that yet?

  Simon Fraser: I don't immediately know the answer to that question. Allocation will need to be decided collectively by the three Departments concerned, now that we know what the actual amount is and we look at what our options are for spending it.

  Q156 Mr Ainsworth: And what timetable have you got for that?

  Simon Fraser: Now we've got the Strategic Defence and Security Review under our belts as well, which helps us because it sets some new parameters—for example, for DFID spending in relation to some areas—and we can, I think, move forward. I can't tell you the exact details, but I'm happy to come back with some more specific information on the process for allocating the money.

  Q157 Sir Menzies Campbell: You won't be surprised to learn that the BBC World Service has a number of friends on the Committee, as I am sure it has in the Foreign Office. We've had a letter dated 22 November from Mr Horrocks. Has a copy reached you in advance of today, Mr Fraser?

  Simon Fraser: I think I have received that, yes.

  Q158 Sir Menzies Campbell: In the letter, he effectively says that when unavoidable cost increases such as those arising from the BBC-wide pensions deficit are taken into account, "the like-for-like savings which need to be made in our"—that is the World Service's—"existing and ongoing services is more than 25% by 2014-15". Do you agree with that calculation?

  Simon Fraser: The 16% figure that was agreed by the Secretary of State did indeed include some provision to cover some of these additional costs, particularly in relation to pensions. So, they are included in the 16% figure. It is therefore true that there are some additional costs, which will accrue to the World Service and which will have to be met. But if I may say so, that is true pretty broadly across Government. For example, in the Foreign Office, as we have just indicated, we know that we are going to have additional costs to meet differential inflation costs around the world and we know that we're going to have to find additional money to fund the Olympics. So, the World Service is not alone in this, and that was taken into account in the decision that the Foreign Secretary made.

  Q159 Sir Menzies Campbell: Broadly, the answer to my question is yes, but the position for the World Service is the same as, for example, for the Foreign Office.

  Simon Fraser: I think that it's yes, but I don't think that it is exceptional in facing those sorts of additional pressures in the environment we're in.

  Q160 Sir Menzies Campbell: Coming on to another matter, the friends of the World Service, both in the Foreign Office and on the Committee, were, shall we say, rather taken aback by the events that resulted in the transfer of the responsibility for the World Service to the BBC budget, along with, of course—it is sometimes forgotten—BBC Monitoring, which is to be another charge to the BBC budget. How is the Foreign Office going to retain a role in setting the objectives, priorities and services of the World Service once the financial responsibility passes to the BBC?

  Simon Fraser: That is a very important question. I want to underline and agree with you that the Foreign Office and the Foreign Secretary consider the BBC World Service an extremely important organisation and an extremely important part of our, if you like, national projection internationally. So we are extremely concerned that the World Service should continue to function effectively. In that context, the terms of the agreement under which the Foreign Secretary will continue to set priorities, objectives and targets for the World Service, along with the BBC's management, remain in effect, as indeed does the provision that he has formally to agree to any proposals for opening or closing a service.

  Sir Menzies Campbell: Closing a particular service, yes.

  Simon Fraser: So, the terms of the relationship remain unaffected, other than in the sense of who holds the purse strings.

  Q161 Sir Menzies Campbell: May I say, perhaps in rather less fanciful terms than I did on a previous occasion, that if it comes down to a dispute between light entertainment and the World Service, it will be the board of trustees of the BBC that determines which is to prevail?

  Simon Fraser: It will be they who are responsible for funding, but, as I have said, the decisions will have to be made in consultation and discussion with the Foreign Secretary and he would have formally to agree to any closures. It is important to underline that, in meetings with the Foreign Secretary, both Sir Michael Lyons and Mark Thompson made clear their commitment and support for the World Service, and indeed their intention to maintain funding for the World Service to enable it to carry out its projected plans.

  Q162 Sir Menzies Campbell: But they've got a flat licence fee for six years, haven't they?

  Simon Fraser: Yes.

  Q163 Sir Menzies Campbell: It is inevitable that that budget of the BBC—indeed, I think it is accepted almost as a purpose of the flat licence fee—will come under very considerable scrutiny and pressure.

  Simon Fraser: Well, I think all budgets are coming under a lot of pressure. Of course, the Foreign Office has a flat cash budget itself over a similar period, so that is not particularly unusual. I have, since we are referring to correspondence, been in correspondence with the head of the BBC World Service myself, who has given me his assurance that he believes that the BBC is committed to providing the sort of level of funding, or indeed more, to the World Service in the fourth year of this settlement than—

  Q164 Sir Menzies Campbell: But he gave the Committee the same assurance. I am just trying to look ahead to the reality of the position in, say, 2016 if there were circumstances in which the budget of the BBC came under very substantial pressure, it was unable to raise its licence fee and was forced, to put it colourfully once more, to choose between Mr Bruce Forsyth and the World Service.

  Simon Fraser: Well, Sir Ming, that is a legitimate point, but I'm not sure that it is a question that I can answer as Permanent Secretary at the Foreign Office in the sense that a decision has been made and it was a cross-Government decision about the future funding of the BBC World Service. What is important is that the sort of concerns that you have expressed were expressed by the Foreign Secretary and by the Foreign Office. We have done our utmost to ensure that they have been registered, and I believe they have.

  Q165 Sir Menzies Campbell: In that case, can I just round this off by asking, what is going to be the level of continuing interest taken in the BBC World Service by the Foreign Office? How would you characterise and describe that, so that we can measure what you say today against performance in the future?

  Simon Fraser: I think I can say without any hesitation that the level of interest of the Foreign Office will remain high as it is now. It is, as I have said, an extremely important part of our national ability, if you like, to project our values in the world. It is a very important part of Britain's presence in the world, and of course we, as the Foreign Office, are very mindful of that. It is a part of the broader soft power projection of this country. But, in a way, it is extremely important and the BBC World Service has always made this point that full editorial independence should be maintained and that there should be a clear sense of the independence of the World Service, and we must preserve that. To some extent, this new funding arrangement might re-enforce that.

  Sir Menzies Campbell: Thank you.

  Q166 Chair: Mr Fraser, do you accept that this inevitably means a reduction in services by the World Service?

  Simon Fraser: I don't think I can comment on that because I certainly have not seen any proposal at the moment for a reduction in services.

  Chair: If the budget is reduced quite substantially, it must inevitably mean that. Given that the Foreign Office still has a say—an aspect—in the editorial side, is that not something that you should look at?

  Simon Fraser: We certainly will. If we receive a proposal that involves the reduction in services, then of course we would engage in that discussion. Informal contacts do go on between the BBC World Service and the Foreign Office to think about the future priorities of the organisation. It is fair to say, and I think it is correct to say, that the World Service's offer has changed over the years, both in terms of the way it provides information and the services that it operates—the language services, for example—reflecting political change and different priorities and developments around the world, so I don't think we should assume that the closure of services is automatically a bad thing. What is important is that there is a proper process to ensure that the service that is offered is one that we believe is appropriate and effective in terms of the projection of our national voice in the world.

  Q167 Mr Baron: Can I pursue that point, if you don't mind, Mr Fraser? The director of the World Service has clearly stated that there will have to be some service cuts and some services should close. Looking around the world, I am not conscious of any cuts to other countries' world services. The Foreign Secretary has quite rightly talked about the importance of soft power and promoting a British presence abroad, and the World Service is an integral part of that. Do you not think it a slight madness that we are forcing cuts on the World Service at a time when, more than ever perhaps, a British presence abroad is needed?

  Simon Fraser: I think it's very important that we have an effective projection and presence abroad. As I have said, the World Service is a very important part of that. That doesn't necessarily mean that the same offer of services needs to be applied at all times. It may be that some new services are required and some others are no longer required. I do have to point out that, in the present public finance environment, it is hardly surprising that there should be pressure on the budget of the BBC World Service, as there is on virtually all public sector organisations.

  Q168 Mr Baron: Looking forward, given the interest that the Foreign and Commonwealth Office will, quite rightly, retain in the output of the BBC World Service, and picking up a point made earlier, precisely how do you see the relationship working between the trustees of the BBC and the Foreign Office? To put it more crudely than Sir Ming did, it could come down to quite a choice between "Match of the Day" or funding the World Service. The pressure on the trustees could be quite significant. What sorts of mechanism have been put in place to regulate this relationship between the Foreign Office and the trustees, or are we just winging it for the moment, given that we have four years to get there?

  Simon Fraser: Of course, that relationship is going to evolve as things change, and in a sense it will develop, but we do already have very close relations. We have mechanisms in place. There is frequent contact and discussion with the World Service through the Foreign Office through our communications directorate, but also at ministerial level and at senior official level. I myself am in frequent correspondence and contact with Mr Horrocks, the Foreign Secretary is in contact both with the trustees and with the Director General, and I shortly am to have a meeting with the Chief Operating Officer of the BBC, so I think those contacts are effectively in place. I also believe there is a strong commitment on both sides to avoid the sort of circumstance that you have described. In other words, I think there is a clear understanding of the importance of the World Service and the need to protect its capacity to provide the appropriate level of service.

  Q169 Mr Baron: Before we get to the four-year point—just looking at the practicalities of the situation that has been forced on the BBC—service cuts will be proposed, according to the Director of the World Service. It will be very difficult for the Foreign Secretary to say no to proposals to cut services, given the budget targets that have been forced on the BBC World Service.

  Simon Fraser: If I may, I would rather wait until we have had some proposals, so that we can see what they are. There is a range of ways in which the BBC World Service, like any other organisation faced with these circumstances, can achieve savings. For example, the BBC World Service informed me some time ago that it was already prepared to make 15% efficiency savings. It will be able to make efficiency savings, as we are, and it may have to or wish to address some of the services. It may wish to propose the closure of services, but I have not yet received such a proposal and I would not like to speculate on what it might be.

  Q170 Mr Watts: To pursue the same questions as my colleagues, is it legally binding on the BBC to use the money that has been earmarked for the World Service for that purpose? If the circumstances changed and the BBC found itself in a poorer position, could it ignore that? Secondly, if there is a negotiation, which you said there would be, between the Foreign Office and the BBC about the type and delivery of service, who has the final say?

  Simon Fraser: On the first point, under the present arrangements, the funding for the BBC World Service is ring-fenced within the Foreign Office budget. When it transfers to the BBC, there will not be a formal ring fence, but there is a commitment from BBC senior management to maintain the funding of the World Service for the level of activity that it is proposing. That is an agreement, not with the Foreign Office, but between the DCMS and the BBC.

  On your second point—who has the final word—there is a clear understanding that there has to be a written, formal agreement between the Foreign Secretary and the BBC if there is a proposal to close specific services.

  Q171 Mr Watts: What happens if there's no agreement?

  Simon Fraser: According to the rules, if there's no agreement, there can't be a closure.

  Q172 Mr Watts: And how will it be funded? The point I'm trying to make is that, if a proposal is made that is not seen to be acceptable by one party or the other, how will you break that deadlock when you've already reduced the budget and we know that there isn't enough money to continue to do what you're already doing?

  Simon Fraser: I don't accept that we know that at this point. If there is a proposal and there is not full agreement, there will be negotiation and discussion until agreement can be found. That is the way that this will have to be handled.

  Q173 Mr Watts: That's one way of looking at it. Or the BBC could just decide that it will cut the budget somewhere else, because it is not bound legally.

  Simon Fraser: Indeed, it may do that.

  Q174 Mr Watts: What you've got is a deal that you hope will be okay, but there's no guarantee that it will be okay, because there's no legally binding agreement.

  Simon Fraser: There is no ring fence for the funding of the World Service once the funding transfers to the BBC—that is correct.

  Q175 Chair: Mr Fraser, I hope it has become apparent from the questions we are putting to you that there is a lack of clarity at the moment. On this very point, you said that you would wait until a proposal was initiated. Who would initiate the proposal, the Foreign Office or the BBC?

  Simon Fraser: There are continual contacts between us and the BBC World Service because we have a commitment to engage in setting its priorities and to discuss them with the Foreign Secretary. Those contacts go on between the Foreign Office and the World Service. I think that any proposal to close services would come from the World Service side, not from the Foreign Office.

  Q176 Mike Gapes: When the Foreign Secretary came before us, he seemed to be quite pleased with the new arrangement with the World Service, but when the World Service came before us, it seemed to be pretty uncomfortable with it. I understand that the BBC was given an ultimatum that it take over paying for either the licence fee for the over-75s or for the World Service. I am interested to know who came up with the World Service idea. Did it originate in the Foreign and Commonwealth Office, the Treasury, the World Service or the BBC?

  Simon Fraser: I'm afraid I'm not able to answer that question, Mr Gapes, because I wasn't involved. I don't know at what point the idea arose. I don't think, in a sense, that that is particularly germane to the finance and performance of the Foreign Office. It is a broader question that relates to the funding of the BBC.

  Q177 Mike Gapes: Okay, but following the question from Mr Watts, I put it to you that if BBC licence payers are told that they are paying towards a service in languages that they don't understand and broadcast to areas where they cannot receive it, it might be rather difficult to explain why that should be the case. Isn't this a rather uncomfortable botch that has been pushed through at the last minute?

  Simon Fraser: I don't think it is. I wouldn't describe or characterise it as that, Mr Gapes. I think that the arrangement we have made is a satisfactory one. It is true that we will have to see how it is carried forward in the future after this spending round. Of course, the World Service is not just about providing services to people in languages that they don't understand. I don't know whether you are as much of an insomniac as I am, but I am an avid listener to the World Service throughout much of the night, on some occasions. It has a pretty broad following and support.

  Q178 Mike Gapes: Yes, but BBC Persian television, for example, or BBC Arabic television, which are services that the FCO was keen to have established, are clearly not available to the vast majority of British people in terms of understanding or following them. Don't you see that there is a possible contradiction?

  Simon Fraser: There is an issue, but of course taxpayers fund the Foreign Office just as much as they fund the BBC licence fee. That service has been provided at taxpayers' expense in the past, as it will—

  Mike Gapes: No, the taxpayer doesn't pay that—

  Chair: Order. We are drifting into a political debate. This hearing is about the finances of the Foreign Office.

  Q179 Mr Baron: Mr Fraser, let me turn to the British Council, which does a very good job promoting, among other things, a greater understanding of British interests abroad and so forth. From the figures we have, it appears that it is taking a real-terms cut over the period of something like 25%. Can you understand our concern? The BBC World Service and the British Council seem to be responsible for delivering a fair chunk, if not the bulk, of the FCO family's savings during the period of the spending review. I accept what you are about to say about the British Council—it is a relatively small amount of money in the big scheme of things—but taken together in the sum, it creates the impression that the World Service and the British Council have more than suffered from the cuts. Do you sympathise with that?

  Simon Fraser: I would reiterate the point that it is a relatively small part of the overall budget. Secondly, I would reiterate the point that over a period of years, as a proportion of the overall FCO family budget, it has increased because of ring-fencing and protection within a diminishing overall budget. If indeed there is a relatively slightly higher demand on them this time, that only recalibrates the relativities. Having said that, it is important to note that both the World Service, and the British Council in particular, are able to increase their revenue-raising ability—to some extent, they can compensate for the cuts through commercial means. The Foreign Office does not have that ability. There are ways in which they can mitigate the impact.

  Q180 Mr Baron: Okay. I take your point, and we discussed that with representatives from the British Council when they were in front of us. They have the ability to develop commercial interests that would, or could, compensate for the cuts in the budget. Are you at all concerned that pursuing more commercial interests may—may—or could tarnish the brand somewhat? We discussed that at the time, and there was an element of concern within the British Council. Do you have any view on that with regard to any safeguards that need to be put in place? I know that a lot of this is about informal talks and contacts, but there is a concern out there that that could happen and a very good brand could be tarnished.

  Simon Fraser: I absolutely share your view that it is important to preserve the brand of the British Council. It is a very strong and valuable brand and we must strive to preserve it. Having said that, I don't think that asking the British Council to look at ways of increasing its revenues through commercial means needs necessarily to lead to that result. We can do that while preserving its brand.

  Another point relating to that, is that the British Council, in particular, is quite dependent on its relationship with the Foreign Office network around the world. So, to the extent that we have talked about the impact on its budget and on the FCO budget, there is, in fact, a mutually supportive relationship between the two organisations. We would like to go further in seeing to what extent we can achieve savings together through, for example, co-locating premises or sharing back-office services, while at the same time not threatening the independence of the British Council brand. We need to be sensitive to that.

  Mr Baron: Thank you.

  Q181 Mr Watts: You face a £25 million cut in your capital budget. What is the impact of that, and can you give us some demonstration of which schemes will be cut as a consequence?

  Simon Fraser: May I ask Mr Bevan to answer that?

  James Bevan: The settlement gives us an average of about £100 million capital every year for the four years, which is for the whole of the family, including the Council and the World Service. As you say, that is a significant drop from our previous allocation. However, we did also agree with the Treasury that, as part of the settlement, we would be allowed to raise an additional £100 million capital a year through recycling assets, which we could plough back into investments. So, we can sell buildings that we no longer need, and we can use the capital that we generate in that way to invest in new buildings.

  The bottom line is that it will be a tight four years, in terms of our capital allocation. We intend to do some quite ambitious recycling. We're looking at a target of £50 million a year recycling to plough back into the operation, but it will still be tight. In terms of what that means, we want to prioritise and there are a few main things to highlight. The first is buildings—either building them or acquiring them in places where we need them to protect our staff; a good example would be somewhere such as Sana'a, which is a very dangerous place, where we probably need a better building. Then, there is investment in other security, such as hardened vehicles and other measures that protect staff in dangerous places. Finally, there is investment in the modern ICT that we need as an organisation to be able to communicate effectively. So, while the settlement does not give us all the capital we want, we think it does give us all the capital we need.

  Q182 Mr Watts: Are you confident that the shortfall can be made up from sales of assets that you have already got?

  James Bevan: I am confident that we can meet the asset recycling target that I mentioned of £50 million a year.

  Q183 Mr Watts: When you say recycling, do you mean sales?

  James Bevan: We are talking mostly about selling off buildings that we no longer need, or where we want to downsize, and generating a net additional capital income of £50 million a year. That is ambitious, but I am confident we can achieve it. I am also confident that, when we put that together with what we have got in the settlement itself, provided we prioritise carefully, that will give us the basic capital that we need for the next four years.

  Q184 Mr Watts: Can you assure the Committee that the safety of staff will not be put at risk by that sort of sale or cutting in capital programme?

  James Bevan: Yes because, as I have said, our top priority in allocating not only capital, but other resources will always be the safety and security of our staff. If we were to conclude that we could not adequately protect the safety and security of our staff in a given place—for example, because we could not afford a building that we needed—we would recommend to the Foreign Secretary that we withdrew those people, so they were not under an unacceptable threat.

  Q185 Mr Watts: Finally, can you give us an example of the things that won't happen, which you had planned to do?

  James Bevan: On the capital side, I think there are going to be quite a lot of buildings that we would have wanted to build or acquire, but which we will not. We have not yet made a decision, because the Foreign Secretary has not made a decision, about the overall allocation of resources. However, we have a whole spreadsheet of projects that are in the highly desirable category because they will give us modern, fit-for-purpose, better-value-for-money offices around the world. In my judgment, we are unlikely to be able to afford those in at least the first couple of years because we want to prioritise projects that are about keeping people safe and secure.

  Q186 Rory Stewart: The Foreign Office has had a pretty miserable track record in flogging off the family silver with its building sales over the past 20 or 30 years. It is perhaps second only to the Church Commissioners in its ability to get rid of great historic sites with slogans such as "fit for purpose" and "modern." It has essentially ended up with a series of slightly second-rate and embarrassing buildings that, although we feel they are modern and secure, people in the countries concerned often feel are a bit of a comedown for Britain. We can see that all the way from Kabul to Jakarta. How will we ensure that we won't continue the trend of the past three decades with your next round of reallocations?

  James Bevan: First, we are not going to sell off the icons. The embassy in Paris is a classic example of a building that pays its way because it is so effective as a representational tool. There are, as you and members of the Committee know from your visits, a bunch of other buildings across the world that are neither iconic, nor fit for purpose—in some cases they aren't even safe. Those are precisely the kind of buildings that we want to get out of and downsize into more modern, appropriate accommodation.

  Finally, in answer to Mr Watts, Jakarta comes into the category of places in which we have both a real security threat, which we don't feel comfortable with, and buildings that aren't currently fit for purpose. A project to build a new safer embassy and office compound in Jakarta would be top of our list when we come to look at priorities.

  Simon Fraser: I recently came to this job, and I would like to say that I feel that it is probably true that the estates management record of the Foreign Office over quite a long period of time may have left something to be desired. I fully take the message from the NAO report on that last year. We have taken those steps that we can take, and we have introduced a number of measures to improve our performance. Mr Bevan has led that effort.

  I absolutely take the point about the desire not to sell off valuable properties. On the other hand, we need an ambition for efficiency, modernity and health and safety for our staff across the world. The latter of those is a legal requirement, so we have to get the right balance in managing the estate.

  Q187 Ann Clwyd: I am intrigued by the conclusion of the report of the previous Foreign Affairs Committee, which concluded that some of the cuts that you were making then were unacceptably disrupting, curtailed the Department's work and represented a threat to its effectiveness. What notice did you take of that report? It seems to me that these cuts are even more severe, so how did you react to the previous Committee's observations? In light of those, how are these further cuts justified?

  Simon Fraser: Are you referring to the cuts that were made in-year in the current financial year?

  Ann Clwyd: Yes.

  Simon Fraser: The first point is that those cuts had to be made, because they were part of the Foreign Office's contribution to the Government's wider purpose of seeking to reduce the deficit.

  Q188 Ann Clwyd: Do you not think that you rolled over too easily?

  Simon Fraser: All Departments were asked to make a contribution to the £6 billion target, and the Foreign Office made its contribution. I don't think that it's a question of being rolled over. We had to find a £55 million contribution to that target, which we did in a number of ways. We sought to do it in a way that had the least deleterious impact on the operations of the Foreign Office, but, clearly, there were some areas in which we had to make reductions. One of those, for example, was our in-year programme spend, in which we agreed an £18 million reduction, which, almost inevitably, will have some impact on our ability to do things, but I think that that is an inevitable consequence of the circumstance. I assure you that, in making our savings and efficiencies, we have sought to do as much as we can through the reduction of so-called overhead and back-office costs while protecting our front-line activity wherever we can.

  Q189 Ann Clwyd: Can you tell us how much of the savings in the administrative spend will come from the core FCO budget, and how much will come from administrative savings at the British Council and the BBC World Service?

  Simon Fraser: You're talking here about our 33% requirement to find administrative savings in the four-year period ahead. That means that we have to find, I think, £66 million of savings over that period. We are going to do that through a pretty ruthless focus on improving our corporate service performance and looking at other aspects of our organisation in order to drive out inefficiency. We have to find that within our FCO core budget. Mr Luck will correct me if I am wrong, but my understanding is that the World Service and the Council are classified as programme spend, and will therefore need to seek their own administrative efficiencies. But they will not be counted against the FCO target.

  Keith Luck: That's right. It's £66 million over the four years, and we have some plans in place to achieve that. Indeed, we have had a successful and good track record in exceeding efficiency targets in recent years.

  Q190 Ann Clwyd: You said in your letter that some of your administrative savings will come "in more equitable sharing of the costs of corporate services provision across Government Departments overseas." Will this deliver actual savings to the public purse, or are you simply reducing your administrative budgets by passing on some costs to other Departments?

  Simon Fraser: The issue there is that in a number of countries around the world, different Departments are represented and possibly have duplicate arrangements, into which we could drive greater efficiency through co-location and the sharing of common services. If we achieve that, that will be a saving, in the sense that it will achieve the administrative saving and/or help us to put more money into the delivery of actual, what we call front-line activities.

  Q191 Chair: Can you clarify one point? As you say, many of the savings have come from the FCO's corporate services programme. This was set out in your letter of 12 November, and it is key to delivering a 33% reduction in your administration spend. We've got the impression that that is on a 2008-09 baseline. Can you confirm that the 33% administrative spend saving will be against a 2010-11 baseline?

  Simon Fraser: Mr Bevan conducted this part of the negotiations.

  James Bevan: The answer is yes. It will be against this financial year.

  Q192 Chair: Where did we get this impression it was 2008-09?

  James Bevan: I can't answer that.

  Chair: Fair enough.

  Q193 Rory Stewart: Can I bring you on to staff? The Foreign Office has one of the most unique and impressive reputations in the world, and a lot of that is based around our UK-based diplomats. Yet there is a sense—we are getting this from the PCS and elsewhere—that morale has been hit quite hard by some of the benefits cuts, and people are not sure about their futures within the Office. What are you doing to make sure that people are as proud and excited about being diplomats today as they were 10 or 20 years ago?

  Simon Fraser: That's a very important question. The reason for that is, as you say, that we have a very good reputation, and we need to preserve that; we are determined to do that. Also, of course, our staff are our real asset—that is what we do; we are a people organisation. We have to have our people enthused and positive.

  What I'd like to say on that—I will ask Mr Bevan to fill in more detail—is that we have just had the headline results of the cross-civil service staff survey, which looked at all these issues. You might not be surprised to hear, given the events of the last year, that we're expecting a fairly considerable hit on the staff engagement scores. Indeed, they have taken a slight dip. Last year it was 69% for the overall positive engagement, and this year it has gone down to 66%. In the circumstances, that is a pretty positive result, which gives me some encouragement that although, as you rightly point out, there are issues causing concern, nevertheless we have maintained enthusiasm and engagement in the organisation. I don't know whether Mr Bevan wants to give more detail.

  James Bevan: Thank you. As the Permanent Secretary has said, we participate, as does every other Department, in an annual survey of our staff. We have just got this year's initial results. The first thing to say is that there was the highest response rate that we've ever had as an organisation. It was 88%. Response rates tell you something about people's belief that change will happen if they bother to vote, so that was encouraging. It was actually the highest response rate of any Department except for one, DFID, which had 89%—we'll beat them next year.

  What was interesting on the substance was, as the Permanent Secretary has said, that there was a slight drop in the overall positive scores about working for the Foreign Office, but not a very big drop. It was, on average, between 1 and 2%. The overall figures are still, in relative terms, impressive. The vast majority of our people think that what they do is really important. They are proud to work for the organisation and they want to stay in it. Those numbers are starting to soften, and I think we know some of the reasons for that, but we will need to keep going over the next few years to continue to improve what we can improve, and to manage what we can't.

  Q194 Rory Stewart: As people who are more on the administrative or operational change management side, how do you engage with the very unique culture of policy stream diplomats? They have, in particular, their reputation for language expertise and country expertise, their ability to get on with foreigners and their representational functions, which are all things that are very difficult to measure. There is a culture where, over the past five to 10 years, people have sometimes felt that people have been promoted on the basis of their performance in management tests and boards, and that if you were a traditional country or language expert, you were being marginalised by people who were perhaps slicker with the jargon.

  Simon Fraser: The first thing that I would say is that I regard myself as somebody who has come up through the policy streams of the Foreign Office. I'm sure that Mr Bevan does as well. So, with respect, I don't really recognise the distinction between the two sides of the Office that you paint, Mr Stewart. I think it has been important in recent years that the Foreign Office has made some pretty impressive strides in improving its management and its leadership. Those sorts of things are reflected in these figures.

  On the other hand, it is also very important that we maintain those unique skills in diplomacy, policy, international activity, languages and negotiation that you described. Certainly, the Foreign Secretary has placed a high emphasis on that since he has come to office, which I entirely applaud. We are seeking to ensure that as we look forward, building on the achievements that we've made in terms of the organisation, we have a very clear focus on what we call diplomatic skills and excellence. So, for example, we will be increasing the money that we spend on language training, we will be ensuring that there are very strong policy processes in place in London, and we will be ensuring that the excellence of our missions overseas, which, by the way, Ministers have commented on positively since coming to office, is maintained. I entirely accept that we have to have a clear focus on the core purpose of the Foreign Office, which is diplomacy.

  Q195 Rory Stewart: How concretely are you going to change promotion to the very senior levels in management to reflect this new initiative of the Foreign Secretary?

  Simon Fraser: I don't believe that it is necessary to do so, because promotions within the Foreign Office are done in a transparent and merit-based way.

  Q196 Rory Stewart: Sorry, but let me push that point. There has been a huge culture shift in the kinds of transparent, merit-based things that you are looking for when promoting people. There has been a shift over the past decade from one sort of person to another sort. The kinds of things that are proving to be stumbling blocks for people who seek to be promoted to senior management positions are often more their management skills than their policy skills. How could you re-weight the system, so that if someone was genuinely a brilliant Arabist, with an astonishingly deep understanding of the culture and the history, that counted strongly in their favour, as against somebody else who might be an efficient administrator?

  Simon Fraser: What we need to ensure is that we have the right balance of the two. When you are appointed to a senior diplomatic position, of course you have very senior diplomatic responsibilities, but you also have senior management and leadership responsibilities, including the management of money and of people. What we are striving to do is achieve the promotion of people who have the appropriate balance of those skills, but not either at the expense of the other. That is our ambition. I think it is the correct ambition.

  Q197 Rory Stewart: So you are not going to change in any way the sorts of things you are looking for in a promotion in order to reflect the Foreign Secretary's agenda?

  Simon Fraser: We are seeking to ensure that the people we promote to senior positions have the range of competencies that we have established as being appropriate to that position, but of course we are going to give very heavy weight to the diplomatic expertise, including, for example, language and regional experience, to which the Foreign Secretary rightly attaches a lot of importance. But not at the expense, I would argue, Mr Stewart, of people's ability to be responsible stewards of public funds and good leaders of their teams, and people having that broad range of skills. For me this is about the balance of the skills of the leader.

  Q198 Mr Watts: The balance includes, does it not, the things that my colleague, Mr Stewart, raised, but also the ability to actually act on behalf of Britain as far as business is concerned? One of the things that we heard from the Foreign Secretary was that he wanted more emphasis on that. You didn't mention that. Is there a change? Are you looking for different people? Is it something that you are going to have to do with training or recruitment policy? It seemed to us, from what the Foreign Secretary said, that he was looking for a completely different type of person than had perhaps been in the Foreign Office before.

  Simon Fraser: I myself spent six years in the European Commission doing trade policy, and a year and a half as Permanent Secretary in the Business Department, so I feel that I speak with some experience on this. I think it is important that the Foreign Office has a clear, commercial mindset in the way that it approaches its business and the development of relations around the world. That is one of the diplomatic skills, among others, that Mr Stewart identified, and that we need to promote. I think that diplomats and good heads of mission should be perfectly capable of conducting and pursuing commercial diplomacy on behalf of the Government. I don't therefore necessarily think that we need to be looking for a wholesale introduction of different people. It is more about the mindset of the organisation and making sure that people think in a certain way and are trained to do certain types of activity. There are, of course, some jobs in which more specialised professional backgrounds outside the Foreign Office, in other parts of the public service, or outside the public service may be appropriate, and we will bear that in mind. In some cases, we will seek actively to bring in those with that expertise.

  Q199 Rory Stewart: The two major changes that seem to be happening in the staffing are the 2.5% reduction in the UK base staff every year during the CSR period, and a corresponding push to have more locally engaged staff. How are you going to manage that change? I understand that most of the locally engaged staff are coming in at administrative level—ambassadors' assistants and various others. How are we going to make sure that that pretty dramatic change in both UK and overseas staffing isn't going to have an effect on the culture and performance of the Foreign Office?

  Simon Fraser: There are slightly different questions in that, Mr Stewart, but clearly we have a work force strategy already in place that will help us, over a period of time, to manage down the size of our overall work force. We need to do that in order to meet our budgetary requirements, because people are our most expensive asset. One of the ways that we have been doing that is to look at the opportunities available to us to employ locally engaged people overseas in some jobs where, in the past, UK-based diplomats were placed. There are a number of reasons for doing that. It is, in most cases, cheaper to do that. In addition to that, sometimes you can attract highly qualified people with strong local contacts and experience who actually add to our ability to perform. It can actually enhance our performance, in some cases, but you are absolutely right that we have to be very aware of the overall impact of these changes, in terms of the overall shape of our service.

  We now have a service that is more than two thirds locally engaged staff, so we have to bear that in mind. There are some cases in which it's not appropriate to take these steps because, for example, there are security or other concerns that prohibit it. And, of course, we need to have the right number of British diplomats overseas who are seen as British diplomats in their relations with foreign Governments. There are a number of factors to take into account. I hope we're striking the right balance, but the concerns you raised are absolutely legitimate ones. Mr Bevan has been closely involved in that process over time, so he may want to add something.

  James Bevan: I just want to illustrate where it can work really well, because the Permanent Secretary's absolutely right that we still have to front up with senior British diplomats to the world. I visited Karachi a year ago. We have a young Pakistani political officer employed in Karachi who is not just cheaper but far better than I could be in that position, because he speaks the language, he understands the networks, he knows who's influential and who isn't, and he can move around that environment in greater security than a British diplomat could. That's an example of where the Foreign Office is winning by employing somebody like that. But equally, in Islamabad, if you want to go into the Foreign Ministry at a senior level, clearly a High Commissioner has to go in, and it's got to be a British diplomat fronting for us if we want to get the result we want.

  Q200 Mr Roy: Can I come in on localisation? It seems to me to be a rather sensible idea, but the problem you've got there is that the negative to localisation is the job prospects of young people in this country. Has localisation brought, for example, a lowering of morale for recruits to the FCO, who now see a diminishing market for their work abroad?

  Simon Fraser: At the moment, we're operating in an environment of an overall recruitment freeze in the civil service, so we can't actually recruit young people in this country at the moment. But you're absolutely right that, of course, there are structural implications for policy shifts of this type. That is why I referred to our work force strategy. We have to try to make sure that we are giving people appropriate expectations, creating the opportunity to manage careers and creating opportunities for people as circumstances change. We are seeking to do that, but it is true that at the junior levels, there is a perception that there are fewer opportunities for people to go overseas now than there were several years ago in some of the supporting functions.

  Q201 Mr Roy: Is that a perception or a reality? Surely it's the reality.

  Simon Fraser: I said it is true. It is a fact to which we are having to adjust.

  Q202 Mr Roy: How, then, does the younger member of the FCO get experience abroad if those jobs are already taken up? Does that mean that the first time they actually go abroad is when they get a more senior position? Surely that's not advantageous.

  James Bevan: As you said, Mr Roy, it's a fact, not a perception. The way to illustrate that is that even five years ago, if you were a junior UK Foreign Office employee, you could expect to spend two successive postings abroad and one posting back in London. The ratio is now one abroad to one in London. We've been very clear with our staff, as the Permanent Secretary says, about the reasons for that.

  That is a changed expectation. It doesn't apply to everybody. The one exception to the recruitment freeze imposed on all Government Departments across Whitehall is a cross-Whitehall agreement that we will continue to take in so-called fast stream entrants, who are graduates who are particularly talented. Those are still following the historic career path of coming into the Foreign Office for a year or two and then going off abroad for their first experience. The people who are being hit—the ones you're talking about, Mr Roy—are our more junior staff, who may have joined the Foreign Office previously with an expectation of a greater percentage of time spent abroad. That's now diminishing.

203 Mr Roy: Okay. Lastly, apart from the quality or lack of quality, is the cost. Two years ago, it was stated that the savings would be £14 million; last year it was said it was £12 million. Now I understand we're talking about £10 million. Does that mean, therefore, that someone's got their sums wrong and actually, this is not the great big idea that they thought it was?

  James Bevan: I don't think so. I would need to see the figures to be clear what we are talking about. We are continuing with programmes of localisation, which are continuing to save us significant amounts of money. For example, we are in the middle of a programme of localising about 120 management officer slots overseas. Some of those are currently occupied by UK staff, but in a couple of years they will be completely localised. That is already saving us a significant amount, and it will save us at least £9 million a year once it is complete. So, that is an ongoing process.

  Q204 Mr Roy: Okay. Would you be able to write to the Committee just to clarify the costs?

  James Bevan: Of course.

  Q205 Mr Baron: I am going to turn to the network of posts, but before I do I will ask a quick question, following on from earlier ones, about policy versus managerial skills when it comes to the promotion of individuals. The answer given was that we need a balance, and one can understand that as it is a very reasonable answer. But the danger of such a balance is that managerial skills will always be looked at first, because we live in an age of bureaucracy, box-ticking and all the rest of it. Isn't the answer that it comes down to team work at the end of the day? You can have somebody who is a brilliant Arabist leading your mission, wherever that may be, as long as the team around him have the appropriate skills, whether those are managerial, budgetary or financial. That would be the answer, because you are looking at the mission as a sum, rather than as just one individual.

  Simon Fraser: I don't recognise the description of policy versus management, which is an important thing to say, because my point of balance is important in my perception of where we should be going. I agree with you that you need a mix of skills in any organisation, including any mission, but the head of mission sets the tone for the organisation, as does the head of any organisation. It is therefore important that our heads of mission demonstrate a broad range of skills. Of course, not everybody will be the same, and we need brilliant Arabists, Sinologists and experts on Latin America. We need such cadres of experts, and we need to reinforce those cadres—that is a fair point. For example, we need to improve our language skills in areas where they may have dropped away a bit, and we will do that. Those traditional diplomatic skills—languages, negotiation, interaction with people and being an impressive representative of your country—are absolutely critical, but they are not everything, in my view. Therefore, we need to try to train our people, to coach them and to give them the opportunity to have a broad range of skills. Where particular individuals have particular strengths, we look to backfill those strengths with complementary strengths in the staff around them.

  Q206 Mr Baron: Thank you for that. On the network of posts, I don't think there is any doubt that on paper it is good value for money, particularly compared with near neighbours, such as France, which has double the budget for a similar number of posts. But in this world of budgetary restraint, one has to look at how viable posts are. The Foreign Secretary has made it very clear that he believes that having a presence on the ground is terribly important, and I think we all agree with that. He once came up with the figure that the cheapest 40 posts would save only something like £2 million or £3 million anyway. Mr Fraser, in your letter of 12 November you suggested that we had to examine the existing network of posts to see whether it adequately meets the new realities. Can you expand on that? What are the new realities that the FCO will use to judge the adequacy of its network of posts?

  Simon Fraser: I am not sure whether I used the word "realities" or "priorities".

  Q207 Mr Baron: "Realities" is my understanding.

  Simon Fraser: My view is that the Foreign Secretary has taken a very clear position, which is that he wants us to maintain a network of diplomatic posts that has global reach. He believes that that is one of the top priorities for the organisation, and we agree with that. We are now in the process of looking at the priorities that he has set for the organisation in the period ahead, looking at our resource allocation in the spending round and looking at how we are going to fund that network to support those priorities. We are going through that process right now, and we will make recommendations to Ministers on the future of the network in the coming weeks. I hope that that will be before the end of this calendar year. I think the Foreign Secretary's view does not mean that we have to stick with the network we have. Our view and, I think, his view is that we should look at the future priorities and realities in the world and in particular, for example, emerging markets—those areas where economic growth and greater political weight are shifting in the world—and we should try to ensure that our future network is geared in that direction. For example, we may want to open some new posts and we may want to close some other posts to fund that, because our finances are a bit of a zero-sum game. That's what I mean when I say we need to look at and plan for new realities over the next four years, but also beyond the next four years, in terms of our understanding of the way the world is developing.

  Q208 Mr Baron: Yes. I want to push you a little more, in the sense that although you're looking at that at the moment, we know what the new realities or priorities are. They are the promotion of soft power, the emerging markets or emerging economies coming through and the emerging countries, both politically and economically. You've suggested a change or a shift in emphasis from some regions to others. Can you give us any more details on that? How long is that reassessment going to take?

  Simon Fraser: As I said, we are working on that now. Mr Bevan and I have been discussing it, and I hope that we will be in a position to make recommendations to our Ministers about our resource allocation in the office as a whole, including funding for the network, before the end of this calendar year, because we need to be in a position by the beginning of the next financial year to begin to make those changes when the new spending round cuts in. It is, of course, worth saying that although we will be looking to allocate resource towards new priorities, there are some limits on the extent to which we can shift resource around, because we have a lot of static assets and also because, to go back to Mr Stewart's point, there are some places, such as Afghanistan and Iraq, where the cost of our post is very high because of security concerns, but they are critically important commitments for the organisation and therefore we can't flex resource easily out of some of those commitments.

  Q209 Mr Baron: Just one quick remark in response. A presence on the ground is terribly important if you're going to promote trade.

  Simon Fraser: Yes.

  Q210 Chair: Very specifically on the question of posts, how is co-location with DFID going? Can we have an update on that?

  Simon Fraser: We are actively pursuing that with DFID and, indeed, we are talking to other Government Departments. One of the things I would like to draw your attention to, if I may, Chairman, is the language in the Strategic Defence and Security Review about how we are going to try to increase the co-operation and co-ordination between different Government Departments represented in countries overseas under the overall leadership of the Ambassador or High Commissioner. I think that's quite an important thing for us to pursue, and we're working with other Departments on that. One aspect of that will be attempts to increase co-location. With DFID, I think we now have 36 co-locations in operation, and we're discussing more, so we've made quite good progress on that and I hope we can make further progress.

  Q211 Chair: Is any sharing of corporate functions going on?

  Simon Fraser: That comes within the same category—the attempt both to improve our co-ordination and to drive down our costs.

  Chair: Mr Fraser, I wanted to draw this session to a close at 4.30. It is now 4.18. We have a number of questions on the business plan for 2011 to 2015. We'll make a start, but I suspect we won't cover all the ground. They fall into the category of questions that can be dealt with in writing, but let's make a start. Frank will lead off on this.

  Q212 Mr Roy: In May, the coalition announced five foreign priorities, and in July the Foreign Office and Prime Minister announced three priorities. In relation to the structural reform plan, isn't that confusing for the people in the FCO?

  Simon Fraser: Mr Roy, that is a very important question and I'm grateful to you for asking it. The Foreign Office, like all Departments, was requested to produce a business plan—a published business plan—that reflects the particular priorities represented in the coalition agreement, and that is what we have done. That was the plan published on 8 November. But I think it's important to say that that does not reflect all the activity of the Foreign Office. The objectives identified there include one to protect and promote national interests. There's one on Afghanistan. There are also objectives on the machinery of government, policy in Europe and soft power. Those are important, but the Foreign Office does a lot of other things.

  We came to the conclusion that in order to do our internal business planning and allow our Posts around the world to set their priorities, we needed an internal set of priorities that went a bit further. They subsumed those but added others so that we could allocate our activities and our funding to them, and be accountable for our funding against those. That is why we came up with this set of what we call "The FCO's Priorities", which are encapsulated in a poster that we have just produced. They talk about what we seek to do and indentify these three priorities of security, prosperity and consular services. That is a more comprehensive description of what the Foreign Office is going to be doing.

  Q213 Mr Roy: So that is what the FCO wants as opposed to the coalition?

  Simon Fraser: No, the coalition priorities are subsumed within this. I would say that these are the priorities against which I hope you will hold us accountable, as you rightly should, in the proper use of our resources.

  Q214 Mr Roy: Okay. More specifically, you are devising lots of metrics to measure your impact indicators. How are you developing these and what is the cost? How will you judge from these indicators whether the FCO's priorities are being achieved?

  Simon Fraser: May I answer briefly then ask Mr Luck to come in? In the published business plan a number of milestones are identified, and we are required to report every fortnight and every month against those. We have just submitted our first report this week on our performance against the milestones, and I am happy to say that we haven't yet missed any. Beyond that, we have a further exercise to identify indicators with the Treasury, which Mr Luck may be able to tell us more about.

  Keith Luck: We do indeed. As the Permanent Secretary has implied, we have some activity recording, and we have looked again at our activity codes and what we record against the new priorities and the internal implementation plan that the Permanent Secretary has referred to. Our proposal is that as of Q3—the end of December—we will be recording again our activity against these new priorities, in line with the new settlement and spending review results that are implemented from 1 April.

  Chair: Turning to FCO performance for 2009-10, a question from Bob Ainsworth.

  Q215 Mr Ainsworth: You have a new programme that you introduced in 2007 called "Five Star Finance". How far has the development of that gone? Potentially, if it measured up, there was to be a new phase to be designed. Will you be able to go further down that road with the cuts that are being imposed on the Department?

  Simon Fraser: Can I just say a word and then ask Mr Luck to back this up? I think that the Five Star Finance programme has been a very important programme for the Foreign Office. A few years ago we were in a situation in which we didn't have effective financial management processes, and we didn't have effective, reliable financial information. We have made huge strides on that. That is really important to run the organisation and a lot of the credit for that actually goes to Keith Luck, who came to the organisation with a specific brief to achieve this. We have made further progress, and maybe I could ask him to update you on where we now stand.

  Keith Luck: Thank you very much. We have indeed made further progress; it has been an important programme of driving improved financial management across the Foreign Office. Indeed, based on recommendations from this Committee and the Public Accounts Committee, it is being used as a model with other Government Departments for them to use the same sort of really focused, programme-based approach.

  That said, the final phase is to achieve four and a half stars by July. We think we just about got there in July of this year, but we asked the National Audit Office to come in and do an evaluation. It is currently doing that, and its indicative report was presented to my programme board earlier this month. We are clearly somewhere in that territory between four and five stars, but it will probably be December before the NAO can come down with a firmer figure. Based on its recommendations, we then decide how much effort to continue in trying to get to five stars. You can appreciate the declining utility in return for the investment made around that.

    This is a good opportunity to tell the Committee that on Monday we achieved recognition under the Chartered Institute of Management Accountants awards. We were runner-up in the public sector category for the Five Star Finance programme so it also has brand recognition and so on.

  Q216 Mr Ainsworth: What you appear to be indicating is that any further roll-out or development is effectively going to have to be self-funding and that there is a law of diminishing returns, and those are decisions that you are about to take depending on whether the return would justify further development.

  Keith Luck: We'll take the decision on whether to continue dedicated investment in the team and the effort based on the NAO's report, offset of course by other priorities and pressures within the organisation. It is fair to say that we have achieved many of the objectives that we set out to achieve, and, as the Permanent Secretary has indicated, financial management—and good management of resources more generally—is much more firmly embedded in the organisation and is part of our leadership toolkit. When it comes to the number of accountants, almost a quarter of our finance staff are now professionally qualified—a significant change from where we were only a few years ago.

  Q217 Mr Ainsworth: Facilities management outsourcing in India and the Asia-Pacific region was supposed to deliver savings of, I think, between £7 million and £15 million. Where are we with that? How are we measuring it?

  James Bevan: Shall I take that one? The answer is that we have just signed a contract for facilities management in Asia-Pacific, covering things such as the management of our buildings, security, gardening, maintenance and so on. The contract goes live on 1 April next year. You're absolutely right on the anticipated savings—between £7 million and £15 million over the seven-year lifetime of the contract.

  It is important to say that we are not doing this just to save money—although we expect it to save money—we're also doing it to cut the overall work force and to ensure that our staff remain focused on diplomacy, which is our core purpose, as Mr Stewart rightly reminds us. We also want to ensure that we have the same standards of maintenance across our network, because where we have not had such contracts we have seen widely varying—sometimes worryingly so—standards of maintenance and health and safety, and we want to ensure that those are properly in place.

  We will ensure that we drive those savings out by, first, putting them in our budget for the next four years, so they have to be made. Secondly, we've enlisted the support of our heads of mission and ambassadors in the region, who will help us to ensure that it happens. Thirdly, in London we have, under me, a facilities management client unit that tracks whether, and is responsible for ensuring that, those savings are realised.

  Q218 Mr Ainsworth: And you have structured the contract in such a way as to ensure that those savings will be made, so you won't be coming back to the Committee in years to come saying, "We had to adjust and make savings elsewhere because the contract simply didn't deliver what we anticipated".

  James Bevan: We have done a great deal of research and cost-benefit analysis to assure ourselves that it will deliver the savings that we've predicted. I very much hope that you will hold us to account for their delivery.

Q219 Mr Roy: The memorandum to us from the National Audit Office stated that the value of assets of residential land and buildings was nearly £900 million. We know from recent press criticism that the luxury of some of the residencies has a question mark against it. Will you seek to lessen that type of criticism of such luxury through your planned asset sale?

  Simon Fraser: We constantly seek to reduce the opportunity for that sort of criticism, much of which is in my view unjustified. We do have an estate around the world and it is true that some of it is very impressive. The value of the Ambassador's house in Rangoon is about £26,000, so I hope you will recognise—

  Q220 Mr Roy: The same as the average in my constituency.

  Simon Fraser: We also have people operating in very difficult circumstances around the world. Of course, a lot of the cost in many of the places we are in is attributable to essential security provision for our staff, and that comes at a very high price. Having said that, while of course we need to preserve the estate—and its prestige—on behalf of the country, we are also seeking to ensure that we demonstrate very efficient use of that estate. Increasingly, for example, we have sponsored events taking place in our buildings, financed by companies and others. We are allowing them access to those prestigious environments in order to promote commercial and other British interests. That is very common practice.

  Q221 Mr Roy: In the residencies?

  Simon Fraser: Yes, in the residencies. For example, the residence in Paris is heavily used for those purposes.

  Mr Roy: Very expensive?

  Chair: Last questions.

  Q222 Mr Watts: As well as the spending review, cutting capital budgets and revenue budgets, you lost some of your flexibility from 2010 and 2011. How will that loss of flexibility affect your planned or future use of EYF stocks?

  Keith Luck: The new spending review is clear in stating that end-year flexibility is no longer available for Departments. There might be some exceptions on that on capital items where the Treasury recognise the lumpiness of some of those expenditures. There will be some reduced flexibility on account of not being able to access EYF in quite the same way that we did. That comes back to us having to manage our cash and resources as best we can. Indeed, our track record in spending the budget fully is good—we were at less than 1% last year. I think that we continue to manage within a range of plus or minus 1%, even in the current financial year.

  Q223 Mr Watts: Do you expect that to reduce the overall budget, or will people just stay within the disciplines of each individual budget and make sure that there is not an underspend at the end of the year?

  Keith Luck: End-year flexibility has always been on the underspends accumulated. It had got to the position where that was unsustainable given the wider issues facing the country and the need to reduce the deficit. It does mean that we need to ensure that every pound spent is spent well and that the value is maximised for our spend.

  Q224 Mr Watts: But it does not necessarily mean that that will be the case. If you lose the flexibility, but you allow the people to spend within the budget heads, all you will get is that every one who is in charge of a budget makes sure that it is spent by the end of the year. That is why I was asking whether you expect to make savings on the overall budget at the end of the year, or whether you think that the same amount will be spent, but that it will not be spent in a flexible way.

  Simon Fraser: We are obliged to spend our budgets within plus or minus 1% of the total that we are set. That is the target that we are required to meet.

  Q225 Mr Watts: You were required to do that before, when you had the flexibility on moving them at the end of the year. What makes you think that you will be any more successful this time?

  Simon Fraser: I hope that we will be successful, because, as we have been discussing, we have better financial performance and management. Of course, it is very difficult for us, because we spend money in many currencies in many places around the world, and it is a very complicated organisation. To be frank with you, financial management in this organisation is difficult. I have come from a Department with a budget of £22 billion, which is much larger than the Foreign and Commonwealth Office's budget. However, actually controlling the budget in the FCO is a rather more complicated exercise.

  Chair: On that note, we wish you well. I need to draw this meeting to a close. We have a couple of questions outstanding on winter supplementary estimates and savings in 2010-11 and we will write to you about that. We would be grateful if you could put the answers in writing. Thank you very much indeed. I am going to move the session to a private session, so I must ask members of the public to leave, but thank you very much for attending.

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Prepared 11 February 2011