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Official Report (Hansard)

Session: 2008/2009

Date: 26 November 2008

COMMITTEE FOR FINANCE AND PERSONNEL

OFFICIAL REPORT

(Hansard)

Strategic Stocktake 2009-11 / Public Procurement

26 November 2008

Members present for all or part of the proceedings:

Mr Mitchel McLaughlin (Chairperson) 
Mr Simon Hamilton (Deputy Chairperson) 
Dr Stephen Farry 
Ms Jennifer McCann 
Mr David McNarry 
Mr Adrian McQuillan 
Mr Declan O’Loan 
Ms Dawn Purvis 
Mr Peter Weir

Witnesses:

Mr Leo O’Reilly ) 
Mr Michael Daly ) Department of Finance and Personnel 
Mr Paul Montgomery )

The Chairperson (Mr McLaughlin):

The subject for discussion is an overview of issues emerging from the strategic stocktake 2009-11. May I refer members to their folders which include a paper from the Department of Finance and Personnel, a statement from the Minister of Finance and Personnel, Mr Nigel Dodds, on the pre-Budget report designed to stimulate the UK economy, and a ‘Belfast Telegraph’ article headlined ‘Green light for Stormont’s £86 billion projects’.

I welcome the officials from the Department of Finance and Personnel, who we have come to know quite well in recent weeks: Leo O’Reilly, permanent secretary; Michael Daly, head of central expenditure division; and Paul Montgomery, from the central expenditure division.

Leo, I am not sure whether you have any pressing need to make opening remarks, or would it be ok with you if we proceed directly to discussion?

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

I would just like to clarify that the ‘Belfast Telegraph’ article should have read £86 million, not £86 billion.

The Chairperson:

Yes; I was wondering where they got all that money. [Laughter.] I do not know whether that was a mistake by the ‘Belfast Telegraph’ or by someone else.

Ms Purvis:

It was a mistake by the ‘Belfast Telegraph’.

The Chairperson:

It was? I did not see it.

Members are welcome to jump straight in with their questions.

Mr Hamilton:

I want to discuss the Chancellor’s pre-Budget report, specifically in relation to his remark that it would support individual businesses in the economy generally. Will you clarify for the Committee what the £23·6 million of additional current expenditure for Northern Ireland that the Minister mentioned in his statement consists of, or how it will help those businesses?

Mr O’Reilly:

The additional allocation of £23 million is simply a Barnett consequential of a myriad of changes being made to individual departmental allocations in GB. Using a formula, those translate across to the Barnett formula, which means that there is an additional £11·8 million in the next financial year, and an additional £11·7 million in the following financial year. Therefore, it is simply an additional allocation to our Barnett position consequential on allocations being made to GB Departments.

Mr Hamilton:

In his statement responding to the pre-Budget report, the Minister said that it gave Northern Ireland the opportunity to accelerate £86·5 million in capital expenditure over the next two years. Will you provide some more clarity on that and indicate whether assurance can be provided that the required skills and so forth will be put in place to accelerate those capital projects successfully? The Committee is well aware of, and concerned about, the lack of speed and urgency at times in getting some capital projects delivered and the sizeable capital sum that is under spent in basically every Department every year.

Mr O’Reilly:

The proposal to accelerate capital investment effectively means bringing forward spend that is earmarked for later years, and that has been trailed in the media and press over recent weeks. In offers Northern Ireland flexibility and opportunity if the Executive and Departments decide that they wish to use it in order to bring forward capital spend from year 3 — that is, 2010-11 — into the present year and the next financial year, that is, 2009-10. The sums involved for this year —up to £12·8 million — could be brought forward into the present financial year, and £76·8 million could be brought forward into 2009-10.

There are a couple of things to say about that. Mr Hamilton rightly alluded to the fact that the pattern of underspends across the system in recent years, which shows that our levels of underspend were much higher than the additional £12·8 million that is earmarked for the present year. I know that the Committee has a strong interest in that matter. I know, too, that the Minister of Finance and Personnel and the First Minister and deputy First Ministers have emphasised to the Executive the need for Departments rigorously to examine their present position on capital. That is to ensure that Departments will spend the bulk of the funding that they have been allocated for the present year, and to identify any projects, programmes or specific pieces of work that could be accelerated into the present financial year in order to take advantage of that additional flexibility.

The second point is that we need to think carefully about what we are doing here because although that option is open to us, by taking advantage of it, as it were, money will be drawn out of 2010-11 and into forward years. The issue there is, obviously, whether sufficient funding will be left in 2010-11 to do what we were planning to do. In addition, we need to be cautious that lots of additional capital is not drawn forward into the next financial year, and then have difficulty in delivering. That could leave us in an equally difficult position. There is, therefore, a balancing act to be carried out.

Mr O’Loan:

I believe that you state in your submission that there is no expectation of any additional material resources for 2009-10 and 2010-11, but a recent Executive press release said that:

“The Executive was also brought up to date on the successful financial negotiations in Downing Street earlier this week, the nett effect of which has been to remove pressures facing the Executive amounting to up to £400 million in this and next year”.

The press release adds that the Prime Minister also agreed to make available access to an additional £100 million. There seems, therefore, to be a contradiction between those two statements, which raises a lot of questions.

It is, on occasion, extraordinary that we sit poring over these figures time after time. Amounts of hundreds of millions of pounds get bandied about, often without straightforward clarity on what are the overall budgetary changes. Perhaps you could give clarification on that £400 million and £100 million. Do those figures take account of all of the things that have been discussed, such as the £130 million for the reclassification of NI Water, and the £175 million for Workplace 2010? The Committee was also told, I believe, that receipts looked as though they may be down by £100 million, and there are many other matters, including the equal pay issue.

That does not even to take account of additional things that might be needed, such as measures to deal with fuel poverty, the recommendations of the Bain Report and the five-year plan to achieve the decentralisation of jobs. I could name a lot more issues. Can you, therefore, explain the apparent contradiction between those statements, and provide a lot more clarity on the budgetary alterations, specifically in relation to those figures of £400 million and £100 million?

Mr O’Reilly:

Specifically on those figures, the key words to note in that statement are “relieve pressures”. In other words, those allocations will relieve new pressures that would have come forward but which will not now come forward because of the allocations. That is, it does not create additional spending power over and above the spending power that was already available. The concern was that certain specific things — and I will come to the detail in a second — were happing which, if they were not addressed by the Executive and the Treasury, would have created enormous new pressures for which we had not been budgeted in our financial profiles for this year, next year and the following year. The £400 million in this year and next year that you mention is, I am afraid, a technical issue but is related to the non-cash consequentials of the treatment of the assets of Northern Ireland Water.

Mr O’Loan:

Yes, I am aware of that issue. That is £130 million, is that correct?

Mr O’Reilly:

No.

Mr O’Loan:

Is that something different again?

The Chairperson:

You are throwing hundreds of millions of pounds around again, Declan.

Mr O’Reilly:

The approximately £400 million in each year relates to what are referred to as non-cash costs — basically, costs of capital and depreciation costs in each of the years. Those relate to the assets held by Northern Ireland Water, which, under present valuation arrangements, are valued at around £6 billion. Because the Office for National Statistics — stop me if this is getting too boring — has, for technical reasons, reclassified Northern Ireland Water as a non-departmental public body, different accounting treatments apply to how those costs should be scored for public expenditure purposes. The net effect was that, because the Department had not taken provision, and had assumed that it would be scored as a Government company, the rules changed, which meant that it was now being scored as a —

Mr O’Loan:

It shifted from annually managed expenditure (AME) to departmental expenditure limit, is that right, or is it much more complicated than that?

Mr O’Reilly:

No, it is simpler. — [Laughter.]

The Chairperson:

That depends on your point of view, really.

Mr O’Reilly:

Simply because Northern Ireland Water had been reclassified, there were new, non-cash pressures on the Department. In theory, we would have had to find that non-cash provision. The problem is that non-cash sounds somewhat abstract, but if there is insufficient “non-cash” cover in one’s baselines, it starts eating into one’s cash provision. That was the major pressure that was removed in that case.

Mr O’Loan:

Therefore, did that reference to £400 million relate entirely to NI Water issues?

Mr O’Reilly:

Yes.

Mr O’Loan:

That is new to me. I do not mind admitting that I understand about 10% of the issue [Laughter.] but I understand £400 million, and I believe that the Committee had not heard about that before. The Committee should be receiving straightforward clarity with regard to alterations of budgetary considerations. I referred to the £130 million, and I believe that in the Minister’s statement on the September monitoring round he made reference to the reclassification of NI Water, which required a figure of £130 million. That was a shift, as I understand it, a shift from annually managed expenditure to departmental expenditure limit.

This is, I think, a different issue and one about which the Committee seems not to have heard. It is extremely difficult to monitor departmental performance in relation to those issues when the Committee does not receive simple clarity about them.

Mr O’Reilly:

I hope that I have provided clarity this morning. Without getting philosophical, the challenge in dealing with these issues with the Treasury is that Treasury staff tend to talk in large, round numbers. They do not want to get into the detail of what a specific range of pressures might be in Northern Ireland, but they will look at the sum totals, identify what they see as enormous pressures — for example, the need for £400 million for those two years — and address those. The other £100 million that you mention, Mr O’Loan, is simply a round sum that has been provided to deal with a range of other potential pressures in the system, some of which you identified in your question.

That gives the Executive additional flexibility to address the range of other potential pressures that are around at the moment. Quantifying some of those potential pressures remains uncertain simply because some of the numbers have not yet crystallised. The key point is that that £100 million gives the Executive additional flexibility to deal with some of those other pressures.

Mr O’Loan:

A sum of £100 million seems small compared to the figures that apply to the global pressures.

Mr O’Reilly:

One could take that view.

Mr O’Loan:

That sounds like an agreement.

Dr Farry:

Was the relaxation of the pressures and the £400 million in each of the two financial years granted specifically on the grounds that the Northern Ireland Executive would use that money to defer water charges for two years, or did the Executive decide that they would use the money thus? If it is the latter, surely there is an argument that those proceeds should have been considered in the context of the wider strategic stocktake, as opposed to any decision that could be taken in anticipation of the wider stocktake, and for the Executive — and, in turn, the Assembly — to consider all the pressures in the round in light of the additional resources that may or may not be available to us.

Mr O’Reilly:

First, the £400 million per year is for two years — the present year and next year. Secondly, the relaxation was made only because the Executive wished to defer the introduction of any form of water charging for domestic consumers. That was the starting objective, but in doing that it ran the risk of incurring the additional costs that I mentioned. The sole objection of the negotiation, therefore, was to get those costs covered.

Dr Farry:

Am I right in saying that our Ministers would have been refused if they had said that they wanted that money to address other pressures in Northern Ireland? We got more money only because the Ministers wanted to defer water charges.

Mr O’Reilly:

That is correct. A specific case was made for water charges.

Mr Michael Daly (Department of Finance and Personnel):

As Leo said, the sums are associated with the accounting treatment for the body, so it is non-cash; that is all that it is. That sum could not have been used to address other pressures, because there is no cash associated with it.

Mr O’Loan:

You said that the focus of the stocktake was to monitor progress on Programme for Government (PFG) targets, and your analysis states that more work is required in order to provide the necessary assurances that services are being delivered as planned. What proportion of PFG targets do you estimate to be at risk of not being met? Will you update the Committee on the progress of the performance-management framework, which was to be implemented last April to measure the delivery of PFG targets?

Mr Daly:

I do not have the fine detail of that with me. However, the Department has examined all the PSAs and delivery agreements and tried to assess whether they have measurable targets, whether their actions are readily identifiable, and to identify the governance and risk-management arrangements associated with each of them. By and large, the majority of the agreements that are in place require work in some areas, such as governance or risk management. My colleagues in the supply divisions will engage with the Departments bilaterally on that.

Several of the agreements, possibly three or four, are very good and could be held up as examples of how a delivery agreement should be done. A very small number require considerable work. As I said, when we finish this piece of work shortly, our colleagues in the supply divisions will engage with the Departments to try to get those agreements brought into line as we move into the next year.

Mr O’Loan:

I wondered whether you might be so remote from the action that the answers that you received would not be at all meaningful. However, you gave me some reassurance when you said that the evidence that you get enables you to say that there has been real delivery.

Mr Daly:

It is a case of examining the arrangements that Department’s have implemented to manage the delivery — at this point we do not necessarily have to look at a target. We want Departments to have well-established milestone targets that they will achieve regularly, rather than in 20 years’ time. That way progress can be monitored by identifying whether there are good governance arrangements in Departments that contribute to an agreement at senior level, and on whether the risks have been considered. After that, one begins to get an assurance that the systems in place are working.

Mr O’Loan:

We do not want a situation where all the boxes are apparently ticked, but people are screaming that they are not receiving the service that was promised.

Mr McNarry:

Part of DFP’s terms of reference for the stocktake was for Departments to:

“identify any significant increased requirements for 2009-10 and 2010-11 only and propose how these might be addressed, by departments, through an adjustment of existing plans and priorities”.

Using the premise that DFP did not address that fully in its stocktake submission, did other Departments address fully the terms of reference? If not, what action will the central finance group take?

Mr O’Reilly:

We always encourage Departments to seek to address emerging pressures in the first instance with their own resources, particularly if they feel that there is scope to redeploy resources in their existing allocations to meet certain pressures. The reality, however, is that Departments, because that is their best assessment and the best assessment of their Ministers, will take the view that it would be very difficult for them to meet with their own resources all of the pressures that they expect. They will, therefore, identify to DFP those pressures that they want the central process to address. Therefore, although we ask Departments to address internal pressures, it is not unusual for them to identify pressures back to us at the centre.

Mr McNarry:

How dependent is DFP on other Departments delivering underspends?

Mr O’Reilly:

We are entirely dependent on Departments managing their allocations each year within the sums that they have identified as necessary and which have been allocated for budgetary purposes. We hope that that process means that Departments keep their end-year underspends to a minimum.

The Chairperson:

Were you referring to the release of easements?

Mr McNarry:

I am satisfied with the answer.

Ms J McCann:

The Department’s paper states that each 1% increase to the current efficiency target of 3% would yield a further £85 million. Commenting on the Chancellor’s pre-Budget report, the Minister of Finance and Personnel said that the Executive would need to consider higher efficiency value-for-money targets. Are further efficiencies being considered on top of those that are being taken?

It was clearly stated that those efficiency targets would not affect the delivery of front-line services. Some community and voluntary organisations are saying that efficiencies are affecting front-line services in that some Departments are paying less for those services as a result of targets. What is your analysis of that? Have front-line services been affected, and are the Executive considering raising the efficiency target of 3%?

Mr O’Reilly:

The figure that is quoted in the Department’s paper is illustrative. We said that every 1% increase in efficiency targets would yield a further £85 million. I am not aware of any intention by, or proposals from, Ministers to increase over the next two years of the planning cycle the efficiency targets that are already in place. It is difficult to comment on your point about community and voluntary organisations because they are dealt with by individual Departments. Unless individual Departments report back to DFP on specific issues to do with a particular organisation, we would not necessarily be aware of that centrally.

Ms J McCann:

Are you saying that a rise in efficiency targets will not be considered?

Mr O’Reilly:

There are no proposals at the moment to increase the present levels of efficiency targets in the system. To complete the picture, part of the Chancellor’s pre-Budget report announcement, to which the Minister referred in his press release, included a statement that a further £5 billion of efficiencies would be delivered by central Government Departments in GB. That means that if Department X reduces its budgetary provision for 2010-11 because of those efficiencies, there will be Barnett consequentials for the devolved Administrations.

That is coded language, so we are not clear on exactly what that means, but it could mean that Barnett reductions could be applied to our 2010-11 settlement. However, we will not know any of the detail of that until the UK Budget in March 2009. I have given that information in order to provide a complete picture of what is happening with efficiencies.

Ms J McCann:

From your analysis, has that affected front-line services?

Mr Daly:

I have heard the same comments that you have made. Without knowing the detail of what is happening on the ground, if the level of a service is reduced, that is not necessarily a cut. It can still be an efficiency measure if less of what is being delivered is needed.

Ms J McCann:

If Departments are paying community and voluntary organisations less for delivering those services, those organisations will have to cut back on what they deliver. If that is happening then those services are being affected.

Mr Daly:

I am not aware of that level of detail.

Mr Paul Montgomery (Department of Finance and Personnel):

The alternative is for those organisations to become more efficient. I presume that the Department’s underlying rationale is that, with less funding and by becoming more efficient, the same levels of service can still be delivered to the public.

Ms J McCann:

I do not necessarily agree with that.

In your briefing paper, you stated that questions remain about the scale of some of the bids submitted by some Departments and about whether those bids represent pressures at all. Before the Departments submitted their bids, what discussions were there between DFP and other Departments about the contents of the strategic stocktake? In addition, how can you advise the Minister about the outcome of the stocktake if doubts exist about the validity of submitted information?

Mr Daly:

Discussions with Departments are ongoing, and they will continue until the assessment is finalised. The Committee asked for an initial update on the emerging picture, so that is the purpose of this meeting.

Returning to the terms of reference for submitting bids, we asked to be informed about new and significant pressures that had arisen. We have seen many of the pressures that were reported before in monitoring rounds. Consequently we must consider whether to fund such bids. The initial assessment for many of those bids is that they are desirable but not essential, so we must decide whether they should be funded at the expense of something else that might be inescapable.

That answer should give members an initial feeling for the situation. Nevertheless, before completing the overall assessment, we will get to the bottom of many of those questions with the Departments and, if necessary, with our colleagues in Supply division.

Mr Weir:

When the Budget was presented in January 2008, it included detailed capital receipts for Departments, amounting to £486 million, £266 million and £612 million respectively for the three financial years. Obviously, we are now in a different economic environment, and your submission states that the 2008-09 target will not be achieved. Although I appreciate that you may need to get back to us, what are the latest estimates for capital receipts for those three years and what actions are you taking in that area?

Mr O’Reilly:

I shall give you my best recollection of those figures; Paul may have them in front of him. In addition, we will produce a —

Mr Weir:

It may be better to wait until you are certain about them.

Mr O’Reilly:

As I recall, following the suspension of the procurement, the £175 million capital receipt for Workplace 2010 that was designated for DFP will not materialise. In addition, members will be aware that the £200 million capital receipt for the Crossnacreevy lands that was due in year three is now uncertain, if not completely unlikely. Furthermore, £60 million of central assets realisation team (CART) receipts will probably not be delivered this year. Some, although not all, of those outcomes relate to the state of property markets here and elsewhere. My colleagues may have some supplementary details.

Mr Daly:

The only other item that I can see is the capital receipt for house land sales. Our submission may not fully explain that, but that is what it refers to.

Mr Weir:

Although, given the state of the property market, specifying dates and figures for some of those matters can be like hitting a moving target. Apart from the Crossnacreevy lands and exceptional circumstances in which assets are heavily overvalued, rather than massively reducing our expectations, should we accept that there are legitimate reasons for the delay in getting in those capital receipts and that they will be deferred rather than disappear altogether?

Mr O’Reilly:

Apart from Crossnacreevy and Workplace 2010, we put the rest entirely down to the state of the property market.

Mr McNarry:

Do you have the figures for Workplace 2010 and Crossnacreevy?

Mr O’Reilly:

My recollection is that the figure for Workplace 2010 is £175 million and for Crossnacreevy it is £200 million.

Mr McNarry:

So, should I add those figures together?

Mr Daly:

They relate to different years.

Mr O’Reilly:

It is always interesting to add numbers together.

Ms Purvis:

In relation to what you said about house land sales, does that relate to the sale of land at Ballee?

Mr Montgomery:

No. The land at Ballee was in respect of 2007-08, so the Department was given money because the land sale did not go through. We have been continuing to press the Department to put the issue back on the table again at some time.

Dr Farry:

Turning to the detail of the figures, over the two years, there has been £51 million in reduced requirements against a combined figure of about £493 million in additional revenue pressures, which is a gap of more than £400 million. With regard to capital expenditure, there is a grand total of £1 million in reduced requirements against increased pressures of £611 million, which is a gap of £600 million. Therefore, there seems to be a billion-pound gap between the reduced requirements and the additional pressures. No doubt you will tell us that the Department is not giving you figures on time and underspend, but there seems to be a considerable gap between the two different positions.

Mr Daly:

As I said earlier, those are the figures that the Departments have presented. However, when we go through those figures, we will find that a lot of them are discretionary. Even if Departments are asked to include only big things that are inescapable, and things that we did not know about, everything will be thrown in. That is the game that Departments play, because they always worry that someone else will throw in such issues, and that the money will go there instead. Nevertheless, those are the figures that have been handed in, and, when we go through those figures, they will be whittled down to the critical few that need to be addressed.

Dr Farry:

I presume that reduced requirements will not increase by much until the end of the financial year, when most Departments suddenly hand back a large wad of cash that they have found at the bottom of the drawer.

Mr O’Reilly:

Hopefully, Departments will not hand back money at the end of the financial year. It is much better if they do it earlier in the year, because that allows it to be redeployed to other purposes as soon as possible.

If the numbers are added up, they look comparatively large. However, if one considers the pattern of recent reduced requirements declared by Departments in the course of any financial year, over the past three years, it has been at least £150 million in each year and more than £200 million in some years. That is just current expenditure, but, similarly, between £150 million and £200 million of capital expenditure comes out of the system every year for deployment. Therefore, although the figures might look stark now, we are not long into the year, and a lot can happen during the course of a year.

Mr Daly:

Before the start of the financial year, Departments, and the Department of Enterprise, Trade and Investment (DETI) in particular, declare their hands with regard to reduced requirements. One would expect that as they get further into the year and their plans firm up, more will come out.

Dr Farry:

I appreciate that the figures have come from the Departments, so you may not be able to respond; nevertheless, it seems bizarre that a lot of the new pressures that Departments are identifying do not seem to be overly focused on the current situation. For example, the Department of Education has come in with additional energy costs, which is fair enough. There are also difficulties with house land sales, additional bids and the warm homes scheme, but, apart from that, there is not a huge amount that could be related directly to the current situation. Is that surprising?

Mr Montgomery:

We found it surprising that energy costs have increased, as we would have expected them to be falling. Crude oil prices are lower now than they were when the Budget was settled, and we are talking about emerging pressures and expecting that to be reflected in utility costs. Therefore, it was unclear to us how the Department perceived that there would be additional costs in 2009-10 and 2010-11.

Mr O’Reilly:

Arguably, the best way of addressing some of the significant emerging pressures caused by the wider economic situation is to stick with the strategy that was agreed in the Budget last year — for example, with regard to the various allocations of resources, which were targeted at that time on seeking to address economic-growth issues. Perhaps the answer is that Departments should have the resources in place to relieve a range of the pressures that they face.

Dr Farry:

Under the Department of Education, the two figures given for school rationalisation are £22·7 million in 2009-10 and £19·5 million in 2010-11. It seems slightly counterintuitive to be asking for considerable sums to rationalise schools when you are seeking to reduce costs. Does school rationalisation relate to the education and skills authority (ESA)?

Mr Montgomery:

Given that £20 million is a significant amount, we are in discussion with the Department of Education. It appears that the Department has the money and that it is simply a case of shifting it around. Given that that is the case, the Department is concerned that the incentive may no longer exist, because the people making the decisions now have direct responsibility for the one-off costs associated with rationalisation. Therefore, asking for additional money is designed to ensure that people have the incentive to make, what is in our view, the right choice. To achieve that from the budget could be challenging as it falls under the category of nice but not necessary.

Dr Farry:

That is a topic for discussion.

I want to return to the issue of water charges. Under the Department for Regional Development’s (DRD) revenue figures, it faces a loss of income from the deferment of water charges of £70 million next year and £128 million in the following year. Its capital expenditure issues include a loan note of £20 million for Northern Ireland Water. Thus a total cost of £220 million of additional pressures has now emerged. How can that be reconciled with the announcement that it will cost £400 million to defer water charges for two years?

Mr O’Reilly:

As I explained in response to Mr O’Loan’s question, the £400 million in each of the two years refers to the non-cash consequences of deferring water charges. We will still have to manage the cash consequences. In layman’s terms, that means that the anticipated revenue from water charges — £70·4 million and £128·7 million — will not now be received.

Dr Farry:

Those costs are unlikely to be negotiated via the system, and the Assembly will have to deal with them.

Mr O’Reilly:

At present, we have to consider those pressures as part of the strategic stocktake.

Dr Farry:

I do not expect Leo to respond to my next comment, but the transparency of announcements is a huge issue. The Executive announced, with a great fanfare, that water charges are to be deferred without cost. However, at the same time, £200 million cash consequence that the system must absorb is contained in the detailed figures — and that amounts to fine print. That was more of a political comment than something to which the officials must necessarily respond.

Mr O’Reilly:

You asked a question about the loan note of £20 million.

Mr Daly:

I understand that the loan relates to the timing of payments. I do not have much detail, but although Northern Ireland Water’s capital plans are on course, there is a timing issue involving cash inflows and outflows. The company is getting to the point at which it will not be able to accrue the necessary expenditure and the loan of £20 million, detailed under 2009-10, is to cover that.

Dr Farry:

Paragraph 8 states that DFP expects more reduced requirements due to:

“the lower cost of taking forward capital projects as a result of the fall in property prices and the more competitive market conditions for public procurement in the construction sector.”

What actions will DFP take to challenge Departments to ensure the early identification of reduced requirements, so that the impact of the available resources can be maximised?

Mr O’Reilly:

In general terms, it is a perennial task that we must constantly ask Departments to review their positions regularly and to come back to us with reduced requirements. I do not need to go into the reasons again, as the Committee has scrutinised the matter on several occasions. It is fundamentally important to achieve the best value for money, the best return, and the best use of total available resources.

On the specific point about capital projects, obviously, the way that the manifestation of greater competition in the market should feed through to us is via the procurement process. I am sure that you will want to discuss that subject later.

Mr McNarry:

Have you actually calculated the shortfall between the value of property two months ago and the value of property now?

Mr Montgomery:

Land and Property Services (LPS) provides advice on the property market. It indicates what property values are, although there is a general expectation that — due to purely economic factors, such as supply and demand — value will fall.

Mr McNarry:

It is just a simple calculation: if it was worth x then, for example, is it now worth x-? What is x-? Do you have those figures?

Mr Montgomery:

No.

Mr O’Reilly:

That is probably due to the fact that, as you know, it is difficult to make such generic cross-cutting assumptions because there are so many variables in the marketplace from one day or month to the next. We rely primarily on Departments to come to us and say: “We have £x million forecast receipts next year. Valuations that we have received from Land and Property Services and work that we have done with Central Procurement Directorate (CPD and the Strategic Investment Board (SIB) indicates that we will not get that amount of money next year. Therefore, we now have a problem that must be managed.” That is the process.

Mr McNarry:

Do they tell you how much they will get?

Mr O’Reilly:

Yes. If they tell us that they are due to get £100 million, but that they have a problem with £40 million, by definition, therefore, they are telling us that they still expect to get £60 million. At present, the situation is fluid.

Mr McNarry:

Is it possible that we can obtain the breakdown information that you have? I accept the way that the matter is being handled. However, it seems inconceivable that anyone who is in business does not know what their business assets were worth yesterday and does not have a baldy what they are worth tomorrow.

Mr O’Reilly:

In normal times, that would be an accurate comment.

Mr McNarry:

We are living in unusual times. However, figures do not fluctuate that much at present.

Mr O’Reilly:

That probably goes back to a question from another member of the Committee about the overall position as regards forecast asset receipts from asset disposals.

Mr McNarry:

Is it all right to request that information?

Mr O’Reilly:

We have already undertaken to provide information on what we understand the current position to be.

The Chairperson:

Obviously, due to continuous market change, that will be a snapshot of one moment in time.

Mr McNarry:

I just want to know what people consider to be the shortfall; how much did we have to play with and how much do we have now?

Mr O’Reilly:

There is a straightforward answer to that. A forecast figure for the next three years of receipts was published in the Budget. Therefore, we can give you our best assessment of where the situation is at present.

Mr McNarry:

For the next three years? That is crystal-ball gazing. I am glad that you are nodding.

Mr O’Reilly:

Well, for the next two and a half years. We must underline that the information that we provide is very much a forecast that is based on figures at the present moment in time.

Ms Purvis:

Can you provide an update on negotiations on the current Civil Service equal-pay claim?

Mr O’Reilly:

Negotiations continue. It is difficult to provide an update because, by definition, negotiations are an ongoing process. I do not want to damage the prospect of reaching an early agreement with trade unions by going into too much detail about the ins and outs of it. I will say as much as I think that I can: if you think that that is not enough, let me know. You have probably heard the same information from Derek Baker and his colleagues.

In simple terms, strand one of the negotiations deals with the back pay for up to six years for people who are eligible under the Equal Pay Act ( Northern Ireland) 1970. The second, and most complex, strand, seeks to rectify the position for the future so that we do not find ourselves in the same position again. Individuals who receive a back-payment lump sum will become liable for tax, which will, in some cases, affect the individual’s access to benefits, such as tax credits, to which they are currently entitled. The third strand of negotiations will address those situations. We want to explore with the trade unions whether there is scope for agreement on an outcome in which the ultimate payment could be free from tax liabilities, for instance. That would affect the overall quantum of the payment made, but it is an attempt to permit individuals to avoid having to deal with the significant tax consequences of, unexpectedly, receiving amounts of money.

Ms Purvis:

You talked about the equal pay claim, but table 1 does not identify that as an increased pressure. Do you expect to receive funds from Treasury to cover the pay claim? Or, will the required funds come from departmental administration budgets?

Mr O’Reilly:

We have not received a specific commitment from Treasury in respect of equal pay. As I said earlier, the Executive have been given additional flexibilities to deal with a range of pressures that Mr O’Loan listed — among which is equal pay. Part of the difficulty is that we do not know what the final bill will be. We have a rough idea of how it will pan out, but we are still seeking to establish how much the final bill will be. However, it will become clear in the negotiations.

The Committee will not be surprised to hear that, as part of the negotiations, the Department is seeking to minimise the bill but, at the same time, meet fully the Executive’s and the previous Government’s legal obligations to the employees.

Ms Purvis:

Why does table 1 not include figures for administration bids?

Mr O’Reilly:

The Executive, as members will know, set a target for Civil Service administration costs to fall in real terms by 5% a year cumulative over the three years of the planning period. Therefore, we believe that Departments have to continue to manage within the allocations they received to enable them to achieve that target. The allocation of money now would be a breach of that Executive target, and that could happen only if the whole Executive decided that they did not want to stick to that target. That is why administration bids are not included in table 1.

Ms Purvis:

Is it likely that any of the administration bids or any of the pressures that you have identified will increase?

Mr O’Reilly:

There are always administrative pressures at the margins of Departments, but experience tells us that most Departments are capable of managing their systems throughout the year. We do not rush to provide additional administrative-costs cover for Departments before the start of a financial year; we prefer to wait and see how they get on during the year.

Ms Purvis:

Have you not identified anything yet?

Mr O’Reilly:

There were bids of £20 million for each year for administration costs, and that was from a total administration budget of £500 million. The Department of Finance and Personnel is not known to be sympathetic to those sorts of bids, as other Departments will tell you.

Ms Purvis:

Departmental officials who have already provided evidence to the Committee said that the work of the capital realisation task force and the performance and efficiency delivery unit (PEDU) would be factored into the stocktake. Has that been the case? In particular, what impact has that had?

Mr Daly:

The capital realisation task force, particularly the capital assets realisation team (CART), has been mentioned implicitly, if not explicitly. It deals with securing the additional receipts, and, as Leo said earlier, we do not think that the receipts that we were expecting this year as a result of the work of CART will be coming in. We have taken account of that.

Earlier, we gave a brief update on the situation with delivery agreements, and I worked with PEDU in doing that. The other strand of PEDU, efficiency, is built in to the requirements for Departments to deliver within their budgets. That is implicit, but we have not mentioned it.

Ms Purvis:

What has their overall impact been?

Mr Daly:

We had expected the CART to deliver £60 million this year. It has not achieved that, but it is getting up to speed. We are working with our colleagues in the Office of the First Minister and deputy First Minister (OFMDFM) and SIB to try to move that work forward.

Ms Purvis:

Do you expect the next full Budget process to take place at the time of the next comprehensive spending review (CSR)?

Mr O’Reilly:

It will be an important factor in the consideration of the Finance Minister and the Executive. There is no explicit information on when the next comprehensive spending review at UK level will happen. We had anticipated that that might have become apparent with the pre-Budget report, but that has not happened. The next CSR has to happen either next year or the following year, otherwise the Government will run out of plans.

Ms Purvis:

Do you plan to continue with a Budget strategic stocktake next year before you know whether there will be a CSR?

Mr O’Reilly:

That will be for the Minister to consider in due course.

The Chairperson:

You are only considering the possible pressures with which the Treasury must deal when it decides whether to have a CSR. You are not predicting that there will be a CSR, but you think that a CSR is a definite option.

Mr O’Reilly:

As I said, a CSR has to take place either next year or the following year. Even if it were held next year, it could still relate to 2011-12, which is beyond the current planning period. As you know, decisions on when CSRs are held are entirely in the hands of the Treasury.

Mr McQuillan:

In the Minister’s statement to the Assembly on the September monitoring round, he referred to ongoing negotiations with the Treasury on end-year flexibility (EYF). In his comments on the pre-Budget report, the Minister said that there was less scope for the Treasury to provide access to subsequent underspent resources. What was the outcome of those negotiations, and what steps will DFP take to overcome the difficulty of access?

Mr Montgomery:

The Minister’s response to the pre-Budget report related to the difficult financial position at UK level, which will have implications on the access to EYF. EYF access was imposed on us as part of the pre-Budget report, because there was a CSR-set reduction in the allocation to the Department of Health, Social Services and Public Safety (DHSSPS). As a result of that, our Barnett allocation was reduced by £42 million. To compensate for that, the Treasury has said that we will have access to £42 million of EYF. That is the only part-access to EYF of which we are currently aware. However, discussions are ongoing, and we will continue to press the case for EYF.

Mr O’Reilly:

As you know, Northern Ireland received full access to all its EYF stock in January’s Budget. That money was subsequently allocated to Departments as part of the Budget process. Therefore, any new EYF will be available from the end of 2007-08. We are only now beginning to build up an additional stock of end-year flexibility. As Paul Montgomery said, if we access and bring forward that EYF now, it will reduce the scope for additional EYF to be available in future years.

Mr McQuillan:

Are you saying that there is there no budget problem?

Mr O’Reilly:

I would not say that. A stock of EYF remains from the end of the previous financial year, of which £42 million has already been pre-empted on the capital side because of the health position at a national level. The remaining money is available. What are the totals?

Mr Montgomery:

The totals are approximately £200 million in capital and current.

The Chairperson:

Before the session began, the Committee agreed to add the issue of the pre-Budget report to the agenda for next week’s meeting. It would be helpful if the Department could provide a briefing paper on how the elements of the pre-Budget report apply in this region. Is that possible?

Mr O’Reilly:

Yes of course. There are two strands to the pre-Budget report. The UK-wide strand includes all the measures that were introduced. We can provide that factual background information to the Committee. Although we did not produce that information, we will seek to explain it. We will provide supplementary information that focuses specifically on the implications for Northern Ireland.

The Chairperson:

The Committee recognises that it is a dynamic situation and that people are merely drawing down.

Mr O’Reilly:

Although some implications — such as bringing forward pensions payments and the postponement of the 1% increase in corporation tax — originate from the Treasury, they affect Northern Ireland.

The Chairperson:

The Committee needs to consider those factors.

Dr Farry:

I presume that those issues will be factored into the redraft of the regional economic strategy?

Mr O’Reilly:

Yes, they should do.

The Chairperson:

Thank you very much for your participation in that comprehensive session. As usual, if we uncover any other issues, we will send correspondence. Thank you for your assistance.

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