Select Committee on Environment, Transport and Regional Affairs Appendices to the Minutes of Evidence



  1.  The Driving Standards Agency was always thought of as an ideal candidate to become a Trading Fund due to the fact that it is 100 per cent demand led and entirely reliant upon the receipt of fees and charges from its customers for its income. The Agency's initial Framework Document on its creation in 1990 stated that the Agency will seek to achieve Trading Fund status as soon as practicable". This was achieved on 1 April 1997.

  2.  A Trading Fund is a unit of government that operates off-vote and whose finances are managed by reference to longer-term targets. The Government Trading Funds Act 1973, as amended, lays upon the Minister responsible for each Fund the objective of:

    —  managing the funded operations so that the revenue of the Fund is not less than sufficient, taking one year with another, to meet outgoings which are properly chargeable to revenue account; and

    —  achieving such further financial objectives as the Treasury may from time to time, by minute laid before the House of Commons, indicate as having been determined by the responsible Minister (with Treasury concurrence) to be desirable of achievement.

  3.  The initial additional financial objectives set by the Minister and Treasury were set out in a Treasury Minute dated 27 March 1997 and are as follows;

    —  to achieve an average annual return on capital employed (ROCE) on statutory activities of 6 per cent of net assets employed over the period 1 April 1997 to 31 March 2002; and

    —  to increase the weighted average of fees by no more than RPI in each of the three years during the period 1 April 1997 to 1 April 2000 and by no more than RPI minus 1 per cent in each of the following two years.

  4.  The ROCE target is a standard target for Trading Funds reflecting the long-term cost of money and the requirement for Trading Funds to pay interest and dividend payments of an equivalent amount to Treasury (via the Department). The principle being that where a 6 per cent ROCE is achieved then the Fund will be in equilibrium.

  5.  The second target relates to the efficiency of the Agency and requires the effective controlling of costs by limiting the amount of income that can be generated from fee increases. The Agency therefore has to reduce average unit costs by 2 per cent over the five-year period in order to achieve its profit target (ROCE). Where there is an agreed change in the service provided, such as a longer driving test, then the fees involved can be rebased accordingly.

  6.  The Agency is also limited by the amount of cash it can hold. Treasury have set this limit as being the amount of prepaid fees plus £3 million. This controls the amount of surplus funds that can be generated and held within the Fund without good cause. However, it does allow DSA to keep customers' fees relating to outstanding tests and services, which are variable upon waiting times and fee levels.

  7.  The Agency can generate funds for investment internally through control of working capital, surpluses on non-statutory activities and disposals of surplus assets. Any investment that cannot be funded internally would require additional loan funding from the Department.

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