House of COMMONS
MINUTES OF EVIDENCE
THE COMMITTEE OF PUBLIC ACCOUNTS
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Taken before the Committee of Public Accounts
Mr Edward Leigh, in the Chair
Mr Richard Bacon
Mr David Curry
Mr Ian Davidson
Mr Alan Williams
Mr Amyas Morse, Comptroller and Auditor General, and Mr Mike Suffield, Director, National Audit Office, gave evidence.
Mr Marius Gallaher, Alternate Treasury Officer of Accounts, HM Treasury, gave evidence.
REPORT BY THE COMPTROLLER AND AUDITOR GENERAL
Financial Management in the Foreign and Commonwealth Office
Witnesses: Sir Peter Ricketts KCMG, Permanent Under Secretary, Mr Keith Luck, Director General of Finance, and Mr Tim Gardner, Finance Director, Foreign and Commonwealth Office, gave evidence.
Q1 Chairman: Good afternoon and welcome to the Committee of Public Accounts. Today we are considering the Comptroller and Auditor General's Report, Financial Management in the Foreign and Commonwealth Office and we welcome Sir Peter Ricketts and his colleagues. Would you like to introduce your two colleagues, Sir Peter?
Sir Peter Ricketts: Thank you, Chairman. Keith Luck is our Director General of Finance and Tim Gardner is our Finance Director; two qualified accountants.
Q2 Chairman: Thank you. The Report
highlights weaknesses in the Department's financial management track record but
recognises the considerable work that the Department has done to improve the
accuracy, reliability and timeliness of financial information as well as to
align financial and operational reporting.
I would like to welcome, by the way, the Kenyan delegation visiting us
today as part of their work with the Crown agents, so all our friends from
Sir Peter Ricketts: It really has made a difference, Chairman, not just because I speak in both their presences but it has helped us to drive up financial skills and a sense of the importance of the numbers in the Department. You are right, we were not as good as we should have been, people did not have confidence in the numbers that came to us and therefore we had a consistent record of under-spending. As confidence has grown in our numbers we have been able to make our money work harder, drive the under-spend down, more actively manage our budgets and also ensure that we have better quality accounts at the end of the year. We have been able to lay our accounts before Parliament more rapidly than most other government departments, and in good shape I think, and that is also part of a stronger financial culture that these gentlemen have brought to the Department.
Q3 Chairman: Do you want to comment at all on your experience coming into the Department?
Mr Luck: Just to add to that, Chairman, Sir Peter is perhaps being modest because of course as you implied the mere fact of appointing a qualified finance director or director general in my case shows how committed Peter is to getting the numbers right and, indeed, right across the board finances are taken very seriously. I have to say there is plenty of support from our non-executive director colleagues on the board as well here.
Q4 Chairman: How are you going to maintain the momentum now, Sir Peter? You have got this Five Star Finance project; it ends next July so presumably you have got plans to keep things going and get better.
Sir Peter Ricketts: Absolutely, we have. We have first of all got to get to the end of this project and get it absolutely complete, and we are well on the way to doing that, but then what I would really like is for it to become not a special project that we have to work away on but the way the department runs normally, that there should be a culture of high quality numbers where people get the data right, where they follow all the appropriate procedures and we can manage with reliable performance data without having to put in quite the resources we have had to to get to this point.
Q5 Chairman: Are you confident that you know how to accurately cost all your projects so that you can make good cost reduction decisions?
Sir Peter Ricketts: We have certainly got better at that and we have had to put that into practice in the course of this year in cost reductions, as I hope we can go on to talk about. We have now got costed activity recording which means we know what our people cost wherever they are abroad, we know what our embassies cost and we can follow more closely where there is good value for money, so where we have to come to find cost savings we know where to go, where there is high cost but perhaps less priority. It is increasingly becoming part of how we manage, yes.
Q6 Chairman: One of the FCO's objectives is "To provide a flexible global network for the whole of the British Government." Big words, but how is all this going to make a difference in that?
Sir Peter Ricketts: The point there really is that we want other departments to see our embassies around the world as representing them as well and as being the places where they put their people if they want to operate abroad, so that rather than setting up their own shop somewhere else in the city they come to the embassy and they use the embassy platform. For that we have got to offer them a good, secure, effective place to work from and make it as cheap as possible, and what we hear from departments is that they like coming and working in embassies but they find us expensive by the time there have been the security costs and other things. By getting better data, by seeing where the costs are, we can look to drive them down and we are trying to do that by cutting the back office and reducing the management costs so that the cost of departments sending people to our embassies gets less.
Q7 Chairman: How are you going to manage the movement in exchange rates that you are affected by in terms of a threat to your resources?
Sir Peter Ricketts: It has been a really difficult problem, Chairman. The way that it was done previously was that the Treasury provided us a mechanism so that if sterling was stronger we gave money back, if sterling was weaker they gave us money. That was withdrawn, as the NAO Report says, in the CSR in 2007. In the year after that we saw sterling fall by around about 20% against most of the major currencies and it has been very volatile since then. We put in place arrangements to do forward purchasing of currencies and we have extended that out prudently because we wanted to be absolutely sure that we were not open to any criticism for speculation. It covers dollar, euro and yen which are the three biggest currencies, but not all the other 120 currencies that we operate in around the world, and forward purchasing can smooth out currency fluctuations but it cannot help you if sterling drops 20% because then the forward purchasing you do over time will be 20% down as well. We are, therefore, having to absorb a very large shortfall in our budget which has meant, both last year and now this year, working really hard to find efficiency savings and, frankly, cuts to live with a lower purchasing power of sterling. We are managing that but I will not hide from you that it has been pretty difficult.
Q8 Chairman: The NAO are preparing a report on the management of your overseas estate and that will come to this Committee, Sir Peter, in the New Year or the early Spring, so you have got this new systematic approach that you developed for financial management. How are you going to spread it around the rest of your business, for instance how you manage your estate?
Sir Peter Ricketts: We have been managing this very large global estate for many years. We can do it better and we have recently taken on a qualified estates professional as our director of estates to bring qualified expertise to this. We have both got to maintain a programme of building new embassies in places where security is really difficult and current embassies are not secure and also keep up to date and maintain a very large spread of embassy and residence buildings around the world on a limited budget. Getting a professional in to help us do that and also to help drive asset sales, to yield some more capital to invest in our estate - that is his remit. We are managing competently at the moment but we could do better with professional help.
Q9 Chairman: You are not going to sell off cheaply residences that do so much for our image just to meet some Treasury demand?
Sir Peter Ricketts: No, Chairman.
Q10 Chairman: Often residences were bought very cheaply after the war or even donated to us and they serve this country very well. There are no plans to do that.
Sir Peter Ricketts: There are no plans to do that.
Where we sell is where we have got properties that we no longer need or
just very occasionally if there is something which is extremely high value but
low on our priority list, but mainly it is where we no longer need
properties. I do not plan to sell
wonderful historic residences that do so much for the
Q11 Chairman: That is very good news. We are not penny-pinchers in this Committee we hope.
Sir Peter Ricketts: Very good.
Q12 Chairman: Treasury, talking of that, can I ask you a question: how are you
going to spread this excellent good practice that we have been hearing about so
far around the rest of
Mr Gallaher: Within the Treasury there is a Financial Management Reporting Group
which disseminates guidance and best practice across all
Chairman: Thank you. David Curry.
Q13 Mr Curry: Especially those buildings bought after the Napoleonic War, if I can say so.
Sir Peter Ricketts: Indeed, Mr Curry; they were particularly good value at that time.
Q14 Mr Curry: Tell me a bit more about your foreign exchange activities. How much do you buy forward in each currency and how far forward do you buy them? Of course, if you buy forward you are by definition taking a view on the performance of sterling. How do you do that without people saying the Foreign Office thinks sterling is going to fall - quite a good bet over the last few years. Mr Luck, tell me about the mechanism, what volume do you buy and how far forward do you buy? Have you got a mechanism to hedge those purchases?
Mr Luck: Actually, Mr Curry, it is really forward purchase, it is as simple as that. It is a simple outright purchase in so many months time. We now extend out for a full 12 months and, based on our latest cash flow, we will put in place one-twelfth every month until if one moves forward a year you would then have twelve small rates stacked up when those contracts mature. As Sir Peter has said, that smoothes out the effect.
Q15 Mr Curry: In a sense you are doing a yearly contract each month.
Mr Luck: Exactly.
Sir Peter Ricketts: We are doing a rolling programme. We absolutely do not want anyone to be able to say we are speculating or we are taking a view on the future of sterling, so every month we buy forward 12 months. What we are interested in is budget surpluses.
Q16 Mr Curry: One understands why you do it, because of the position you are in, but is there a penalty in doing that? There is bound to be, is there not?
Sir Peter Ricketts: There is a fee, there is a cost of doing it and it gives you budget certainty for the following year because you know what you will get in foreign currency a year hence, but it does not protect you from falls in the value of sterling because that comes through in a delayed way.
Q17 Mr Curry: It is only three currencies, dollar, yen and euro you say.
Sir Peter Ricketts: Yes, our three biggest effectively.
Mr Luck: You asked about volumes.
Curry: In a country like
Sir Peter Ricketts: We are exposed to the currency risk there, or in a country like
Q19 Mr Curry: You have told me how far forward; what sort of volumes are we talking about?
Mr Luck: In US dollars now it is £500 million for the current financial year and for yen it is £7 million. The yen is our third largest currency, so once you get beyond the yen you are into another 120 currencies which are relatively small.
Q20 Mr Curry: Presumably the Ministry of Defence is in the same position as you. It has to have contracts for providing kit overseas and contributing to projects overseas.
Sir Peter Ricketts: The MOD have done a forward purchase of dollars for many years but no other currency.
Q21 Mr Curry: But they do it separately; there is not a sort of joint purchasing authority.
Sir Peter Ricketts: They do do it separately. We have set up our own arrangements because we are covering a larger spread of currencies but over time I would see lots of value in other departments clubbing together with us to do it together because DFID, the other major international department, I do not think do any forward purchasing, so there is scope actually for better inter-departmental working.
Q22 Mr Curry: Correct me if I am wrong factually on this question, please, but am I right in thinking that staff working overseas, for example in Washington, are paid in sterling and get the current rate for their salaries?
Sir Peter Ricketts: Yes.
Curry: Somebody who was, say, sent to
Sir Peter Ricketts: No, because there is a compensating factor which is the allowances that people get to ensure that it is adjusted.
Q24 Mr Curry: We have heard that before if I may say so. I am refreshed to know that we are not the only ones ...
Sir Peter Ricketts: We have a very vigorous system for ensuring that allowances are paid with full propriety and regularity but there are overseas allowances which are adjusting for the cost of living in the country, so if sterling is very strong and the dollar is very weak then your overseas allowance is less. If sterling is extremely weak and the dollar is very strong then overseas allowances are greater, so there is that compensating mechanism.
Q25 Mr Curry: People who are doing the same job would broadly speaking find themselves in the same financial position irrespective of what the exchange rate happened to be doing at that time.
Sir Peter Ricketts: That is the idea; it should be neutral as far as they are concerned.
Q26 Mr Curry: Again, correct me if I am wrong factually, does not the Foreign Office have a tremendous hierarchy of accommodation in the sense that if you have a certain status you get accommodation with three bedrooms as it were and if you are a bit lower you get two and a half bedrooms and a new sofa. You get a dining room table made of beech if you are a certain level. Just explain it, if you go to an overseas post you find that according to the ranking of staff that gives an entitlement to a certain quality of accommodation. Is that false or is that correct?
Sir Peter Ricketts: It used to be more true than it is now; we have got more egalitarian recently. What tends to affect space is the size of your family so you can have a more junior officer with four children so they will get a larger place and a single but more senior person might be in a small flat.
Q27 Mr Curry: On the whole you buy your real estate, do you not, or do you rent?
Sir Peter Ricketts: We have a mix.
Q28 Mr Curry: What is the proportion in let us say the major capitals?
Sir Peter Ricketts: It varies a lot actually. In some it is almost entirely owned and in others it is largely rented, but we need a degree of renting because we have got to have some flexibility. Again, if you have a single person replaced by somebody with five children you need to have different sizes of place.
Q29 Mr Curry: Are you continuing to buy accommodation or have you moved now to a system where you would normally expect to rent?
Sir Peter Ricketts: We are not buying much now, partly because it is very inflexible. Once you have bought a house you have to put somebody into the house whatever size of family they have got.
Curry: Let us take the
Sir Peter Ricketts: Indeed, if we had the money.
Q31 Mr Curry: Were you not tempted at that stage to say looking ahead, this is a good opportunity to perhaps settle our costs for the future?
Sir Peter Ricketts: You are absolutely right, these are the sorts of things we need to
work with. I am hoping that Alan Croney,
our new Estates Director, will help us with that. It is a bit moot at the moment because we are
very, very short of money to buy anything; all the capital we have got is going
into these security builds that we are needing to do in places like
Q32 Mr Curry: Even on normal accommodation there is a quite heavy security bill but I suspect you probably cannot just hire local contractors to do things because of the security concerns.
Sir Peter Ricketts: That is a concern in embassy buildings; on residential
accommodation we can use local contractors but what we do do though is make
sure they come up to UK health and safety standards. In many countries in the world if you hire
something the electricity is not up to our standards and so we have to go in
and do work on that. That is another
cost of renting, unless you rent for a long time. Where we are working in embassies we need to
be careful to use
Q33 Mr Curry: In terms of your consular network, does the same apply there?
Sir Peter Ricketts: Yes, absolutely the same, there is no distinction, we are all part of the same organisation.
Mr Curry: If I have time later I will come back if that is all right.
Bacon: Sir Peter, we have travelled a bit
with this Committee and I with another committee have been to various embassies
Sir Peter Ricketts: I did.
Q35 Mr Bacon: Did you take a conscious decision to look for a manager with a financial management background who was qualified?
Sir Peter Ricketts: Absolutely I did, yes, but also following the advice of this Committee and other committees that we should make sure that we had qualified finance people.
Bacon: It is marvellous to know that someone
is listening because I have been banging on about this for years. There was a time when 23% of principal
finance officers only had a financial qualification and I gather from the
Treasury the figure is now well over 90%.
I would like to pursue with the Treasury if I could a bit further the
questions that the Chairman asked about how you are spreading this around
Mr Gallaher: The Financial Reporting and Management Group in the Treasury holds regular seminars with financial directors and with the departments every quarter, every six months and we will take the message back from this particular hearing and point out the example of the Foreign Office. Certainly we will get the message across to other departments that there is something worth looking at here.
Sir Peter Ricketts: Mr Bacon, there is also quite a strong finance directors network
Q37 Mr Bacon: You all meet up, do you, Mr Luck?
Mr Luck: Indeed, and I sit on the Finance Leadership Group - the chair is John Thompson the head of Finance Profession.
Q38 Mr Bacon: He started at Norfolk County Council so it is no wonder he is doing so well.
Mr Luck: He did indeed. Perhaps I should point out that as part of our Five Star Finance programme we are keen to act as a beacon and share good practice, and one of the things that my colleague Tim Gardner has done is set up a business improvement group where he brings together people from across Whitehall who are interested in working on a real tangible issue - they decide whatever it is each meeting - and share good practice.
Q39 Mr Bacon: I would like to ask a question about how you cost things because for an organisation - shall we say one of the defence procurement bodies - it is relatively easy to say this is how much hardware we got and this is was the associated software, the people that went with getting it, and the total cost was therefore X plus Y equals Z. The Foreign and Commonwealth Office is a rather sophisticated professional services organisation and it is not nearly as easy to pin down where the costs are. If you are, say, a middle-ranking diplomat in Washington working on trade issues or something you are going to be spending part of your time on steel tariffs, part of it on bras presumably (or whatever it is) and part of it on general bilateral trade with the UK. How do you begin to come out with a figure that gives you a sense of what it is costing your department to do X or to do Y, because unless you can do that in the climate that we are entering how are you going to come up with informed choices as to where you rationalise? You might just come up with easy choices which may not be the best choices.
Sir Peter Ricketts: You are absolutely right and we have also got to have a system that is not so time-consuming to fill in that people will not do it. If you ask people to fill in a system saying what they are doing every half an hour, like a solicitor would, you will not get diplomats to do that.
Q40 Mr Bacon: Every six minutes is my experience with lawyers.
Sir Peter Ricketts: It has to be a light touch system. What we have been trying to do first of all is have an accurate idea of what it costs us to maintain each individual embassy, which is already quite complicated because we have contributions from other departments, we get revenue for our consular services, there is an awful lot of moving parts. We have now got a pretty accurate idea of what it costs for each embassy.
Q41 Mr Bacon: Is that a public figure?
Sir Peter Ricketts: Yes, I think it is.
Q42 Mr Bacon: Could you send us a chart? What would be interesting would be to see it ranked by cost with the most expensive one at the top, which one would expect to be one of the big countries where you have got the biggest staffs, and then also if you could rank it by cost per member of staff in that embassy.
Sir Peter Ricketts: We do have that data now and I believe some of it at least has come out in PMQs but we can certainly let the Committee have that. We can now calculate cost per member of embassy and then you have to apply judgment on top of that as to whether the work that they are doing in that place really is high priority as against somewhere else. There is a certain amount of data, therefore, which you then have to apply judgment to.
Q43 Mr Bacon: You have got a senior accountant from KPMG, Alistair Johnston, on your board as a non-executive, which I am very interested in, because when you look around in Whitehall most departments now go through the motions of having non-executives but looking at their backgrounds sometimes one wonders what it is that they are bringing to the department they are joining. Having somebody like the vice-chairman of KPMG as a non-executive sounds like quite a good move.
Sir Peter Ricketts: Yes.
Bacon: This may be one for the Treasury or the
National Audit Office might like to comment as well, but what else is happening
Mr Gallaher: We will certainly look into it and see what we can find out in terms of information on non-executives and forward that to the Committee.
Q45 Mr Bacon: That would be very helpful. Have you found that Mr Johnson's presence has made a big difference?
Sir Peter Ricketts: Yes, absolutely essential. He also chairs our Audit and Risk Committee and so he is challenging and holding to account the whole finance side of the organisation, and I can say without disclosing secrets that he does that pretty robustly. He has helped, with Keith and Tim, to raise standards, to challenge, to demand accuracy, not to be satisfied with inadequate data and he has brought a rigour to it that has been really important. The challenge that these people can bring with their outside experience is very helpful, not just in the Audit and Risk Committee but in the board as a whole.
Mr Morse: Although I cannot quote the information we have pretty good
information on non-executives across
Q46 Mr Bacon: Some years ago we took evidence on the resource accounts of the FCO and the instant cause was the fraud in the Tel Aviv Embassy that had been dragging on for 17 years. Presumably the Foreign Office has learnt something from that particular fraud because it went on for such a long time. Have there been any other frauds recently, if not ones that have dragged on for that long, that you have identified?
Sir Peter Ricketts: Well, there have been some rather small ones but I am actually rather proud, Mr Bacon, of the track record of the last five or six years. The graphs in the NAO Report and then in the supplementary note that they did for you show that the levels of fraud that we discovered in the organisation had fallen to absolutely historic lows - £20,000 last year. £20,000 is still too much but nonetheless on an organisation with a budget of £2 billion it is not bad. The NAO say that this may be because of improved and tighter financial controls or it may be because there are not enough whistle blowers coming forward to disclose fraud. Of course, I would never be complacent about that and we do keep encouraging whistle blowing because it is a very good way, but it correlates with the introduction of our new management information system, Prism, which is an Oracle system which has forced everybody dealing with money around the world through a rigorous system, getting the right sort of permissions to purchase and all those things. I believe that the introduction of this management information system has something to do with this steep decline in frauds in the organisation; we have not had a major fraud in the organisation for some time. I am absolutely not complacent, but the direction of travel is right.
Chairman: I am afraid there is a division in the House so we have to break for about eight minutes. We will be back as soon as we can.
The Committee suspended from to for a division in the House.
Chairman: We are now quorate. Mr Richard Bacon?
Q47 Mr Bacon: Sir Peter, I would like to ask about the paragraph in the Report entitled "Unexpected expenditure charged to budget holders" at 2.55 on page 23. It says: "It is always clear to budget holders where all the accounting entries relating to the expenditure against their budget have come from. The principal contributory factor is that the accounting system is set up so that it is possible, if correct purchase to pay procedures are not followed, for any to post items to any budget codes increasing the risk of erroneous entries." It goes on to say that 24% of purchase orders at the beginning off January 2009 were charged to budget holders outside the directorate which had raised them. It does not really sound like you have completely got a grip of this, does it?
Sir Peter Ricketts: Might I ask Mr Luck to respond to that.
Mr Luck: It is true that we have had difficulties with the way that PRISM, our Oracle-based financial system, was originally set up but it is something that the board has returned to time and time again to try and ensure that budget holders understand their budgets, so in signing off now each month the resource management officers go through with the budget holders any movements to their budgets so that they can understand items here. In turn, directors review their budgets and directors general are now signing them off. You have hit on a difficulty we have had because of the way the system has been implemented.
Q48 Mr Bacon: This is not merely budget holders failing to comprehend what is going on. It is things being charged to their budget that should not be charged to their budget, is it not?
Mr Luck: It is and therefore being in a position to challenge those and have those corrected and then to improve the system so that does not happen in future.
Sir Peter Ricketts: In some cases I think it is people charging items to budgets entirely legitimately but catching the budget holders out.
Q49 Mr Bacon: I can quite see if the Ambassador to
Q50 Mr Bacon: Let me take a better example
because who would want to hold a party there!
I can quite see why the Ambassador to
Sir Peter Ricketts: I think what this is referring to is where you are holding a budget as a regional director and then the personnel side put into your budget personnel costs or the estate side put into your budget the costs for renting and maintaining property, so it is parts of the organisation putting costs on the budget holders that perhaps they were not expecting and therefore it makes it difficult to keep control of your costs particularly towards the end of the year.
Q51 Mr Bacon: I hope part of the answer to this will come when you send us the figures of the staff and where they are distributed. What is your headcount now? It was 16,000.
Sir Peter Ricketts: It is about 15,000 now.
Q52 Mr Bacon: To what extent in trying to allocate them around the world do you take a global view of Britain's financial and economic interests and say, "Well, trade with China is X% and trade with India is X% and we are expecting it to grow in the following way over the next five to ten years ergo our representation in China and India, particularly on the trade side, should be X." Is there a correlation? Does it match in terms of where the staff are versus where the economic interests are?
Sir Peter Ricketts: The answer is yes,
essentially. First of all, UKTI have done
that exercise for the specific people who do trade and investment work abroad
and their strategy is now concentrating on the 20 or so largest markets in the
world. That has moved UKTI staff to
Q53 Mr Bacon: As a Committee we visited the British Embassy in
Sir Peter Ricketts: It is normal and they are doing it. The instruction from the top is sweat the asset and make the maximum use of these wonderful embassy buildings and houses and, where you can, get commercial companies to sponsor events so that we get the benefit as well. It is standard practice now to use the residences for all sorts of commercial events.
Q54 Mr Bacon: I was very reassured by your answer to the Chairman where you said there was not any proposal to get rid of them because they did often come for free in many cases and we would not want an accounting change to require you to get rid of them for any reason.
Sir Peter Ricketts: I think they are real assets and it is smaller and less prestigious places that we would consider getting rid of.
Q55 Mr Bacon: But you did do that in the case of the British Ambassador's
residence in the Holy See? You got rid
of a cheaper and better residence and replaced it with one that is best
described - it is quite a grand garret - as an attic flat. Although it has a good view of
Sir Peter Ricketts: I am afraid it was before my time, Mr Bacon, and I do not know the detail of it. I am surprised if the flat is cheaper.
Q56 Mr Bacon: The present flat where the British Ambassador to the Holy See now is is more expensive but not as good as the previous British Ambassador's residence.
Sir Peter Ricketts: As I say, it happened before my time and I would need to look into it.
Q57 Mr Bacon: Could you send us a note?
Sir Peter Ricketts: Of course.
Q58 Mr Bacon: I have only one more question and that is about the theft of satellite telephones because you may remember when we last looked at the resource accounts a batch of satellite telephones was stolen in Iraq and the thieves, one presumes, then used these phones to dial up betting lines and indeed sex chat lines resulting in bills of several hundred thousand pounds, which the Foreign Office just merrily paid, you signed the cheques and no-one seemed to look askance at the fact that there was a £200,000 phone bill each month. Why would that not happen now?
Sir Peter Ricketts: We have learned some very painful lessons from that. Part of it is about proper purchase to pay
arrangements, proper receipting of goods received because part of the problem
was that phones were sent out to
Q59 Mr Bacon: They were by somebody!
Sir Peter Ricketts: They were intercepted on the way.
Q60 Mr Bacon: Did you ever get them back? Sir Michael Jay told us - I do not think he personally did - "We dialled the number but nobody answered."
Sir Peter Ricketts: I do not think we ever got them back, no. Part of it is better financial controls so that when bills come in people who pay the bills make sure that they are legitimate and proper expenses, and I think the fact we have got this PRISM system now and a better culture for numbers has instilled better discipline. I hope we have put the systems in place that mean that would not happen again. It was a very painful episode for us.
Q61 Chairman: So if a mobile phone bill comes in for one mobile phone for £200,000, Mr Luck is there to spot it for the first time ever in the history of the Foreign Office, is he?
Mr Luck: Not personally Chairman but, yes, there are processes in place absolutely to do that and, as indicated in my previous answer, the budget managers are now really switched on to examining all the costs that are coming through.
Chairman: That is very reassuring. Alan Williams?
Q62 Mr Williams: We are told there are delays in delegating budgets to budget holders. What effect does this have and why is it happening after all this time?
Mr Gardner: It was happening. The effect of it was that it added to the underspend because people were getting their budgets later in the year. We quickly picked up on that. I think colleagues have noted in the last year we gave out budgets before the beginning of the financial year and this year we are giving out budgets a month earlier again, and that means that people can focus on what they are supposed to be doing and kick off activity much earlier in the year.
Q63 Mr Williams: C&AG, do you think that improvement is adequate or do they need to do even more?
Mr Suffield: We have looked at it and we think that the steps that have been taken are sensible and appropriate but we continue to look at it going forward.
Q64 Mr Williams: Then again you have advised us that there is confusion in the Department over roles and responsibilities. For a long-established department that seems a rather strange predicament.
Sir Peter Ricketts: I am sorry if there is still confusion. I think the NAO Report was referring in particular to the lines of reporting for some of our major programmes where they tended to be having to report to a number of different committees. I do want to sort that out because I think if we have a major programme it needs to be overseen but it does not need to be overseen by two or three different committees. That is just of waste of everyone's time. I have in mind some reorganisation of the committee structure under the board to make sure that does not happen. I think financial roles and responsibilities are pretty clear actually.
Q65 Mr Williams: We are told that across government 14% of staff have financial and management skills whereas you, strangely enough, only have 8%, just over half of that. Why are you trailing so dismally behind?
Sir Peter Ricketts: Mr Williams, we were spurred into action on that before the NAO Report but even with it and the supplement that the NAO have given the Committee shows that we are already up to 12% and we are heading for 17% by end of this year. We are training a lot more of our own staff in financial matters and also taking on some experts from outside so we will get to about 17% of our finance staff with qualifications by the end of this year. I still do not think that is enough, I think we can do better than that, and I would want to go on increasing the proportion of qualified people in the finance function.
Q66 Mr Williams: We have been talking about the foreign exchange fluctuations. What proportion of your budget is affected by that?
Sir Peter Ricketts: More than half our budget is spent in foreign currencies.
Q67 Mr Williams: Really?
Sir Peter Ricketts: Uniquely in
Q68 Mr Williams: Historically you have employed a large number of consultants and contractors on finance. Are you still doing so?
Sir Peter Ricketts: We are reducing them.
Q69 Mr Williams: How effectively and what are they costing at the moment?
Sir Peter Ricketts: I am aiming to complete a 50% reduction in contractors by the end of this year, that is 50% less than two years ago, as a result of training more of our own staff and bringing in career civil servants with qualifications, so they will certainly be costing us half what they were two years ago. I do not have an absolute figure in my mind but I am determined that we shall drive down the cost of contractors because we can certainly get better value for money by having them on our books as civil servants.
Q70 Mr Williams: Finally to C&AG, on the foreign exchange fluctuations obviously the Department for Overseas Development must have the same problems to contend with. Have they been any more effective, to your knowledge, in meeting the problems than the Foreign Office or vice versa?
Mr Suffield: The Department for International Development is possibly a little bit behind FCO in the way that they have sought to manage this risk but I know that they are in contact with the Department to try and learn from the approach that FCO have taken.
Q71 Mr Davidson: Can I start by saying that I think you have a lot of very fine staff who on occasions have given absolutely excellent briefings to Members as we meander around the world when we have the opportunity to do so. Sometimes I must confess they do give the impression that they prefer MPs to come in the tradesmen's entrance but I suppose they cannot always overcome their background. I am sometimes tempted to confirm their prejudices by stealing their spoons but I have always resisted - most of the time! Can I ask about the tax treatment of your staff abroad. Do they pay income tax the same as everyone else?
Sir Peter Ricketts: Yes.
Q72 Mr Davidson: So they are all charged
Sir Peter Ricketts: Yes, we are
Q73 Mr Davidson: If they are seconded what happens then?
Sir Peter Ricketts: The same.
Q74 Mr Davidson: If people were seconded
Sir Peter Ricketts: If they are seconded to the Commission for example then I think they
pass under a different regime. I think
then the Commission pay their salary and I suppose they then pay Belgian
tax. I am not absolutely clear about
that. But as long as they are working
for the British government they are paid in the
Q75 Mr Davidson: Can you give us a note
about what happens if people are seconded in these circumstances to
Sir Peter Ricketts: Of course.
Q76 Mr Davidson: Arising from paragraph 1.8, where it has mention of the link with UKVisas, you seem to be responsible for providing staff and providing floor space yet UKVisas pays for it. Why I want to explore this is I am particularly unhappy about what seems to be a relatively poor service in some circumstances from UKVisas taking too long and in many cases coming out with decisions which I think are far too soft. You sometimes get the impression that in order to get a decision out the way people just grant visas. Can you make clear to me whose responsibility it is to fund these things adequately? Is that through yourselves or is that through the Home Office budget? To what extent are the constraints on the physical space and the number of staff they have caused by constraints in space that you have or is it any other reason?
Sir Peter Ricketts: The responsibility for the visa operation is now with the Home Office and with the UK Border Agency. That was a change a couple of years ago. It used to be a shared enterprise between us and the Home Office. It is now a Home Office responsibility and Home Office ministers set the policy. We provide the space for them to operate abroad because the embassies have always been the place where we have had visa work. The budgets are provided by UKBA and they come from visa income. Partly because the number of visas being issued has been falling in the economic recession they have had real pressure on their budgets and they have been doing some pretty fast restructuring, a lot of hubbing and spoking, ie they have one big visa factory somewhere and then a lot of embassies round about send their visa applications into this centre and get the answers back again. That has been pretty disruptive because a lot of visa sections have closed down and moved into hub and spoke working and that has caused delays. It is not a problem of space in our embassies. It is really an effort by UKBA to drive down the cost of the operation by going for this hub and spoke model.
Q77 Mr Davidson: In a sense they are not here to answer themselves but I just wanted to be clear because in paragraph 1.8 it talks about employing some 3,000 staff from or recruited via the FCO but you then have no responsibility for them once they are handed over?
Sir Peter Ricketts: The Home Office set the policy on the visa issuing but they contract to us, if you like, to provide a visa service abroad so we provide the staff, we receive the applications.
Q78 Mr Davidson: So the enormous queues in some locations that I have seen would be your responsibility or theirs?
Sir Peter Ricketts: It is our responsibility to manage them well in the embassies. I do not know when you have last seen a queue outside an embassy because more often than not we have outsourced the application process to commercial providers who have downtown offices who collect all the data, the passports and money and send them into the embassy, and therefore queues outside embassies are a thing of the past in my experience.
Q79 Mr Davidson: I am glad to hear that
because, yes, my experience might be dated.
If I were in any of the locations in
Sir Peter Ricketts: Absolutely not and you would not see members of the public coming to the embassy because they would go to a downtown office.
Q80 Mr Davidson: And be queuing there?
Sir Peter Ricketts: They have got plenty of staff so, no, it is not bad actually, and the decisions are taken by people sitting in the embassy.
Q81 Mr Davidson: I accept that my information is perhaps dated but if that is overcome that is good.
Sir Peter Ricketts: There used to be a real problem with visa queues but this outsourcing has helped a lot.
Q82 Mr Davidson: You have brought in talent at the top level which I think we very much welcome. Can you clarify for me why you think it was that the Foreign Office was so bad in the past and had such a bias against numbers basically?
Sir Peter Ricketts: I think we are an organisation that is there to do foreign policy and the people who come to the Foreign Office are basically interested in foreign affairs and going out and doing business in the world and over the decades not enough attention was paid, frankly, to managing the money, the resources and the people, and I think we have understood it is no good just being good at foreign policy; you have got to manage your business properly.
Q83 Mr Davidson: To what extent have you overcome the fact of being unrepresentative of society as a whole? For our Kenyan visitors they will see in many sections of government we have got the tribe, as it were, of public school/Oxbridge people occupying a disproportionate number of positions at the top of the government system. To what extent is that still the position in the Foreign Office?
Sir Peter Ricketts: Unfortunately we are three white males here. I cannot avoid that.
Q84 Mr Davidson: How many of you are from public schools?
Sir Peter Ricketts: No actually. I checked on members of my board. We have 11 members of the board and seven went to state schools.
Q85 Mr Davidson: So five did not, five went to public schools.
Sir Peter Ricketts: Four.
Mr Davidson: Sorry!
Mr Bacon: It is obvious which one you went to!
Q86 Mr Davidson: You spotted that deliberate mistake! That is still disproportionate but that is very helpful. In terms of the top ten officials inside the Department outwith the board, what would the pattern be there? Is the pattern at the top level different from the pattern at the bottom level of people coming in?
Sir Peter Ricketts: Yes, we are much more representative of modern
Q87 Mr Davidson: I understand the point about women and race and so on. More difficult to measure is the question of social background. To what extent are you less socially exclusive than you used to be and can you produce figures to substantiate it?
Sir Peter Ricketts: I do not feel we are socially exclusive at all.
Q88 Mr Davidson: There again the Foreign Office never did and it clearly was, so what evidence can you produce to show that you are less socially exclusive than you were?
Sir Peter Ricketts: I think if you looked at the qualifications of the people in top jobs around the Foreign Office now you would find scientists, you would find people from all parts of the UK, people who have been to universities in all parts of the UK, with very different life stories, and we are not by any means a socially homogenous group.
Q89 Mr Davidson: Do you have figures that monitor this?
Sir Peter Ricketts: That is a purely impressionistic survey.
Q90 Mr Davidson: Let me be clear. You have figures that would monitor gender and you have figures that would monitor race, but you do not have any figures that monitor social origins?
Sir Peter Ricketts: Correct.
Q91 Mr Davidson: Which would tend to be an indication to me that you do not take that seriously.
Sir Peter Ricketts: No, Mr Davidson, I would disagree.
Q92 Mr Davidson: Surely if you did take it seriously you would monitor it?
Sir Peter Ricketts: I do not think it matters, frankly, what social background people come from, as long as they bring intellect ---
Q93 Mr Davidson: That is a traditional Foreign Office view, is it not?
Sir Peter Ricketts: I do not know if it is or not.
Q94 Mr Davidson: It used to be a traditional Foreign Office view that it did not matter what gender people were either but when we moved into the 20th century that started to change and now all the time the top of government is becoming more progressive and aware of the range of abilities and talents that there are in society. You are saying that the Foreign Office does not monitor social origins and sees no need to do so?
Sir Peter Ricketts: I do not know how we would start to monitor social origins.
Q95 Mr Davidson: So you do not even know how to do it. I am having a lot of my prejudices confirmed. Is it something that has ever been discussed in the Department?
Sir Peter Ricketts: We monitor diversity in all sorts of ways, the number of women, the number of ethnic minorities.
Q96 Mr Davidson: Run through the numbers of ways you monitor it again - gender, race, easily visible.
Sir Peter Ricketts: What we are trying to do is recruit the best people for the jobs.
Q97 Mr Davidson: Sorry, what other ways did you monitor diversity?
Sir Peter Ricketts: We recruit qualified accountants when we need accountants. We look for people with the right skills for the job.
Q98 Mr Davidson: I understand the point about accountants being diverse but in terms of coming back to the usual categories, and you indicated race and gender, I am seeking to clarify what other categories you monitor.
Sir Peter Ricketts: I wonder if I could ask you what other categories you think we should monitor for social origin?
Q99 Mr Davidson: The way it usually works is we ask the questions but social origin, disability for example?
Sir Peter Ricketts: Yes.
Q100 Mr Davidson: So you have figures for disability and you have figures for social origin? No? Educational background?
Sir Peter Ricketts: I am trying to understand what you mean by social origin.
Q101 Mr Davidson: By educational background, by geography?
Sir Peter Ricketts: No, we do not collect that data.
Q102 Mr Davidson: I cannot think of anybody from my constituency who has ever gone to work in the Foreign Office. Nobody knows of anybody. There is not a role model. If I thought there was a role model then I would wheel them out round the schools in my area. I have managed to get some senior policemen. I have managed to get some people who are Army officers (because most of my constituents would join the Army at a different level) to show people that these jobs are open to them. I could wheel out lots of apprentices and so on and so forth. I have never found anybody from the Foreign Office. I find that a cause for concern. I am also concerned that is something that has not occurred to yourself.
Sir Peter Ricketts: I am very conscious that we should have as diverse a group of people in the Foreign Office as possible, diverse from all parts of the UK, from all sorts of educational backgrounds and all sorts of degrees and qualifications, but I have not tried to quantify social origins.
Q103 Mr Davidson: I find it interesting because I remember having this conversation with Robin Cook when he was Minister at the Foreign Office, and he was echoing the concerns I had and indicating that he was going to try and do something about it to make sure it was more socially diverse. There was, I seem to remember, a brief effort at that time to do so but that seems to have disappeared now.
Sir Peter Ricketts: I recognise the word diverse and we are desperately trying to increase the diversity of the Foreign Office. It is the social diversity that I am struggling with.
Mr Davidson: Thank you, Chairman.
Chairman: Mr Bacon has a last question.
Q104 Mr Bacon: I have just a couple of questions about the pattern of underspending because the NAO Report tells us there has been a consistent pattern of underspending over several years, which one might think highly commendable and a cause for a reduction in your budget but it does not appear to be that the underspend was deliberate. In fact the Report goes on to say that you actually bid for extra resources. This is in paragraph 2.59. "Part way through the year a predicted overspend led to a request from the Foreign Office to the Treasury for additional resources." Yet in that year as the financial year end approached the forecast resource and capital expenditure outturn reduced to an eventual underspend of £128 million. We are familiar in the National Health Service with underspends and overspends and deficits and so on and a year or so ago there was a surplus of £500 million which was based on a budget of £100 billion. You are tiny compared to that and yet you have still got £100 million sloshing around more than you thought you had. How does that happen?
Sir Peter Ricketts: Mr Bacon, I absolutely share your frustration at that tendency to underspend we have had for many years. The NAO Report is right in what they say in paragraph 2.50 where they list a number of reasons why we were traditionally underspenders. We did not have the financial skills and we did not have confidence in the budget. There was an extreme keenness not to overspend and that was leading to an underspend. I have made it a priority of mine to try to reduce that underspend. The reasons why we underspent in that year 2007-08 are also set out somewhere in the Report.
Q105 Mr Bacon: At 2.60 and a little of bit of it was due to the change in sterling. However, £64 million of the underspend was in part due to higher than expected efficiencies in reducing expenditure. I have yet to translate that into English in my own mind but higher than expected efficiencies in reductions of expenditure led to a £64 million underspend. You hire the brightest people. It is known that the Treasury and the Foreign Office hire the brightest people out of universities and although they will not necessarily be financial managers, how difficult is it, notwithstanding the issue about the conversion of currencies, to figure out here is a certain sum of money that you have got to spend, no more and no less, and go and spend it to achieve the objectives of the department? It is an extraordinary gap for a department that is relatively small?
Sir Peter Ricketts: I share a lot of your frustration.
Can I explain to you where I think we are on underspends. In that year you referred to, as you say, a
£118 million underspend on our overall resource budget, 5.7%, is absolutely
unacceptable, and I share the Committee's view of that. Some of it was because we were able to save
some money on our security costs in the
Q106 Mr Bacon: Just a couple of other areas. On information available to the board it says in paragraph 2.73 that the board is still having to get quite detailed information to support the high-level data so that members of the board can drill down to the underlying figures. At 2.74 it says: "Until the Board has absolute confidence in how the high level figures are derived, it is likely that the Report will remain a lengthy document." Plainly, if the Board cannot rely on the figures upon which it is being asked to make decisions then it cannot be confident to make those decisions. How long is it going to be before you have information that you can rely on? Can you give me an example of one of these key performance reports, which are the in-year financial information reports, that has formed the basis for a significant board decision?
Sir Peter Ricketts: In terms of reliance on the numbers, I think our confidence level is rising all the time and we will be at Five Star Finance at the end of our finance improvement programme when there is one set of numbers universally recognised around the organisation, and I hope that by next summer, which is the date we have set to be at Five Star Finance, we will have got to that point. Then the board can perhaps reduce the size of this key performance report. It is actually full of very useful data but our confidence level is growing and the sorts of things that are covered in it are set out in the table on page 26 of the NAO Report. That gives you an idea of the sort of ground we are covering in it at the moment. This key performance report, the monthly report to the board, showed up earlier this year that we were heading for an overspend in the budget because of currency pressures on us and other pressures that had arrived in our budget and it was the signal for us to take some pretty drastic action to cut costs this year to bring us back on to a profile to spend fully but not to overspend. That was a signal to the organisation upon which we acted to start looking at costs.
Q107 Mr Bacon: Finally you said earlier in
response to a question about the hierarchy of properties that it was now much
more egalitarian than it used to be. You
Sir Peter Ricketts: The Ambassador who has most visits by Cabinet ministers, Members of
Parliament and other senior visitors is the UKREP Ambassador and therefore it
is right he should have a place to do honour to them and entertain them
properly. The Ambassador to
Chairman: I think Mr Davidson has a last supplementary.
Q108 Mr Davidson: Could I just return to the point I made about diversity before. I wonder if you could give the Committee a note outlining the steps that the Foreign Office has taken and any indication that you have of success, not just in terms of gender and race but in terms of being more egalitarian and less exclusive and elitist as an organisation?
Sir Peter Ricketts: I will do my best, Mr Davidson.
Mr Davidson: I am sure you will. Thank you.
Q109 Chairman: My last question is to the Treasury because I was a bit underwhelmed by the response to the questions we were putting to you about our campaign to get professionally qualified finance directors in place. You said that you would take it up with the management group. I take it that you are talking in terms of real action and not just talking about this?
Mr Gallaher: Absolutely.
Q110 Chairman: Sir Peter and colleagues, that concludes our hearing. Clearly you have a pat on the back from the NAO which is richly deserved, but there is this worrying underspend which we have talked about in the latter part of this hearing which shows that we are still to make further progress in better financial management, which I am sure you will achieve.
Sir Peter Ricketts: Thank you very much, Chairman.