Examination of Witnesses (Questions 1-19)
KITTY USSHER,
MR JEAN-CHRISTOPHE
GRAY, MR
DUNCAN SPARKES
AND MR
NICHOLAS JOICEY
5 JULY 2007
Q1 Chairman:
Minister, we take it particularly kindly that you have come to
see us, with all of three days in the job, and for bringing such
a lot of friends. Can I say for the record that this session is
broadcast and appears on the website but we do give you a transcript
of whatever was said afterwards. We sent you a list of questions
which indicate broad areas which we would like to discuss. We
wondered how you would like to do this: is there a general statement
that you would like to make as an opening bid or would you rather
we just started?
Kitty Ussher: It might be helpful if I just
set out some general points and then I am looking forward to the
more detailed questions and answers. Thank you very much, Baroness
Cohen. It is a great privilege for me to appear in front of your
esteemed Committee, a rather daunting prospect, I must say, so
early in my ministerial career because your Committee has such
a high reputation for its scrutiny and analysis of European budgets.
I am sure it is only a good thing for the Government that European
budgets should become my top priority on taking over this post
at the Treasury. I just want to say at the start that I know there
were some difficulties in scheduling this evidence session, for
which we can only apologise but, now that we are here, after the
reshuffle, there is some sense in the fact that you are scrutinising
me, as I will be the one negotiating on behalf of the Government.
I am delighted that we are able to be here today and thank you
for your flexibility in scheduling this session in a way that
works for us as well. I will be going to the ECOFIN Budget Council
at the end of next week so this is extremely timely. I am accompanied
today by some extremely able Treasury officials. On my right is
Jean-Christophe Gray, who is the team leader for the Treasury
EU Finances team; on my left is Duncan Sparkes, who is the Policy
Adviser with responsibility for EU financial management and the
annual budget; and on my far left is Nick Joicey, who is the Director
with overall responsibility for Europe. I will try not to bring
them in but where I have to, I hope you will permit me. I would
like to place the Commission's proposals for the 2008 EC budget
in a slightly wider context which includes the preparations we
are making for the mid-term review of the EC budget and the way
that it is financed and our efforts to improve the way in which
the EC budget is managed overall, because I know that will be
of interest to the Committee. Our overall objective for the EC
budget is to ensure that expenditure at EU level provides value
for money, is affordable, well-managed and that the budget is
fairly financed by the Member States. The Committee will be aware
that the annual negotiations on the EC budget are conducted in
the context of the agreement reached by the European Council at
the end of our presidency in December 2005 on the financial perspectives
for 2007-2013, which set ceilings for expenditure under six headings.
The annual budget negotiations, which is what is in front of us
today, are essentially about how to divide up between the various
expenditure programmes the resources agreed under those financial
perspective ceilings. The negotiations are not the occasion for
discussing major reform of the EC budget although I would be delighted
to take questions on that as well this morning. Unlike the financial
perspective negotiations, which are concluded by the Council,
the European Parliament has at least as much influence on the
annual budget as the Council. The basis for the annual negotiations
is the Commission's preliminary draft budget. The Government's
priorities for this year's annual budget negotiations are broadly
to ensure that the total payment appropriations are based on realistic
forecasts of capacity for absorption and implementation in order
to prevent the emergence of a large budget surplus with no question
as to how that should be spent; to ensure that the financial perspective
ceilings are respected, with adequate margins for foreseeable
and unforeseeable expenditure; and to bear down on areas of expenditure
which the Government regards as particularly questionable value
for money—and I am sure that we will return to that subject—but
notably agriculture and administration; and to protect certain
areas of external expenditure such as development cooperation
and the CFSP. Since the preliminary draft budget was published,
the UK has been working closely with like-minded Member States,
and I have to say that at this point I am cautiously optimistic
that the draft budget to be adopted by the Council that I shall
be attending on 13 July will represent an improvement, although
we never know in the final eventuality, as far as our own priorities
are concerned, on what was initially published by the Commission.
But, of course, the whole process then goes to the European Parliament
and it remains to be seen whether they will be as amenable to
our arguments when it comes back to us later on in the year. Just
a couple of words on the wider context, because I am sure members
of this Committee will want to discuss that as well. When the
European Council reached agreement in December 2005 on the financial
perspectives for the next period, 2007-13, it also invited the
Commission to undertake a comprehensive review of the EC budget,
both of expenditure, including the CAP, and of resources, including
the UK's abatement, and to report in 2008-09. The Commission has
indicated that it will begin a review later this year by launching
a consultation with all interested stakeholders. You will be well
aware of the position of the UK Government on this, with 40% of
the total EC budget still being spent on the CAP, and more than
60% of structural and cohesion funding expenditure still being
directed to rich Member States. The Government will argue that
this is hardly a budget designed to meet the challenges that the
EU faces in the 21st century. We have set out three principles
which will guide our approach to the budget review and we may
well want to return to this in the discussion that we have. The
third of these principles is that relating to sound financial
management and administration. I just wanted to say in conclusion
that I know this Committee published an important and highly regarded
report on this subject at the end of last year and I am grateful
for that. As your report made clear, a particular priority is
to improve the management of the 80% of the EC budget for which
the Commission and Member States share responsibility, notably
agriculture and structural funds. That is why the Government announced
last November that the UK could take a lead in showing how Member
States could improve their own management of EC spending at a
national level. Our initiative, supported by your proposals, has
been widely welcomed and similar initiatives are now being developed
in a number of other Member States, and I will continue to make
the case for such reform when I meet for the first time my ECOFIN
colleagues at the end of next week. I am grateful to you for allowing
me to put some initial remarks of context and I look forward to
our discussions.
Q2 Lord Inglewood: Thank you very
much for that helpful overview. If I might I shall start by asking
a number of separate but connected questions to do with the general
approach that you are adopting towards the review of the European
Union's budget that is coming up next year. You have indicated
some priorities but you did not really indicate a great deal about
level. Are you approaching it on the basis that the appropriate
thing is for the amount of the EU budget to be up against the
limit, or are you in fact of the view that it would be better
and in Europe's and Britain's best interests for us to have a
budget that is below the maximum that is permitted? Secondly—you
touched on it—how in general terms are you going to deploy
your resources and forces in advance of these negotiations to
try and drive forward the things we think are important? Clearly,
others will have a different view. Finally, if I can declare an
interest as a farmer myself, in thinking about the future of the
CAP, and in particular the European component of the expenditure
involved in it, how do you feel about the new Sarkozy regime in
France? Is that going to make it easier for you or do you perhaps
think it might make it a little bit trickier?
Kitty Ussher: On the first point, on what we
are trying to achieve from the comprehensive review and whether
we want to keep the same ceilings, it is probably worth saying
that this really is a very comprehensive review and consultations
on it have only just begun. The informal presumption is that it
will inform the discussions for the next financial perspective,
ie, beginning after 2013, so in a sense, the ceilings of the current
one are irrelevant because that is always negotiated from first
principles but, of course, it goes without saying that we believe
some fundamental aspects of the EC budget do not represent value
for money. We have had that view for some time on the Common Agricultural
Policy, where we want fundamental reform, and we also believe
it is not good value for money for such a high proportion of the
structural and cohesion funds to be going to rich Member States.
We do not think that is the point of that type of programme. It
therefore goes without saying that we would want to argue for
a bottom-up approach. Does that answer your question?
Q3 Lord Inglewood: Can I just ask
for an elaboration on that? If you take it, as you do, that there
is no value for money in much of the CAP expenditure and quite
a lot of the structural fund expenditure is being deployed probably
in the wrong places, you can either proceed by saying that money
should in future be spent in the European budget in different
ways or you can say it is much better not to have this money spent
in the European budget at all. Do you have a position on that
alternative?
Kitty Ussher: We do not have a position in terms
of what the overall ceiling of the budget should be for the next
financial perspective, which I am sure will be informed by this
review that we are currently undertaking. What we have done is
set out some principles, and we have started a process within
the UK of analysing the kind of "fit for purposeness"
of all EU spending. It may well be that that will lead to a conclusion
that will have some very significant implications for our negotiating
stance in the fundamental review but we do not at this stage have
a view on the outcome in terms of absolute levels. Would it help
if I set out the general principles that we have established?
It probably comes to answering your second question, which is
what are we going to do in moving for that. My predecessor, at
the end of last year, November 2006, set out our principles, which
is that the EU should only act where there are clear additional
benefits from collective efforts, compared with action solely
by individual Member States, and this has informed our view on
the CAP, where we are perfectly happy for payments to be made
to agricultural farmers but that does not necessarily mean that
they have to be paid through the EC budget, which may partly answer
your question. The second point is that where EU-level action
is appropriate, it should be proportionate, flexible and use the
most appropriate policy lever, which may or may not be spending.
Thirdly, of course, we must have sound financial management. On
the basis of these principles, we are developing a UK vision for
expenditure and future financing. That is a process of ongoing
work and it is involving a cross-Whitehall effort. We have already
begun some informal conversations with our EU partners, Member
States and the Commission, obviously, but the Commission itself
has not yet published its draft proposal so we are in that sense
at an early stage in all this. There was a third point?
Q4 Lord Inglewood: The way in which
the election of President Sarkozy will make it easier for you
to reform the CAP.
Kitty Ussher: I think we are at rather early
days. The French position has been clearly stated in many different
ways. However, the fundamental point is that I am a member of
the British Government, representing British interests, and we
feel it is always worth a try. Perhaps there are some pressures
out there that will work to our advantage but I do not think I
would be doing my job if I thought "Oh, the French are adopting
their usual negotiating stance and therefore I'm not going to
try and represent the best for our people".
Q5 Lord Inglewood: Are you confident
that you can be successful, at least in part?
Kitty Ussher: I think it is probably too early
to say but I am ever optimistic.
Q6 Lord Marlesford: Minister, could
I ask you a supplementary on this question of structural funds,
because it is so important? You may remember, although you were
not in the Treasury at the time, but in the days of the Prodi
Commission there was a jolly good report produced by Professor
Sapir, and that report came to the broad conclusion that there
should be a major switch of resources in the structural funds
from rich countries to the new entrants. It was very sensible
but it was sat on by the Commission, and it never saw the light
of day, effectively. Do you think there is some merit and indeed
some chance of reviving the Sapir report and getting the present
Commission, perhaps via ECOFIN, to reconsider its conclusions?
Kitty Ussher: I am not an expert in the individual
specifics of that report but from what you have just said it seems
to fit rather closely to the UK position. You will recall, of
course, the domestic document the British Government produced,
I think round about 2003, when we were entering discussions on
the current financial perspective, which argued very much that
structural and cohesion funds should be prioritised extensively
on the new countries and there were quite difficult political
discussions that took place within the UK about what that meant
for the regions of Britain that were currently receiving EU structural
and cohesion funding and a debate about how we should finance
that through the regional development agencies and so on. We fought
hard, and we made some progress, but we lost that debate in Europe,
but it remains our view. So I guess the answer is yes, subject
to the detail of that report, that is exactly the type of argument
that we will be pushing when the proper debate on the fundamental
review takes place.
Q7 Lord Watson of Richmond: I was
very interested in what you said in your opening remarks about
the importance of realistic forecasts and not actually arriving
at situations of unforeseen surpluses. Of course, there are a
number of reasons for that and it is an admirable intention. As
we know from companies and local government and everything else,
there is a tendency that, if you have unforeseen surpluses, you
urgently wish to spend them before the deadline expires and you
rush them into other projects. We have questions for you later
on about Galileo and about the European Institute of Technology,
for example, both of which would be candidates for unforeseen
surpluses, I suspect. My question really is, at this stage—and
I know it is early in the procedure—do you have a feeling
about the degree to which the forecasts that you have been looking
at are actually realistic?
Kitty Ussher: We feel that some of them are
over-generous based on the experience that we have seen in recent
years of the ability for the Commission and Member States to spend,
so we are anxious that they should be borne down on for precisely
the reasons you state.
Q8 Lord Watson of Richmond: Can you
indicate which are the main ones?
Kitty Ussher: Yes. Aspects of structural and
cohesion funding, definitely. We are also concerned about agriculture,
as we always are, and elements in the administration lines we
think are inflated unnecessarily as well. Specifically on the
points that you mention, we are concerned that there will be pressure
for spending on projects that were unforeseen at the time that
the financial perspective was agreed in heading 1a, around pressure
to spend on Galileo and the European Institute of Technology,
and therefore it would be prudent to perhaps bear down on—
Q9 Lord Watson of Richmond: Which
may be very worthy but that is not the point. The point is that
it should have been foreseen.
Kitty Ussher: Indeed. So "yes", I
think, is the answer to your question, Lord Watson.
Q10 Lord Jordan: Minister, from the
remarks you have already made, it is clear that the Government
is keen to improve the management of the budget expenditure. We
know that many of the biggest anti-European propaganda pieces
are about waste and fraud. This Committee in particular has reason
to know that they are generally over-stated but they do exist
and there is the potential for them to exist. What steps is the
Government taking to ensure that the Commission obtains value
for money on both the projects it funds and on its own internal
administration? Further, are you content with the controls in
place for monitoring spending and administration within the external
agencies? Finally, what response has the Government received to
your predecessor's announcement last November regarding Member
States producing a statement of assurance, which, again, this
Committee thought was a step in the right direction?
Kitty Ussher: I have been extremely interested
to read the work that this Committee has done on fraud. That has
been a very useful contribution to the debate. But it is no secret
that our view is that there are some quite serious questions remaining
about the extent to which the EC budget represents value for money,
both in terms of the programme spend but also in terms of simply
the way that the budget is managed and the adequacy of mechanisms
to ensure spending achieves the desired results. We do think some
progress has been made, often at our instigation—we are
near the forefront of this—to improve the way the budget
is programmed but we think much more needs to be done. There are
several separate ways of dealing with this. In terms of project
outcomes, obviously we do not think that there is sufficient value
for money on the big areas that I have already mentioned in terms
of the Common Agricultural Policy, and the structural and cohesion
funds. That is a value for money question. We think that such
projects, in so far as they should happen at all, should be financed
differently. Those are questions that we address through the fundamental
reform of the EC budget, not in the annual budget process. We
also think—this probably answers your final point—that
the countries' administration, the national governments' administration
of EU financial flows is not as good as it could be, which is
why we have led the way here by asking countries to go through
a mechanism that provides a statement of assurance as to how they
do. I know that a number of other Member States have followed
our example in this area—Netherlands, Denmark, Sweden—so
I am proud that we are able to be leading the way in this area,
which will lead to better efficiency in terms of financial management.
There is the issue of fraud, which I will come back to in a minute,
but there is also a general point, I think, about the efficiency
of spending on public finances by the EU Commission. We all know
that within the UK we have gone through some quite difficult budget
rounds, we have had the Gershon efficiency review and that type
of thing, and we are bearing down on core expenditure in order
to get higher productivity, more bangs for each buck, and what
we are not convinced of is that the European Commission is, to
a sufficient extent, adopting the same process. What we are seeing
is staffing levels rising without a corresponding rise in output,
which we think leads to lower productivity and therefore is less
efficient and less value for money. We think that, just as private
sector companies should continually strive to raise productivity
and achieve greater output for input, so the public sector should
as well, and that we are not convinced the European Commission
is doing that. That is another rationale, to answer Lord Watson's
point, for why we need to keep bearing down in negotiations on
individual budget lines. On fraud specifically, we have consistently
championed improving the management of the EC budget, not least
because we are one of the major contributors to it. This is not
just a general point about how to run an organisation; it is because
this is British taxpayers' money that is being spent. We think
it is unacceptable that the European Court of Auditors is unable
to give a positive statement of assurance on the EC budget year
after year. Our taxpayers deserve better. That is what led to
the initiative that we discussed last year. Other steps are being
taken to improve EU financial management. For example, the Commission
has introduced accruals accounting and activity-based budgeting
where it is much easier to see the relationship between the budget
line and the actual output that taxpayers expect from that in
terms of actual outputs on the ground. It leads to a more targeted
approach, similar to PSA targets that were introduced a few years
ago here, where individual government departments are given financial
allocations and are expected to deliver a certain thing. What
we are trying to do is to do that in the EU around activity-based
budgeting as well. There is an action plan to establish a better
internal control framework but we think that far more needs to
be done and we will be arguing that in the annual process and
we will be arguing it in the fundamental review as well.
Q11 Lord Inglewood: Could I just
follow that point up? The countries you refer to are the countries
that, in very general terms, from a traditional British perspective,
one might have most confidence in their accounts and their accounting
arrangements. They are not the problem. The problem is a number
of other Member States where there is much less confidence. How
do you deal with the difficulties of scrutinising expenditure
in some of the countries that are less willing themselves to present
material? We end up in the difficulty that, before you know where
you are, we will be advocating proposals which will really involve
European scrutiny of Member States' accounts, which will clearly
have significant political and sovereignty implications, because
it does seem there is a problem here.
Kitty Ussher: I think the point about sovereignty
is the crucial point. All Member States are sovereign national
governments and we cannot tell them, instruct them or direct them
what to do, even if we are concerned about the way that they manage
their internal finances and the way they manage EU programmes.
The benefit, in my mind, of the EU is that it provides some mechanism
to put pressure on, so we have the opportunity to name and shame,
to build coalitions, to force people into a corner, and that is
what we try and do. It is not a legislative approach; it is a
peer pressure approach, and I think Britain is doing exactly the
right thing. It is finding a way itself to organise its own method
of implementing the EC budget effectively, building coalitions
with, yes, like-minded, "usual suspect" people, but
that will shift the balance of the debate, working through the
Commission, so that eventually other countries will feel that
there are pressures on them to do the same, which must be much
better than not doing anything at all.
Q12 Lord Inglewood: As long as it
works.
Kitty Ussher: We want it to work. If you can
think of a better way, I would be delighted to hear it.
Q13 Chairman: Minister, can I ask
a supplementary about the agencies? Are you content with the controls
in place for monitoring spending and administration within the
external agencies? This is an issue much discussed last Thursday,
when I went as the head of a budget scrutiny committee to talk
to my equivalent from other Member States and to MEPs at a meeting
chaired, of course, by the European Parliament. This was something
that everybody was worrying about.
Kitty Ussher: That is an extremely good question.
I am sorry, Lord Jordan; you mentioned it as well but it slipped
my mind. No, we are not content, basically. We are not content
with the increases laid out in the preliminary draft budget under
headings 1a, 3a and 3b, which show huge increases—24%, 9.5%,
and 23% respectively. We do not think that it is justified, for
all the reasons I have just laid out in terms of value for money
and the efficient spending of taxpayers' money. That is not to
say we do not agree with what these agencies are trying to do;
we just want them to do it in the most effective way. The rationale
behind the agencies is that they should be able to implement Community
programmes more effectively and more efficiently, their staff
should become more expert, and we need to be raising the productivity
of the work that is being done there without, to be blunt, just
chucking money at it. This has been a priority of our initial
negotiations over the last few weeks. The result ought to be efficiency
savings and economies of scale but we have not seen any evidence
of this in the preliminary draft budget in headings 1 and 3. We
think the budgets are growing at a worrying rate without clear
justification, and so we oppose it. It is very interesting to
hear the feedback—
Chairman: I think you might have some support,
we might have some support for that in Europe.
Q14 Lord Watson of Richmond: If I
may, I want to just follow up very quickly something that Lord
Inglewood asked, because he raised this absolutely essential issue
and, let us face it, difficulty, that the sovereignty principle
means that Member States are free, in effect, to administer the
funds themselves and you said we have a name and shame regime.
Actually, we have to some extent a name, shame and pain regime
because the Greek government, for example, has been fined on several
occasions. I am just interested in your basic approach to this,
because clearly, you face the same dilemma. You wish to protect
and preserve the sovereignty principle; on the other hand, it
is absolutely against the interests of the British taxpayer that
Community funding should be misused within individual Member States.
How do you reconcile those two things?
Kitty Ussher: It is a crucial point. Obviously,
fraud faces legal sanctions as well. You mentioned the financial
sanctions we can use. It also has to be said—and I am not
in any way suggesting that there are not serious problems but
I do think that there is some tendency perhaps in some quarters
of this country to imply that every single euro is somehow ending
up fraudulently in someone's back pocket. Members of this Committee
know that not to be true because of the report that you did last
year. That is not to say there are not serious concerns about
the effectiveness of spending in terms of the efficiency and productivity
issues that I mentioned.
Q15 Lord Watson of Richmond: And
accuracy, with respect. It follows that the fine was initiated
by the Commission. The question is whether more can be done via
the Council of Ministers and at Council and intergovernmental
level because, at the end of the day, particularly with the enlargement
of the Community, it is in everybody's interests that Member States
administer these funds accurately and as pre-agreed.
Kitty Ussher: There are procedures in place.
The European Court of Auditors has to sign off the report, therefore
we at least have a mechanism for knowing that things are not as
good as they could be because they are unable to. It is our job
as members of the European Council to continue to make the point
that that is completely unacceptable.
Q16 Lord Watson of Richmond: And
to energise that mechanism.
Kitty Ussher: Absolutely. I am personally very
concerned about the fact that this seems to be happening year
after year. Often within Whitehall, if accounts are qualified
or not signed off, there tends to be a crisis and the problem
is fixed, whereas in Europe we have not seen the movement, although
there may be individual improvements, and that is unacceptable.
Q17 Lord Watson of Richmond: I am
encouraged to hear that.
Kitty Ussher: There is the European Anti Fraud
Office, which is able to quantify the extent to which this is
real fraud or just slight timing irregularities. I think that
you have perhaps answered the question yourself in terms of energising
it, and that is certainly a point we have to push.
Chairman: I am rather unsportingly going to
take the questions out of order. We need to ask the key, general
questions about the budget and then proceed rapidly to scrutiny
and I hope, given the amount of time you have allowed for this
meeting, we will then be able to sweep up the ones of general
but not absolutely critical interest.
Q18 Lord Cobbold: You mentioned the
Galileo project briefly. We would very much like to know what
the Government's attitude towards this project is, what the difficulties
are and whether you are going to do public-private partnership
and what you feel about the whole project.
Kitty Ussher: We are very supportive of the
Galileo project, which I think has very useful benefits for the
EU and is the type of thing that we should be co-operating on.
We supported the PPP approach in principle. That support remains.
It is a fact that the Commission's negotiations with the various
private sector potential providers have broken down. A decision
will be taken by qualified majority voting and it is clear that
many Member States support the Commission's proposal to abandon
the original PPP negotiations, which do appear to have reached
a dead end, and to deliver the project by classic direct public
procurement. Our immediate concern—and I understand that
the Chancellor will be discussing this at the routine ECOFIN on
Tuesday—is that there should be no implications for the
already agreed financial perspective ceilings as a result of the
breakdown of the negotiations in the PPP financing.
Q19 Lord Cobbold: Why did the negotiations
break down, do you think?
Kitty Ussher: I have not been involved directly,
obviously.
Mr Sparkes: I think there were several reasons
why the PPP negotiations broke down. One of the key ones is that
the companies that the Commission was negotiating with formed
a single cartel and it was very difficult in those circumstances
to get competitive offers. There was a great deal of involvement
by Member States at a political level to try and secure benefits
for their own particular countries, and the way the PPP was structured
was simply not optimal. So I think the reason the PPP has broken
down is not so much a criticism of PPP as a concept, which we
regard as a good one for major infrastructure projects of this
sort, but of the way in which it was managed.
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