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Official Report (Hansard)

Session: 2007/2008

Date: 21 November 2007

COMMITTEE FOR FINANCE AND PERSONNEL

OFFICIAL REPORT

(Hansard)

Strategic Budget Issues

21 November 2007

Members present for all or part of the proceedings:

Mr Mitchel McLaughlin (Chairperson) 
Mr Mervyn Storey (Deputy Chairperson) 
Mr Roy Beggs 
Dr Stephen Farry 
Mr Simon Hamilton 
Ms Jennifer McCann 
Mr Adrian McQuillan 
Mrs Dawn Purvis 
Mr Peter Weir

Witnesses:

Mr Leo O’Reilly ) Department of Finance and Personnel 
Mr Richard Pengelly )

The Chairperson (Mr McLaughlin):

I remind everyone that, because this session is being recorded for Hansard, they need to make doubly certain that their telephones are switched off. Members have been provided with a paper from the Department of Finance and Personnel (DFP) and a paper from the secretariat.

Mr O’Reilly and Mr Pengelly are no strangers to this Committee. Please start when you are ready.

Mr Leo O’Reilly (Department of Finance and Personnel):

We are conscious that the information that we have been asked to provide for this session of the Committee has been described as a “strategic overview” of the Budget. Obviously, the Budget and its associated materials contain a great deal of detailed information. Other Committees are already discussing the implications of the Budget with their Departments and officials. If Committee members want to raise any points of detail with us, we will, as far as we can, deal with those. If we do not have the answers, we will provide them in writing.

The Chairperson:

Thank you.

Mr O’Reilly:

On the basis of the information that the Committee requested from us, we have provided a relatively short background paper that explains the roles of the various sections of DFP — central expenditure division, supply, and the strategic policy division — in the work that leads to the production of the Budget outcome. We have also provided a note about efficiency savings and the process by which the efficiency savings were identified, both under the previous direct rule Administration, and, subsequently, under the arrangements that are now in place.

Obviously, the process of producing a Budget takes a number of months. The work intensifies from the summer onwards as we receive detailed bids from all Departments. That essentially involves each Department setting out a series of bids for particular items of expenditure, and what additional amounts of money they think they require over the following three-year period. They provided a lot of associated material to DFP as part of that exercise.

As is inevitable with these exercises, there is a substantial difference between the totality of what Departments seek and what, at that time, we think will be available for allocation over the next three years. A summary of the detail and the amounts involved has already been provided to the Committee.

Therefore, there is a period of engagement at official level between us and Departments in order to explore their bids and to ascertain the extent to which they can be justified. Most importantly, we have to ask Departments to think about prioritising the bids that they have made, so that, given the limited resources against the totality of bids received, they can begin to reprioritise. That process of bilateral engagement at official level goes on intensively between August and September.

However, inevitably, there is a point beyond which officials cannot engage; Ministers have to become directly involved. That part of the process starts with a series of bilateral meetings between the Minister of Finance and Personnel and all the other Ministers. That is followed by a period of further meetings, as required, and as appropriate, between the Finance Minister and individual Ministers to discuss the detail, to explore where there are still pressures, and to seek, as far as possible, to produce a set of recommendations to the Executive that we, as officials, feel — and, more importantly, that the Minister of Finance and Personnel feels — can be justified given the totality of resources available, the pressures on the system, and the cases made by individual Departments for additional resources.

This draft Budget was considered at two formal meetings of the Executive. At the second meeting, the Executive agreed the draft Budget as a basis for public consultation. That is the stage of the process that we are now at. The various documents and the material that has been published is where we have got to.

Mr Beggs:

First, with regard to the overall Budget situation, it is difficult to have an appreciation of whether the balance between Departments is appropriate without being aware of the pressures that exist. I and, I am sure, other Assembly Members have had difficulty in acquiring copies of the bids that all the Departments have submitted and the outcomes of those bids. When does that information enter the public domain?

Secondly, with regard to the capital expenditure plan for the next three years, I see there is a negative figure for DFP in 2008-09 and for the Department of Agriculture and Rural Development (DARD) in 2010-11. I assume that the DFP figure is related to Workplace 2010, but I would like more information on why DARD has a negative capital figure of £171·1 million in 2010-11. What is the reason for that significant figure?

Mr O’Reilly:

I will ask Mr Pengelly to deal with the details of the specific departmental allocations. On the first point about the details of the bids that were received from Departments, I recall that the Member has submitted an Assembly question on that matter, although I am not sure whether is due to be answered next week. However, subject to the answer’s being cleared by the Finance Minister, the Department will, in response to the Member’s question, provide a summary of the overall bids that it has received. Obviously, the details of those bids are a matter for each Department to provide. DFP will, however, provide a summary.

Certainly, the question has been raised at official level about disclosure of the bids that have been made by Departments. The advice that DFP has provided to Departments through the Office of the First Minister and deputy First Minister is that, now that the Executive have considered the overall position and published their proposals, that information can and should be made available in order that all Assembly Members can see the totality of bids that have been made by Departments.

Mr Beggs:

It would be dreadful if Members had to resort to the Freedom of Information Act 2000 to get that information, which should be in the public domain.

Mr O’Reilly:

Yes.

Mr Richard Pengelly (Department of Finance and Personnel):

The £171·1 million that the member referred to with regard to DARD relates to the disposal of the Crossnacreevy site. It is estimated that there will be receipts of around £200 million in 2010-11, which exceed planned capital spend in that year, giving a negative net figure.

Mr Beggs:

Will it take three years to sell the site?

Mr Pengelly:

Yes, because planning permission must be secured and there are also site-assembly issues.

Mr Beggs:

In the past there has been expenditure overcommitment, and there is a plan to reduce it. The latest available figures that were given to the Committee for 2006-07 show under-expenditure of £155 million on current expenditure and £96·7 million on capital expenditure. That is approximately £250 million. Why is there a proposal to budget for under-expenditure of £100 million in the next financial year? Is that being overly prudent?

Mr O’Reilly:

Certainly, on resource spending, my recollection is that the overcommitment figures for the next three years are £100 million, £80 million and £60 million. The Department is not budgeting for underspending. However, we acknowledge that, for various reasons, there will be an element of underspending in the system each year. The question is how much of that underspending should be anticipated in advance — how much money must be overcommitted, or allocated, before the start of the financial year in anticipation of underspending — and how much is left to be reallocated during the course of the year as underspending emerges. The view of the Finance Minister and the Executive is that the balance that had been struck previously by the direct rule Administration had got too far out of kilter and too much underspend was being anticipated in advance, which left the Executive with little discretion to reallocate money in-year in response to any emerging pressures.

So far this year, fortunately, no significant unexpected pressures have emerged, apart from the flooding episode in June. However, in the nature of public-sector activity, it is inevitable that such pressures could emerge. The Department’s concern is to ensure that sufficient flexibility is left in the system in future years to allow the Executive to respond to those pressures when they happen.

Mr Beggs:

There must be a balance between the two. There is a danger of having too much money committed in a year that may be short-term expenditure and that it might not be well-spent.

Mr O’Reilly:

Yes, it is a balance. The Finance Minister’s view — and the Executive agree with him — is that starting off at £155 million is too high.

Mr Pengelly:

It is £100 million, £80 million and £60 million for current expenditure. The other important contextual point is to compare the 2006-07 year, when current expenditure underspending was £155 million, with 2008-09. The financial year 2006-07 was part of the spending review of 2004, in which real-terms growth was around 4%. The overcommitment in 2008-09 is £100 million, and real-terms growth is less than 2%. The declining public expenditure environment suggests lower levels of year-end underspending. DFP is also aggressively pursuing a financial management agenda with Departments to make better use of money in-year, which will also seek to minimise underspending.

The Chairperson:

The fact that it is a phased process means that it can continually be reviewed in the light of changing economic circumstances.

Mr Pengelly:

There is no overcommitment on capital expenditure. You mentioned an underspend figure of about £100 million, but the issue is different on capital. With current underspending, money that Departments do not spend from their budgets by the end of the year can be reallocated. Generally, the reason that the money is not spent is because it is not needed. However, capital underspending tends to arise because a project has run into difficulties, or because there is a problem with it. However, it cannot be reallocated because a school or a building cannot be left half-completed. The overcommitment has been limited on capital for different reasons.

The Chairperson:

The Committee had a discussion based on an interesting paper that came from Research Services which informed that question. You do not have that background; we will supply that paper to you to help with transparency.

Dr Farry:

On the point about transparency, some of my colleagues have tabled questions asking the individual Departments for information on their bids and the results of those bids. Some of the Departments have already responded, and I have noted that there are major variations in the format of, and the amount of detail in, those responses. That is not helpful. I have also been contacted by a number of non-governmental organisations (NGOs) which are having difficulty in getting beyond the headline figures to truly understand what is happening on key aspects of public expenditure. If it is difficult for MLAs to try to find out what is happening, it will be even more difficult for NGOs, never mind members of the public.

A proper consultation process is supposed to be taking place over the next six or seven weeks, but I am not sure how effective that will be. This reinforces the need for a standardised list of the bids that were made and the responses to those bids. When making a judgement on the Budget, one of the things that people will be interested in is how much money is available to the Departments compared with the requirements that they faced, and whether or not those requirements were met. In that light of that information, people could take a view on whether the balance of the Budget was correct.

Mr O’Reilly:

I will take away the requests that have been made by two Members concerning the format of the information. The information, when you receive it, is likely to list the bids that were made by Departments in prioritised order. Inevitably, Departments presenting bids go through a process whereby they seek to present those bids in a way that is as favourable as possible, in order to secure the resources that they need. The bids are presented in the expectation that not all of them can or will be met. Therefore, when the money is allocated to Departments, what actually happens to it may not be the same as what is listed in the bids. For example, if a Department makes 30 bids, and bids one to 15, say, are met through its allocation, that does not necessarily mean that nothing will happen on bids 16 to 30. Once the Department has received its allocation, its Minister will review the position and may wish to adjust the allocations to take account of the actual amount of money that is available. The Finance Minister has stressed that he expects individual Ministers to go through their proposed allocations and how they propose to spend them over the next three years.

Mr Pengelly:

If there is a perceived inconsistency, that is inevitable to a certain extent, because although the Departments present their bids within a common framework when we commission the inputs, different Departments do things in different ways, and rank and analyse bids in different ways. We have seen some of the questions, while others have gone directly to Departments. The point that we have made to Departments, as Mr O’Reilly said, is that now that process has concluded for the draft Budget and there is a public consultation process, they should release that.

Dr Farry:

My second question relates to the regional economic strategy. Will you clarify the current status of that? A draft document was published by the Department in January and put out for a public consultation that closed in April. The Minister of Finance and Personnel originally stated that the regional economic strategy would be encompassed within the Budget for the forthcoming three years. Last week, when I asked the Minister about that in Committee, he seemed to imply that there would be a separate regional economic strategy. Can you clarify its status? Will it be part of the Budget, or a free-standing strategy that will come out later?

Mr O’Reilly:

The answer is the latter. It will be a separate document that we hope will be published early in the new year. As you know, a draft regional economic strategy was published before devolution, and there has been a prolonged period of consultation. Concerns have been expressed about that, mainly around the fact that it was drafted in the context of the direct rule Ministers’ approach.

The Chairperson:

It was modest in its expectations.

Mr O’Reilly:

There was also concern about the expectations implicit in some of the targets in the document. That is being revised to take account of a number of factors; one is the different priorities and views of the Executive Ministers about economic policy. Also, it has to be revised to take account of the specific announcements in the draft Budget in relation to, for example, the proposals that the Minister has made on industrial derating and other aspects of business taxation, which this Committee has considered separately.

It also has to take account of the outcome of the Varney Review, when that is published, which we hope will be soon. We do not have a firm and final date for publication from the Treasury. The final strand of the strategy that must be reviewed to take account of developments is in the area of funding for innovation. There is the balance of the £25 million that was allocated by the Chancellor last year, which it is now proposed should be spread out over the coming three years to allow it to be spend in a phased way. That is in accordance with the views of a number of Ministers, who felt that in order to spend the money meaningfully it should be spread over a number of years.

On top of that, there is the £36 million that was announced by the Irish Government for partnership projects to promote innovation. We also have the innovation funding streams that have come on from the new European funding programmes for competitiveness and employment, which include significant allocations earmarked for innovation activity.

A strand of work is ongoing between the draft and final Budget to allow those aspects to be pulled together into a coherent strategy. Those will be reflected in a revised version.

Dr Farry:

In the draft Budget, there was some historical economic analysis of trends such as economic growth. However, the Department made no projections for the consequences of the Budget and the Programme for Government. Will such projections be contained in the regional economic strategy?

Mr O’Reilly:

Yes, they will be contained in the revised version.

The Chairperson:

Does that mean that a red line has been drawn through the draft, so that this will effectively become an Executive document, or is it the original document amended following consultation and subsequent developments?

Mr O’Reilly:

The economic strategy will be revised to reflect the Executive’s priorities.

The Chairperson:

Will the strategy be presented as a departure or as an evolution of the draft?

Mr O’Reilly:

I expect that it will be presented as the Executive’s economic strategy. Parts of it are simply factual and analytical material, which will probably stay in much the same format. However, I suspect that substantial parts of it will be rewritten to take account of the new priorities and approach that the Executive want to take to promoting economic growth and development. When the Scottish Government published their revised economic strategy last week, they effectively revised and rewrote the previous Administration’s strategy to reflect the priorities of the new Government in Scotland.

The Chairperson:

Did you indicate a timeline for the process? Obviously, the Varney Review will be an essential element.

Mr O’Reilly:

I expect that we will conclude the Budget process by the end of January 2008. By the end of March 2008, a revised draft will be circulated for comment among Committees and MLAs before the Executive finally sign it off. We would like it to be signed off quickly so that it runs in parallel with the timescale for the Budget and the other documents that the Executive have published.

Dr Farry:

Do you aim to have the strategy in place before the investment conference next spring?

The Chairperson:

That seems to be the plan. The Department is blessed to have such a co-operative Committee.

Mr Weir:

Just as there is no uniformity in the way in which Departments produce their bids, presumably the methodology that they apply in deciding whether to submit bids is more or less up to individual Departments. It is not just the ranking of the bids or the number that have been met. You have put a bit of a health warning on that, in that certain bids may appear to be fully met while others, on the face of it, have not been met, but may well then be met by the Department.

Presumably there should also be a health warning on the response that we get from each Department as to its bids. Is it your experience that different Departments and Ministers employ a slightly different culture when it comes to putting together bids? Do some Ministers produce long wish lists, on the basis that at least it demonstrates that the Department is showing some commitment to a particular issue, while others take the view that, if they are likely to get, say, an extra £30 million, they should bid for perhaps £50 million on the basis that there is little point in going beyond that? Some Ministers may be realistic, while others make lengthy wish lists. Is there any uniformity in the Departments’ approach to submitting bids?

Mr O’Reilly:

Departments do use different patterns, and I suppose that one way of measuring that would be to measure the totality of the bids received against the size of their present budget and see what the difference is. Having said that, we have gone through all the bids in recent months and found them to be fully rationalised, justified and well articulated.

Departments, inevitably, start off with what they refer to as their “inescapables”. They make some assumptions about pay inflation, and, for instance, health-cost or drug-cost inflation in the Health Service. If a service is to be maintained to a particular standard, there will be a level of inescapability about those sorts of bids. That is the basis from which Departments generally start their bidding process. Following that, they move through a prioritised list of initiatives or improvements that they wish to make. The length of those lists does vary, but sometimes it reflects the nature of a Department’s business. There is an element of the approach of individual Ministers and their officials.

Mr Pengelly:

There are differences, but I would categorise them more as variations on a theme than as fundamental differences in technique. It is most obvious at the low end of the priority list. Departments tend to have a fairly similar approach in that they put their “inescapables”, high priorities and fundamental issues on the table. Departments are aware that we are unable to go very far down the list in terms of our scrutiny, due to the amount of money that is available at block level. Some Departments will, perhaps, have a slightly longer tail, and include a couple of initiatives just on the off chance that some extra money might be available in a particular year. However, the difference in approach is not a fundamental issue, and not one that causes us any problems with any Departments.

Mr Weir:

My point is that we have to ensure that we do not take all the figures at face value. If one Department ends up with £30 million even though it bid for £100 million, and a similar Department received the same amount having bid for £60 million, one should not assume that one Department has been more harshly treated than the other.

I appreciate that a lot of “inescapables” are in fact inescapable, but I presume that DFP carries out some analysis on whether they agree that certain issues fall into that category. People may act with the best will in the world, but they will not always agree on whether something can be classed as inescapable.

Mr Pengelly:

“Inescapable” is a word used by Departments; we only use it when talking about how Departments classify their bids. We accept that Departments face cost pressures that are truly inescapable — contractual and ministerial commitments, pay and price pressures. However, we do not accept that additional funding is required merely because a cost is inescapable. There are other ways — for example looking at their own internal prioritisation. Departments generally have large budgets. Therefore, they can deal with budget issues in ways other than through the receipt of additional resources.

Mr Weir:

Have there been cases where a Department says that something is inescapable and DFP says that it is not?

Mr Pengelly:

Yes; that has happened. With regard to benchmarking, you quoted an example of a £30 million outcome compared to bids of £60 million or £100 million. We do not indulge in a debate with Departments about that as a measure of performance.

Mr Weir:

I appreciate that. I am thinking more about the Committee’s point of view in respect of whatever figures we get back.

My final question relates to contingencies. Earlier in the year, we had that flooding in parts of Northern Ireland. In the grand scheme of things, that did not cost a fortune. However, some emergency situations might arise that do cost a lot of money. Has any separate contingency fund been set aside, or is it intended that any emergencies that do arise will simply get higher priority in the monitoring rounds or end-year flexibility?

Mr Pengelly:

Our view, in discussion with Ministers, has always been that, considering the size of the block and the pressures that all Departments face, to set money aside as a contingency fund would mean that it is sitting doing nothing for a chunk of the year. If no emergency has arisen by month nine or month 10 of the year, the money will, most probably, be spent on something of a fairly low priority — just so long as it is spent.

We have never taken that approach. Instead, we use the in-year monitoring system. The empirical evidence over a number of years shows that there is a genuine, material amount of flexibility. However, that has been eroded somewhat by the previous approach of a significant level of overcommitment. We are trying to reduce the level of planned overcommitment so that our contingency fund is really the normal churn within the system throughout the year. Evidence suggests that that approach provides a sufficient safety net to deal with an unanticipated emergency.

Mr O’Reilly:

This is an element of self-analysis and self-criticism: in the budgeting process there is a strong element of incrementalism. In other words, Departments start with 100, seek 120 and end up with 110. The debate tends to be around whether they should get 10 or 20. There is a weakness in that system, which is that we tend to have less focus on what they are doing with the original 100. That is an area where we are conscious that we could have greater focus on the 100 as well as on whether the Department should get 10 or 20. Inevitably, in the nature of the process and the way that it is run, there tends to be a focus on marginal differences, rather than on the big chunk of money that each Department has. That does not tend to get debated. That is why the Minister has placed such a focus on putting mechanisms in place in future to look at the efficiency and the effectiveness of the way that we look at both the 100 and the 10 or 20.

The Chairperson:

This Committee does not have the responsibility of drilling into each individual Department’s spending priorities. They have their own scrutiny Committees, and there is a demarcation in terms of our relationship with DFP on strategic issues, and of course on your own spending programme. I do not think that we have got into the business of another Committee, but there is a limit to how far this Committee can take that line of discussion.

Mr Hamilton:

I found the final comments about incrementalism interesting, and I am tempted to get into the discussion about zero-based budgeting.

I have two questions on the issues of efficiency, one general and one specific. Generally, the performance and efficiency delivery unit (PEDU) is an interesting idea. Will you elaborate on its remit, how often it will report, and what it will report on? More specifically, on page 7 of your paper there is a table with the top ten efficiency options for savings by 2010-11. The first one is a programme of measures to enhance productivity in the health and social care sector, including the review of public administration (RPA). The health reforms through the RPA are currently on hold — what are the ramifications of that freeze? Has it been taken into account in the projected savings of £160 million?

Mr O’Reilly:

The precise format and coverage of those individual saving areas will continue to be subject to review by the individual Departments. No Department has told us that it will not deliver the efficiency saving targets identified. However, they may adjust the precise programme of work to achieve the efficiency savings. I am not sure if we have had any communications with the Department of Health on that specific point.

Mr Pengelly:

That table largely reflects the position on 8 May, and the plans developed at that time. In many cases, individual Ministers, upon appointment, pressed the pause button and commenced a review of the approach to delivering the savings: but all Ministers, without exception, have committed to delivering the 3% efficiencies. They may be looking at the exact mechanism to do that; that process will be concluded by the time of the final Budget. As the paper suggests, Departments will be publishing efficiency delivery plans. There may be some variation in how they do it, but the overall number will still be delivered.

Mr O’Reilly:

PEDU is on the agenda for next week. The Minister of Finance and Personnel is still working through the precise mechanisms that should be put in place to ensure that the unit operates effectively. We may talk more about the detail of that next week. The principle is relatively straightforward — there is a facility and resource in the system that is external to individual Departments, but can work with Departments on specific areas of concern that are identified and agreed between the relevant Minister and the Finance Minister. That will not be done in a judgemental way.

There are lots of areas of Government activity in Northern Ireland about which we can say that, when measured objectively, they are not as efficient as those in England, Scotland or Wales. What are the reasons for that? What could be done differently in order to achieve more — and to deliver better results — with the funding that has been provided? Therefore, it is not just about “efficiency” reductions in spending, it is also about performance and the better use of existing resources. There is a facility in the system that will allow specific topics to be examined in depth to see what scope there is to secure improvements. We have looked at parallel examples elsewhere, including, for example, the Prime Minister’s delivery unit in Whitehall which, in working along with Whitehall Departments, performs a similar function to PEDU.

The Chairperson:

What is PEDU’s role, and how does it compare with the Audit Office or DFP’s supply division?

Mr O’Reilly:

We will have more detail next week. I would not say that there is an overlap, but PEDU is coterminous with the Audit Office. Audit Office activities generally tend to be retrospective, because it examines what has happened and the lessons that can be learned from it. There is also coterminosity with the work of supply division and my area of responsibility. As with the Prime Minister’s delivery unit in Whitehall, which is physically — and, to some extent, organisationally — located in the Treasury, the idea is to create a specific focus on particular areas of concern.

The other key lesson is that it is very important that that sort of unit focuses on specific areas. It should not be general or broad-brush in its approach; it needs to focus on specific areas of concern so that its work can be targeted at a particular area for a specific period of time, come up with recommendations, and then move on to other areas of concern in the system.

The Chairperson:

I suppose the question of retrospection deals with the Audit Office. You may then have a Chinese wall as regards DFP’s supply division. What is the mechanism for ensuring that it is an innovation? I am perfectly content with the broad principle, but there is potential for duplication and replication. What are the accountability and scrutiny arrangements, and how will the performance of PEDU be measured?

Mr O’Reilly:

There should be a matching-up between the responsibilities of supply division. Again, I stress that the point of the unit is to create a specific and more high-profile focus on issues of performance and efficiency specifically. That is the reason for creating a separate unit to look at those things. It does not mean that the ongoing work of supply division — processing bids, considering supply estimates and dealing with individual casework in Departments — will not go ahead as a matter of routine. However, I also expect that — if the unit was looking at some particular aspect of some particular Department — the relevant supply division people in my group would also be involved, and would support and work with the people in the unit. Moreover, where specific areas of activity are being examined, we anticipate that the relevant Department would be involved in a joint venture. That has happened on other occasions, when looking at a particular area in an effort to work together to identify ways of doing things better.

The Chairperson:

OK. As you say, we will return to what I suspect is an issue that might need to be spelt out in some detail so that we can see the structure and, maybe, even the hierarchical relationship between the different functions within the Department.

Ms J McCann:

Given the history of some PFI projects, the difficulties and delays, to what extent will capital investment over the next three years be dependent upon any current or proposed PFI projects?

My second question relates to consultation. Your briefing paper states that part of the Department’s remit is to undertake consultations with the general public and specific groups. Will that include consultation on the draft Budget? If so, how will it be rolled out? In particular, how will the voluntary and community sector be included? How will their responses be relayed back to the Minister, and what impact will that have on the final Budget?

Mr Pengelly:

I cannot give you a precise figure as to PFIs, but the figure predicated in the first version of the investment strategy for Northern Ireland, which was published a couple of years ago, was that about 20% of overall investment was likely to be made through some sort of PFI mechanism. There has been no fundamental shift in that figure; it certainly has not increased significantly. The figure work is still subject to variation until the final Budget and investment strategy are nailed down; however, it is a figure of that size. The other point that I would make in relation to PFI — without giving you ammunition — is to concede that, in some cases, projects fail. However, that is not necessarily because of the mechanism chosen to fund the project; it may be because it was not properly managed. There are a whole range of issues.

There is a difference between what happens in England and in Northern Ireland. In many cases in England, because of the slightly different public expenditure framework, the PFI route is chosen because it offers an advantage in budgetary control. That advantage does not apply in Northern Ireland. Therefore, the only test for PFI procurement in Northern Ireland is whether it produces value for money. Whether it is conventional or PFI procurement, the same rigour will apply in project management. That offers some assurance: there is a value-for-money test underpinned by good project management skills.

The consultation runs until 4 January. We will hold four public meetings, which were advertised on 29 October in all the local news media: one each in Belfast, Enniskillen, Derry and Armagh. All will be held in the evening, to facilitate working people who want to contribute. As to the voluntary and community sector, the Northern Ireland Council for Voluntary Action (NICVA) is separately organising either five or six events— there is a question mark over one of them. We will attend those, in order to work with NICVA and try to facilitate that debate. We are also holding a range of other meetings, for example with the Confederation of British Industry, the Northern Ireland Committee, Irish Congress of Trade Unions, and other social and economic partners. All the comments made will be recorded and put in a substantial consultation report to Ministers. That will be available to them before they conclude the Programme for Government, the Budget and the investment strategy. People can also make written submissions through a website. Everything will be collated, analysed and presented to Ministers in advance of decisions being taken.

Mr Storey:

The top ten efficiency options relate to only five of the 11 Departments. Have they been prioritised by the amount of money involved? How do we come to have that top 10?

Mr O’Reilly:

I think it is simply on the basis of size.

Mr Pengelly:

It is just the size, because —

Mr Storey:

The amount of money?

Mr Pengelly:

Yes.

Mr Storey:

OK. I just wanted that clarified.

Where are we in relation to the implementation of the recommendations in the Pannell Kerr Forster (PKF) report? Given that in the long term, the way in which we are allocated funds is going to change, do you think that there is any merit in reopening the entire debate regarding the Barnett formula? We received an interesting paper this morning, which we are going to share with you, regarding a fiscal conference. Obviously, the Scottish constitutional reform paper will inevitably open up that entire debate.

Mr Pengelly:

The final PKF report was received in June; I think that a copy was passed to the Committee. Our immediate response to that has been to secure a specific resource within DFP to take the lead in the “implementation of PKF” — that is the generic term, but it is really about a wider financial management agenda, to which the PKF report has made a valuable contribution. An action plan has been produced, and immediate steps have been taken. Some training courses for the senior Civil Service have been arranged, focusing on the key skills that are required for better financial management. That cuts through all sorts of issues, including the levels of overcommitment and underspending that we talked about earlier.

We are also focusing on measures such as trying to develop standard board reporting packs. That will mean that, at board level in Departments, non-department public bodies and all public-sector organisations, there are a common set of what we call the key metrics, which are things that should be available to a board at every monthly meeting. They give a good sense of how the organisation is performing financially, and flag up warning signs about issues that need to be addressed. That is continuing to be rolled out. We are also working with the finance network across Departments to continue to develop training packages.

We are not seeking to turn every public servant into an accountant. Public servants need a whole range of skills; the last thing that they need is to become accountants. However, they do need to know what sort of questions they should ask, and they need to know where the accountant — as the person who can answer those questions — sits within their Department. Therefore, it is about education, but it is not a brainwashing exercise of management by numbers. We will continue to roll that out in the coming months. We have started to see some benefits in the in-year cycle, in the quality of information that Departments are producing and in their responses regarding reduced requirements and pressures. We expect that to continue in the coming months and years.

Mr O’Reilly:

We have also recently held a senior Civil Service best-practice event specifically on the PKF report and the follow-up to it. Follow-up actions will include a mandatory two-hour seminar for all senior civil servants to reinforce the messages. A two-day training programme will also be developed for those who need to improve their budgeting skills. In addition, the Treasury has a website called ‘love learning’. It is a self-learning programme, and people can go through budgeting issues over a number of weeks. Therefore, that particular strand of work is continuing.

Last week, I attended a Government finance professionals’ conference in Brighton. There was a separate session on financial management in Northern Ireland, and we were able to talk to people about what we are doing. There was a fair degree of interest in that.

Regarding the question about Barnett and all that —

The Chairperson:

That is a good way of putting it. [Laughter.]

Mr O’Reilly:

A great deal has been, and probably will be, written about the way that the Barnett formula operates. I am sure that the research report referred to the background and the basis for the formula. The formula is named after Joel Barnett, who was Chief Secretary to the Treasury in 1976 when it was introduced. He is on record as saying in the House of Lords some years ago that he was surprised that the formula had lasted 15 minutes, never mind 15 years.

The formula has advantages and disadvantages. It is crude and simple, but fairly easy to understand. One of the very good developments in recent years is that the full details of the workings of it have now been made fully public. In fact, the Treasury has just published an updated version of its statement of funding policy, which includes all the nitty-gritty detail of how the formula operates.

I describe it as crude in the sense that it is a population-based mechanism; effectively, it transposes changes in spending programmes in England, on a population basis, to the devolved Administrations. The advantage for the devolved Administrations is that, over the years, it has allowed them to maintain a fairly high lead in terms of spend per head, over and above both England and the average for the UK. That, in turn, is simply based on the lead that was in place when the formula was introduced in 1976-77.

I am sure that your researchers will explain the mathematics, but the formula also has what is called a convergent effect, which means that, over time, it will cause spend per head to converge to the UK average — but never actually become the UK average, for some mathematical reason that I am sure somebody else can explain. That convergent effect is quicker when there are higher increases in spending in England compared to the rest of the UK.

I suppose that the question is at what point that convergent effect will result in a substantial differential between the spending that has been allocated to the devolved regions and their needs. Of course, a mechanism is in place whereby, if a particular devolved Administration formally request a needs-assessment review, there will be a fundamental review by the Treasury of spending against needs in each of the devolved Administrations. I suspect that there is a reluctance to request such a review because we are not sure what the result would be. Indeed, we could end up worse off. In recent years, the balance of judgement has tended to be not to seek such a fundamental review. I suspect that, in coming years, as the convergent effect comes into play, the pressure from within individual Administrations will increase. I will not go on at length about that.

The other aspect is the relationship between taxation and spending. Under the UK system, which is fairly unique across Europe — and, indeed, more widely — there is frankly very little relationship between the levels of revenue raised in any particular part of the UK and the levels of public spending. The two issues are determined entirely separately. That means that the devolved Administrations receive net transfers in terms of the totality of tax revenues allocated to them. However, that is not really surprising; it is a feature of any diverse national economy that individual regions will have variations between their spending needs and their ability to raise taxes. In fact, very often the spending need is higher in regions that are remote and deprived, in contrast with those regions’ capacity to raise public funding. Therefore, there are usually fiscal transfers in any economy. The issue for the devolved Administrations is that their transfers can be easily measured, whereas there are equally significant transfers in, for example, England, between the south-east, the north-east and the north-west.

The fundamental issue is whether there should be some greater relationship between levels of revenues raised in regions and their levels of spending. Again, the judgement in the past, particularly in Northern Ireland, has been that that is probably not a path that we would want to go down, based on our understanding of relative revenue-raising capacities in Northern Ireland compared to other parts of the UK. That is a brief overview of a very complex subject.

Mr McQuillan:

Will the Budget allocations be affected by any decisions that the Varney Review might make? When can we expect to hear the outcome of that review?

Mr O’Reilly:

We expect to hear an announcement on the Varney Review very shortly — I say that, but it is in the Treasury’s hands. We expect it to be announced in a week or two. Do we expect that review to affect budget allocations? The short answer is not very much, and certainly not in the short term.

We have not seen the Varney Report. Our expectations, however, are that it is not likely to have public expenditure implications. It will not, therefore, affect the Budget allocations as such. Obviously, it has major implications for the regional economic strategy, which the Chairman mentioned earlier.

The Chairperson:

We would need to hear the pronouncements of the Treasury before we could make any projections.

Ms Purvis:

Where do the cash-releasing efficiency savings go?

Mr Pengelly:

There will be a total of around £790 million by the third year. The starting point for the Budget process is to establish the baseline for each Department. The Budget covers three years: 2008-09, 2009-10 and 2010-11. The 2007-08 baseline position is rolled forward on a flat cash basis for the three years. Cumulative efficiency savings of 3% are then calculated. That amount is taken off the total and held at the centre with the additional revenue that we get through the Barnett formula. That forms a pot of money for which the Executive makes allocation decisions. Therefore, the money is initially taken from a Department and is then reallocated back to the same one or to a different mix of Departments. The key point is that the money absolutely stays in Northern Ireland.

Ms Purvis:

Therefore, the money is not necessarily ploughed back into the same Department? Instead, it goes back to the Executive to be reallocated?

Mr Pengelly:

That is correct.

The Chairperson:

Are you confirming that the money goes back to the Executive for reallocation?

Mr Pengelly:

Yes.

Ms Purvis:

I have just done a quick calculation, which is probably totally off-the-wall. According to your top 10 efficiency options for the period until 2010-11, the Department of Health is looking at cash efficiency savings of £326 million. However, its departmental expenditure limit for the three-year period from 2008-09 to 2010-11 will only be increased by £455 million. Why is the Health Department being asked to make savings in the first place, if its allocation will only be £129 million after savings?

Mr Pengelly:

That money will come back and be reallocated to the Departments. If a Department’s budget is £100 million, £3 million of efficiency savings are taken away and it only gets £2 million back, its net budget is £99 million as opposed to £100 million, but it is still £2 million better off, because it has initially managed to provide the same level of public service for less money. The fact that efficiency savings are made means that the Department has provided the same level of service, but that it has cost less money. Therefore, the money that Departments are given back is for service improvements and for meeting other pressures.

Ms Purvis:

That goes back to my previous question: if the money goes back to the Executive to be reallocated, it is reallocated to the same Department or to a different Department?

Mr Pengelly:

The money that comes back from all 11 Departments goes into a central pot. The Executive then assesses bids that are received from all Departments and decides how the available resources can be best deployed. It is not a matter of X amount being taken from a particular Department and that same amount being given back: it could be more or less than that amount, depending on the circumstances and the pressures on that Department.

Mr O’Reilly:

On a rough calculation, the cash growth in the Department of Health’s allocation for 2006-07, or, indeed, 2007-08, is roughly in the region of a £500 million cash increase. The efficiency savings would be on top of that again for 2007-08 and the plan for 2010-11 current expenditure. There is another £40 million or £50 million in increases in capital allocations.

Ms Purvis:

How will the Department monitor and report progress in achieving savings?

Mr Pengelly:

Alongside the publication of the final Budget, the Departments will publish delivery plans that will set out the details. They will be monitored within the system. The Executive have yet to conclude on external reporting. They will consider that issue when finalising the Budget.

Mr O’Reilly:

The paper that we provided to the Committee contains the guidance that DFP has given to Departments in the construction of the delivery plans.

Ms Purvis:

How will any slippage in delivering the plans be addressed?

Mr Pengelly:

The key incentive for Departments is that the money has already been taken off them. The Departments have signed up to these levels of efficiencies; they have produced efficiency delivery plans that set out a clear approach to delivering them. Ministers expect those plans to be followed. If delivery were not to occur because of reasons within the Department, that would need to be addressed and understood. It is not as black and white as to say that the Department would be left to suffer if it were not to deliver. Ministers would always avoid that. The efficiencies are underpinning key public services, which cannot be allowed to suffer because public servants are not doing the job. That would be an issue that would be addressed in the course of in-year monitoring. If the efficiencies could not be delivered, DFP would examine the reasons for that. We would consider the introduction of mechanisms to deliver the efficiencies. Failing that, Ministers would consider deploying some of the available in-year flexibility to address the issue. All of that would be in the context of the impact on public services.

Ms Purvis:

You mentioned that funds were found to compensate people for the flooding episode in June. Is a contingency fund set aside for such emergencies?

Mr Pengelly:

The full cost of the flooding episode was slightly less than £5million. That money was found through the in-year monitoring process. The October monitoring round has been announced; the next round will be in December. That will create a contingency, and pressures identified by Departments will mop up that contingency.

Ms Purvis:

So there is no particular fund for emergencies.

Mr Pengelly:

There is not a pot of money.

The Chairperson:

If the efficiency amounts are being removed from the baseline, does that mean that the centre already has that money? It is not money that is to be achieved; it has been removed from the baseline of Departments.

Mr Pengelly:

It is easier to talk about one year, rather than three years. In the third year of the Budget, 2010-11, the Executive has a total of around £1·8 billion to allocate, of which £1·1 billion comes from additions through the Barnett mechanism and £700 million to £800 million from the efficiency agenda. The money comes from Departments back to the Executive, and is then redeployed in Departments.

The Chairperson:

Yes, but Departments have had 3% taken out of their budgets from the beginning. It is not a question of their realising those savings and surrendering them at some stage.

Mr Pengelly:

That 3% is taken out on the basis that the Departments will deliver the necessary efficiency to release those funds.

The Chairperson:

The consequence of the money being taken out of the original budget and the Department missing its efficiency commitments is an impact on the delivery of public services.

Mr O’Reilly:

That is why the efficiency delivery plans are so important. In those plans, the Departments set out, in some detail, the actions that they will take to deliver the efficiencies. In other words, they remain as efficiencies and do not become cuts in public services. Your description of the mechanism is correct. We use that mechanism quite deliberately to ensure that there is an element of re-profiling. In the absence of zero-based budgeting, Departments are forced to consider how they can re-profile and reprioritise their activities, year on year. Provision is removed from Departments and is given back to the centre for reallocation. Departments can then bid for activities that they believe to be their priority activities. It is a deliberate mechanism to create an element of pressure on the system and to constantly review its priorities and to ensure that money is being used by the highest priority activities.

The Chairperson:

The Minister gave us an example — and I do not intend to examine another Department — of very significant additional resources built up incrementally over the past number of years almost to the point of having a budget that is worth twice what it was 10 years ago. The Minister asked whether the delivery of the front-line service is twice as good as it was 10 years ago. Is that an inbuilt contradiction? Reducing the baseline on the basis of experience does not necessarily mean that you will get the same services at the same level.

Mr O’Reilly:

In our presentation of figures, we always attempt to distinguish between totals that include efficiency savings and totals that do not. For example, the vast majority of figures in the Budget do not include efficiency savings, but are simple, real cash increases, as distinct from recycled savings. In a few places we do include the efficiency savings as well to illustrate the total increase in spending capacity, but generally the figures that we use are the cash figures excluding money released through greater efficiencies.

Mr Pengelly:

Surrendering 3% in a budget that perhaps has a lot of fat in it does not necessarily mean becoming more efficient — it may just mean doing a little bit less of something that may, or may not, have needed to be done. The efficiency delivery plans have two main purposes. On the one hand, for those Departments that genuinely experience difficulties in becoming more efficient —or those Departments that are working hard to become as efficient as possible — they can set out a clear methodology and mechanism, and deliver real and meaningful efficiencies. On the other hand, for those Departments that might adopt the easier approach, as you have suggested, they set out a delivery plan that will demonstrate meaningful consideration of real efficiencies and how they will be delivered. The plans have a dual purpose.

Mr O’Reilly:

There should always be clarity on the distinction between cash growth and any growth that becomes available through greater efficiency, and hence through greater spending power. A clear distinction needs to be drawn between those two types of figures, and we try to ensure that that always happens.

The Chairperson:

Your submission states:

“A significant contribution was to come from a 5% real terms reduction in administration Budgets”.

To what extent does the reclassification exercise contribute to that 5% target? It is not a matter of shifting the goalposts, I assume.

Mr Pengelly:

The starting point for Departments is that there has to be a 3% cash reduction, and a component of that must be delivered through a 5% real-terms reduction in administration costs. Quite a number of Departments felt that there was a problem with the classification of administration, and that if they reduced what was called administration by 5% in real terms, they were actually reducing spend on front-line services, because the classification was poor. So we worked with all Departments, and now the things that are classed as administration are those things that all Departments accept are pure administration and bureaucracy.

The Chairperson:

That is a common definition?

Mr Pengelly:

That is a common definition across all Departments. The 3% target has not changed in any way as a result of the classification, although the element that comes from administration may have been tightened a little.

The Chairperson:

Which leaves less room for people to manipulate.

Mr Pengelly:

Absolutely.

Mr Beggs:

Under the reinvestment and reform initiative there was borrowing of £200 million a year, paid for in the past by above-inflation increases in the regional rate. That no longer being the case, it will obviously be paid for out of the block grant. If in your household budget you continued to borrow an additional £2,000 a year for ever, you would still have to pay that back out of your limited baseline income. What assessment has been made of whether this accumulative debt will get out of control at some point?

The Executive programme funds and priority funding packages that were previously available were particularly useful in dealing with cross-cutting issues. Now that those are being done away with, how will DFP ensure that issues that may be of importance to a number of Departments and have a collective significance to Northern Ireland and to the Executive, but fall between bidding processes because they may not be one particular Department’s top priority, do not fall by the wayside?

Mr O’Reilly:

The facts that you have set out in relation to the borrowing of £200 million are absolutely accurate. When we borrow money, we have to repay it. It is borrowed through the National Loans Fund, which has the advantage of providing a competitive rate of interest. Every £100 million that we borrow over 25 years costs £7 million a year to repay.

Your second point is also accurate. There is a limit; we cannot keep on borrowing £200 million a year ad infinitum. We would end up in difficulties, as a private individual would do if he kept on borrowing. We believe that the total amount of borrowing that we have undertaken at present is relatively modest, and is easy to manage within our overall allocations. Obviously, however, we could not keep on borrowing ad infinitum, because that would ultimately create serious problems in other services.

Mr Pengelly:

The previous arrangement was that in order to access borrowing, there had to be a certain level of increase in the regional rate. Beyond that, the servicing of the loan was still a charge on the regional rate. There is now no need for increased access to borrowing; the fact is that we can now borrow £200 million a year.

The draft Budget sets out the regional rate forecast across three years. Notwithstanding the fact that the domestic regional rate has been held flat, there is an inflation-based increase in the non-domestic rate and the normal incremental drift, with new properties being built. The revenue from rates is going up by about £20 million a year, and if we borrow £200 million a year, as Mr O’Reilly says, at £7 million per £100 million, it only costs an additional £14 million a year. There is sufficient additional revenue coming through that stream to deal with the situation without it eating too significantly into the overall resource availability.

The Chairperson:

There might be a bigger issue. PFI is a means of front-loading capital expenditure, and that has an impact on flexibility going forward.

Mr O’Reilly:

The costs of PFI are recurrent also. One of the judgements that have to be made in value-for-money terms is the cost to the private-sector provider of raising capital. That ultimately feeds through into what we refer to as the unitary charges. That still offers value for money against any alternative facility that is available to Government. First of all, most of our money is “free” in the sense that we do not have to pay interest on it; it comes to us through taxation and an additional element of borrowing. There is always a judgement to be made as to the relative value for money when financing particular projects.

Mr Beggs:

What about the cross-cutting issues?

Mr Pengelly:

There was a real practical difficulty with the old Executive programme funds and the Secretary of State’s priority funding packages. In the first instance we had to top-slice the amount of resources available for the generality of pressures across Departments. The money that was top-sliced went into a specific fund, which, as you say, sought to address cross-cutting issues. Our experience over the past couple of years has showed us that levels of underspend in those specific, ring-fenced funds, were at least double the normal rate of underspend. The projects were small, and because the money was ring-fenced, it was very difficult to get them moving. The nature of the ring-fencing and cross-cutting element meant that the ability of the Departments to be flexible in managing the programmes that delivered the services was more limited than was the case in normal circumstances.

Our view was that there was a better approach. Rather than reduce the amounts available to Departments through top-slicing, we would leave the money in the general pot. However, it would be made clear to Departments that where these sorts of issues to be addressed through those funds are of high priority, they should be treated as a priority in the preparation of normal bids. The cross-cutting dimension is dealt with through the Executive’s public service agreements, which cascade through all Departments and focus on issues such as children and the family, as well as other issues that would have been picked up previously. Those issues are still there for consideration; they have not been relegated in terms of importance, but the way in which funding reaches projects has subtly changed.

Mr Beggs:

The feedback that I have received from the community and voluntary sector is that that is not how it is working out in the bid process. However, I have not yet seen the figures, so I do not know.

Mr O’Reilly:

There is a consultation process involving the voluntary and community sector. Some of that sector’s leading figures have arranged to meet the officials who are carrying out the consultation exercise to discuss their concerns about that aspect of the Budget.

The Chairperson:

That is a significant issue, and we will come back to it.

Finally, do we now have a fixed view going forward on the annual limits and level of access to end-year flexibility? It has been something of a moveable feast as the situation has evolved.

Mr Pengelly:

The settlement letter from the Treasury to the Executive represents the outcome of the comprehensive spending review. The end-year flexibility in current expenditure for the three years will be £125 million, £35 million and £25 million. I need to double-check those figures, but the figure of £125 million is definitely correct. For capital expenditure end-year flexibility, it is £100 million, £50 million and £50 million. That gives us full access to the stock of end-year flexibility as it stands today. That is guaranteed access and an agreed profile over the three years of the Budget period. The pot of end-year flexibility will be topped up when we get to the end of the current financial year. The Minister made the point strongly to the Chief Secretary that he will want to return to that debate when we find out our end-year flexibility entitlement. He will want another debate about securing access to that.

The Chairperson:

That will be a product of our own capability to match the projections with the actuals.

Mr O’Reilly:

Ideally, we would have complete flexible access to end-year flexibility. That is where we should be with the Treasury, but, given its insistence on spreading the end-year flexibility access, the deal that the Minister of Finance and Personnel has secured from the Chief Secretary was as good as it could get in the circumstances. The front-loading of end-year flexibility, in particular, allows us to deal with other pressures in the system next year.

The Chairperson:

I think so too.

Thank you for an interesting session. We managed to cover a range of issues. I also thank Hansard staff for their support.

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