FCO Performances and Finances

Supplementary written evidence from Simon Fraser CMG, Permanent Under-Secretary of State, Foreign and Commonwealth Office

Thank you for the constructive and positive FAC hearing last month on the "FCO's Finances and Performance". I very much wish to maintain that positive relationship in future. In the time available for the hearing the Committee Members were not able to ask a number of questions they had in mind, and I said I would write.

Three of these questions were in relation to the £55m in-year cuts required as the FCO's contribution to immediate deficit reduction. You asked how and when we will decide to deliver them and what their impact would be on front-line services.

These were spending cuts to be achieved in this financial year. Our Parliamentary Main Estimate, published in June, was net of this £55m cut. Effectively from the start of the year our Budget was reduced by £55m. FCO Ministers set out to Parliament on 7 June how these reductions would be achieved. They said that the £55 million would be delivered by cutting waste and inefficiency, and reducing lower priority spend, including through:

- reduced spend on consultancy and support functions;

- more collaborative procurement with other Departments who have a presence overseas, such as the Department for International Development;

- increasing asset sales in less-used parts of Foreign and Commonwealth Office's (FCO) overseas estates;

- a review of the FCO's programme spend. The results of the Programme review, which was the only front-line impact of these cuts, were that we reduced our planned programme expenditure by 18m in this financial year. The details of the break-down of this £18m were set out in a Written Ministerial statement on 29th June.

You also asked a question whether the Winter Supplementary Estimate was consistent with these £55m cuts. The FCO Main Estimate not only included the £5 million reduction in plans but also included the previous reduction of £20 million to the CSRQ7 plans for 2010-11.

As a general rule, Main Estimates reflect agreed plans and changes to baseline expenditure across years rather than in-year adjustments. However our Winter Supplementary Estimate allowed us to make required ad-hoc budget transfers with governmental partners, e.g. the costs of the Papal Visit which were shared between several departments, the HMT share of the annual costs of International Subscriptions, along with non-baseline expenditure such as the in-year modernisation money for the FCO and the transfers from DFID for conflict prevention.

The Committee asked about the modernisation work that the additional £30 million included in the Winter Supplementary Estimate would pay for, and why it had not been included in the Main Estimate. The £30m for modernisation consists of £15m agreed by HMT as part of a package of exceptional measures in spring 2010, and a further £15m for modernisation work within our Corporate Services Programme (CSP). It was not included in our Main Estimate as HMT do not approve drawing down money in advance of need. We have used this sum to fund the early retirement of nearly 120 British staff, to enable some restructuring in our Consular network, and to reduce the number of LE staff employed in addition to the Corporate Service Programme's (CSP's) localisation/FM agenda.

Mr Roy also asked about the savings from the Corporate Services localisation agenda (Q203-204 on the transcript). The Foreign Secretary expects us to find further savings and create a reinvigorated Foreign Office, at the heart of government, playing a more leading role than has been possible in recent years. Localising positions in our overseas network is one of the ways we can make further savings in support areas in order to ensure we continue to deliver value-for-money and free our diplomatic staff to concentrate on front-line diplomacy.

The FCO's localisation initiative is forecast to save approximately £12m annually from 2012/13. In addition to the clear financial savings, localisation of certain roles is also delivering other benefits through recruitment of talented local staff. Where appropriate, the localisation programme has allowed us to increase the level of professionalism in the way we deliver management and support functions and take fuller advantage of local knowledge.

Mr Roy also mentioned a Parliamentary Question (PQ) he asked recently about the admin cost of foreign transactions. We spend over £800m a year in foreign currency in thousands of transactions. Across our global network, our staff pay bills and salaries in local currencies. To calculate the administrative cost of this process globally would incur disproportionate cost, which is why we answered as we did. If Mr Roy, or any Member of the FAC, is seeking more specific information, we would of course do our best to provide it.

Mr Ainsworth asked about the timetable to allocate the four separate programmes within the Conflict Pool. The allocations will need to be decided collectively by the three Departments concerned, now that we know the detail of the conflict settlement. The settlement covers both the Assessed (i.e. the obligatory) Peacekeeping Costs and the Conflict Pool, (which funds discretionary UK conflict activity). The Treasury will provide £374m annually for the Assessed Costs. This is the same amount provided per annum in CSR07. We expect the actual costs of our international peacekeeping obligations to be more than £374m in each year of the Review period. Therefore money from the Conflict Pool will need to be used, as at present, as the first port of call to top up the peacekeeping budget.

The Conflict Pool funds five programmes aimed at achieving our objectives for conflict prevention: Wider Europe, Africa, Middle East, South Asia and Strategic Support to International Organisations. The tri-departmental Stabilisation Unit will also be funded from the Conflict Pool. Departments are currently preparing advice for Ministers on Conflict Pool allocations for 2011/12. These will be announced to Parliament.

I also need to clarify an area related to peacekeeping and conflict funding that we discussed in the hearing. To help improve the coherence, transparency and simplicity of the Government's spending documents Parliament has agreed some changes under the new Clear Line of Sight (CLoS) budgeting regime. One of these is that Departmental Net Resource and Capital budgets will be voted in Supply Estimates rather than the specific Request for Resources (RfRs) 1 & 2 as the present. The effect for the FCO is that, from 2011-12, there will no longer be an RfR1 for FCO family and a separate RfR2 for tripartite Conflict Pool and peacekeeping expenditure.

We will continue to have separate lines in the Estimate for the FCO, BBC World Service (until end 2013/14), and the British Council, and we will also include lines for both the Conflict Pool and Peacekeeping tripartite funds. We will draw down our Conflict Pool funding from DFID, on whose baseline this budget will sit and Peacekeeping money from HMT as we do now. We will continue therefore to present Conflict Prevention and Peacekeeping expenditure explicitly in Supply Estimates and will need Treasury approval to move money between lines in the Estimate. We plan to show the FAC a dry run CLoS Main Estimate before the Christmas recess.

Finally, you asked me about the core FCO cut in SR10. The Treasury makes an allocation to the FCO family (the FCO, the British Council and the BBC World Service) and the Foreign Secretary then further allocates that overall budget within the family. The cut to the FCO family as a whole is projected to be 10% in real terms in year 4, taking account of estimates of UK inflation and the removal of BBCWS by that fourth year of SR10.

Within that the effective cut for the FCO itself by year 4 is also around 10%. The FCO will go from a core resource budget this FY of £981m to a core budget in 2014/15 of £1016m. On the projected level of inflation that equates to £925m at today's prices-a mathematical real terms cut of around 6%. But those figures give only part of the picture. Within them there is an amount of ring-fenced HMT money to fund the costs of the UK's International Organisations membership subscriptions and a cost sharing agreement for additional costs. When this formula, and the best forecast of costs in the final year, are taken into account the predicted core FCO cut is a shade under 10%.

The difference between the cut to core FCO budget and those of the British Council and the BBC World Service was a decision by the Foreign Secretary designed to ensure long term proportionality and fairness across the whole FCO family. It took account of the impact of different pressures faced by its members and their ability to mitigate them. In particular the Foreign Secretary took into account that:

- the British Council can, and increasingly does, earn income from commercial work to supplement their Grant-in-Aid; and the BBC World Service can also do so to a lesser extent. The FCO cannot;

- the FCO took a particularly hard hit over the loss of the Overseas Pricing Mechanism, harder than the British Council-which has a natural hedge in its commercial operations-and World Service, which spends mainly in the UK. That hit cost the FCO 10% of its purchasing power since 2008;

- the FCO leads the UK's global presence and network on which the British Council's work in particular, but also that of the World Service, depend;

- the core FCO is taking the brunt of the steep reduction in capital allocations compared to SR 07;

- further increased costs, which will fall particularly on the FCO over the corning years, will come from differential inflation, especially in emerging economies; and

- a decline in the costs we will recover from our Partners Across Government (PAGs) for providing support to them on our platform.

In addition, as I have made clear, the FCO core budget has in previous years declined as a proportion of the overall FCO family budget as a result of ringfencing of the BBCWS and British Council budgets.

I hope this letter provides answers to your outstanding questions. May I take this opportunity to wish you and Members of the FAC season's greetings.

13 December 2010