FCO Performance and Finances

Letter to the Chair of the Committee from Peter Horrocks, Director, BBC World Service

During my recent appearance at the FAC to offer evidence on behalf of BBC World Service, a member of the Committee asked me about details of the Spending Review settlement with respect to a letter that had been received by the Committee from the Foreign Secretary. I had not seen that letter, and so wish to clarify my response in the light of this new information.

The FCO’s overall settlement

In his Spending Review announcement to Parliament, the Chancellor of the Exchequer made the following announcement with respect to the FCO:

"Our international influence and commitment to the world are not determined only by our military capabilities; our diplomacy and development policy matter too. Savings of 24% in the Foreign and Commonwealth Office budget will be achieved over the review period by a sharp reduction in the number of Whitehall-based diplomats and back-office functions."

The Foreign Secretary’s letter to you states that "Taking account of the transfer of BBC World Service funding to the BBC in 2014/15, our baseline falls by 24% overall". His letter also says that there is a 10% real reduction in funding for the FCO "family" by 2014/15. It is not immediately clear from these statements and the figures that have been published what the impact of the transfer of World Service to the licence fee from 2014/15 will be on the FCO’s own budget. However the Treasury press notices on the Spending Review state that ‘once the additional resources from the BBC are taken into account the rest of the FCO budget will only fall by 10% over the period.’ (http://cdn.hm-treasury.gov.uk/sr2010_pressnotices.pdf)

BBC World Service’s own settlement

World Service has been allocated a 16% real terms reduction in its funding in the Spending Review settlement. However, as I explained in my evidence, World Service faces a number of unavoidable, identified cost pressures which will have a significantly greater impact than this headline reduction suggests.

Sir John Stanley asked me in my evidence whether or not these costs, and specifically the extra costs associated with the BBC’s pensions deficit, were provided for in the settlement. As I said, the settlement does acknowledge the impact of the BBC-wide pensions deficit on World Service. However our increased pensions contributions, and any other cost increases, must be funded within the published budget, which is scheduled to fall by 16% over four years. There is no additional funding for any costs outside that settlement. When unavoidable cost increases are taken into account the like-for-like savings which need to be made in our existing and ongoing services is more than 25% by 2014/15. We should also remember that these percentage reductions are calculated on a baseline which is £7.6m lower than World Service’s budgeted spend for 2010/11, because of the post-election cuts to our budget requested by the new government. It is on this basis that I said we cannot continue to do everything, and why there will be reductions in services and substantial job losses.

Because of the high proportion of staff costs in our cost base, achieving these savings will have significant restructuring and redundancy costs. These must also be met within the settlement.

In the new BBC Licence Fee agreement, struck at the same time as the Comprehensive Spending Review announcements, the DCMS-BBC Trust exchange of letters states that "The Government will continue to fund the World Service at CSR agreed levels for 2011/12, 2012/13 and 2013/14. The BBC will be allowed to fund any World Service restructuring costs, at its discretion, during this period. The World Service will become part of the Licence Fee funded BBC from 2014/15".

I hope this clarifies the issues for the Committee.

Conclusion

The respective impacts on the various parts of the FCO family are important considerations in assessing the ability of the various organisations to sustain Britain’s global presence. The BBC welcomes the Committee’s investigations and deliberation in this matter.

If you require any further explanation or clarification, please do not hesitate to ask.

22 November 2010