House of Commons - Departmental Annual Report 2010-11

Departmental Annual Report 2010-11 - Foreign Affairs Committee Contents

2 The Implementation of SR2010

5. The large spending reductions demanded of the FCO and its associated bodies by the SR2010 should not be seen in isolation but instead as part of a long-term pattern of reductions in the FCO's budget. Giving evidence to us as part of our inquiry into British foreign policy and the "Arab Spring": The Transition to Democracy, Lord Malloch-Brown, a former FCO minister, described the previous Government as embarking on:

the strangest model of cost-cutting ... which was that you expand programme and investment but cut headcounts and buildings, basically. This fell astonishingly disproportionately on the Foreign Office, which is all people and some rather grand buildings. The whole model of Treasury-driven cuts over the previous Government cut into the bone of the Foreign Office.[3]

In 2009-10, the then Permanent Secretary, Sir Peter Ricketts, told our predecessor Committee that "pretty drastic" measures were needed if the FCO was to remain in budget that year. Together with our colleagues on the Committee of Public Accounts, we and our predecessor Committees have reported on the FCO's progress in implementing a series of planned, and unplanned, spending cuts.[4]

6. The FCO's difficulties in this area are compounded by the distinctive characteristics of the FCO's budget:

The FCO's budget is already small. Less than 1% of Government spending is on the Foreign and Commonwealth Office, and the entire spending of the FCO, including grants to the British Council and BBC World Service, is less than the spending of Kent County Council.[5]
A relatively large proportion of the FCO's spending is inflexible because it is committed to staff salaries, buildings and grants to other organisations such as the BBC World Service rather than programme spending. The FCO is further responsible, along with the Treasury for paying the UK's subscriptions to the UN and other international organisations.[6] The NAO estimates that less than half of the FCO's total budget is available for "direct spend".[7]

7. We noted the long-term trend of reductions to the FCO's budget in our Report last year and concluded that "cuts to the core FCO budget even of 10% may have a very damaging effect on the Department's ability to promote UK interests overseas, given that these will come on top of previous cuts to the FCO's budget in the very recent past." Given the scale of the task that faces the FCO and its associated bodies we were keen to monitor throughout this Parliament the effect of SR2010 on the core performance of the FCO, BBC World Service and British Council, staffing levels in those organisations, and the Department's overseas network.

The Foreign and Commonwealth Office

8. In evidence to this year's inquiry, The Foreign Office told us that it would implement the spending reductions demanded by SR2010 by acting in three main areas or "strands":

The Estate strand: "we are seeking to make £34m savings in our annual estates and security running costs. As part of this we are currently reviewing the scale and level of residential accommodation we provide overseas."
The Corporate Services strand: "The majority of this saving will come from reducing our numbers of locally-engaged support staff; and, where possible, consolidating corporate functions into regional hubs or bringing them back to the UK to maximise efficiency." Simultaneously, the role of locally-engaged staff will change and their use in other areas will increase, "The localisation of corporate services and support positions overseas is delivering benefits - annual savings of £12m by March 2012."
The Human Resources strand: reducing staff costs by "reducing to a minimum the number of junior staff posted overseas from London, by removing or reorganising their positions or recruiting locally". The FCO estimates savings of £30 million per year from this process.[8]

9. The majority of the money allocated to the FCO by the Treasury is not available to the FCO as direct spend. 44% of the FCO's budget is spent on grants to various outside organisations: to the BBC World Service (approx. 10%), the British Council (approx. 7%), contributions to the cross-Governmental conflict prevention pool (approx. 20%) and the UK's subscriptions to international organisations (a further 6.5%).[9] A further large proportion of the Department's budget must be allocated towards the upkeep and maintenance of the FCO's overseas network. Changes to the Department's overseas network were announced on 11 May 2011 and are analysed below. However, even accounting for these other demands on the Departmental budget, a significant proportion of the FCO's budget remains discretionary and is allocated to the programme budget. It is this area, of discretionary or "direct" spend, that is likely to see the largest reductions in spending.

10. Simon Fraser, Permanent Under-Secretary, FCO was unable to tell us exactly how the SR2010 would impact on the FCO's discretionary spending. He told us:

For the programme budget, which is discretionary expenditure on different aspects of foreign policy, we have made plans to reduce it over the spending round period. It is currently around £140 million. The Foreign Secretary has said that that will have to come down over the spending round period to a figure not lower than £100 million, but we have not yet planned precisely how that will happen.[10]

We were further told that where decisions had been made, it was too early to say what the impact on the Department would be as the FCO was only at the beginning of the "implementation phase" and "further difficult decisions" would have to be taken. Despite this, he was "confident" that the FCO would adapt to the spending reductions demanded in the Spending Review 2010.[11]

BBC World Service

11. Like the FCO, the BBC World Service faced a long series of budget reductions even before the Spending Review 2010. In evidence to our inquiry this year, Lord Patten noted that:

Although the World Service has sometimes been protected from the most savage instincts of the Treasury public spending division, you could not say that it had done fantastically well over the years in the allocation of public funds.[12]

The cuts announced by the BBC World Service in immediate response to the Spending Review came after a period of "lean" spending for the World Service. The BBC World Service's initial response to the SR2010 was announced in January 2011. Under these plans, the BBC World Service announced the full closure of five language services, the end of radio distribution in a further seven and a phased withdrawal from "most" short wave and medium wave distribution. This would lead to 650 post closures by 2014-15, 480 in that financial year. We reported extensively on these changes in April 2011.[13] Following the publication of our Report, the Foreign Secretary announced further funding for the World Service to mitigate some of the effects of the initial budget reduction. In a letter to us of 20 June 2011, the Foreign Secretary announced funding of £2.2 million per annum until 2014-15 which would continue the operation of the BBC Arabic Service; further funding for the World Service under the Arab Partnership;[14] and an arrangement whereby the Government agreed that if the World Service's contributions to the wider BBC's pension deficit were less than the £13 million already provided by the FCO, the World Service would be able to keep the surplus. We were told in November that this surplus equates to extra funding of £9 million over the spending review period. Some of this surplus has allowed the maintenance of the BBC Hindi shortwave service for at least one year.[15]

12. As a result of the changes announced in June, the BBC World Service's savings target over the Spending Review period has been reduced from £46 million to £42 million. The World Service estimates that the changes announced in January, and subsequently revised in June, will save approximately £30 million. A further £12 million of savings will have to be found over the next two financial years. We asked Peter Horrocks, Director, BBC World Service, where he anticipated these cuts would come from. He told us that plans to meet the £12 million target were neither finalised or announced, but he did not rule out further reductions in services.[16]

13. Despite the impressive performance of the Foreign and Commonwealth Office in representing the UK's interests across the globe with what is, in Governmental terms, a particularly small budget, we believe that the FCO is under-funded. This situation has been exacerbated by the Spending Review 2010. In this context, we conclude that the lack of detail provided by the FCO and the BBC World Service as to exactly how the spending reductions target set by SR2010 will be met is disappointing. While there is no doubt that meeting the targets set by the Spending Review will be challenging and will require much planning and forethought, it is equally disappointing that the FCO has not yet planned how a reduction of £40 million, or over one-third, of its programme spending will be achieved.

14. Given the lack of detailed plans available for scrutiny we do not at this time pass further comment on the overall strategy pursued by the Foreign and Commonwealth Office and the BBC World Service in meeting its budget reductions, except to reiterate our earlier conclusion that SR2010 may turn out to have had a very damaging effect on the Department's ability to promote and safeguard UK interests overseas. We would expect information on how the FCO and the BBC World Service plans to reduce its spending throughout the Spending Review - including information on which services or programmes are to be curtailed - to be made available to us in response to this Report. We further recommend that both bodies continue their current welcome practice of writing to us in advance of major announcements and changes to their respective organisations.

15. The lack of detail provided by the FCO and the BBC World on the broad strategy they will follow to meet the SR2010 spending reductions prevents us passing comment upon the FCO and the BBC World Service's plans. Accordingly, we present the evidence we have received to the House without detailed analysis. However, we draw the House's particular attention to the following areas of interest which we will address in the following chapters: