House of Commons Foreign Affairs Committee FCO Performance and Finances Third Report of Session 2010–11 Volume I Volume I: Report, together with formal minutes, oral and written evidence Additional written evidence is contained in Volume II, available on the Committee website at www.parliament.uk/facom Ordered by the House of Commons to be printed 2 February 2011 HC 572 Published on 11 February 2011 by authority of the House of Commons London: The Stationery Office Limited £0.00 The Foreign Affairs Committee The Foreign Affairs Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Foreign and Commonwealth Office and its associated agencies. Current membership Richard Ottaway (Conservative, Croydon South) (Chair) Rt Hon Bob Ainsworth (Labour, Coventry North East) Mr John Baron (Conservative, Basildon and Billericay) Rt Hon Sir Menzies Campbell (Liberal Democrats, North East Fife) Rt Hon Ann Clwyd (Labour, Cynon Valley) Mike Gapes (Labour, Ilford South) Andrew Rosindell (Conservative, Romford) Mr Frank Roy (Labour, Motherwell and Wishaw) Rt Hon Sir John Stanley (Conservative, Tonbridge and Malling) Rory Stewart (Conservative, Penrith and The Border) Mr Dave Watts (Labour, St Helens North) The following Member was also a member of the Committee during the Parliament: Emma Reynolds (Labour, Wolverhampton North East) Powers The Committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via www.parliament.uk. Publications The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at www.parliament.uk/facom. Committee staff The current staff of the Committee are Dr Robin James (Clerk), Mr Eliot Barrass (Second Clerk), Ms Adèle Brown (Committee Specialist), Dr Brigid Fowler (Committee Specialist), Mr Richard Dawson (Senior Committee Assistant), Jacqueline Cooksey (Committee Assistant), Mrs Catherine Close (Committee Assistant) and Mr Alex Paterson (Media Officer). Contacts All correspondence should be addressed to the Clerk of the Foreign Affairs Committee, House of Commons, London SW1A 0AA. The telephone number for general enquiries is 020 7219 6394; the Committee’s email address is [email protected] FCO Performance and Finances 1 Contents Report Page Summary 3 Conclusions and recommendations 5 1 Introduction 9 2 The effect of the Spending Review on the performance of the FCO 11 The FCO’s budget 11 Pressures on the budget 12 Key features of the Spending Review settlement 14 Managing the settlement 17 Reductions in the capital budget 18 Staff reductions and the ‘localisation’ policy 20 Overseas Posts 23 Foreign Currency Mechanism 25 Overseas Development Assistance 27 The Conflict Prevention Pool 29 3 The British Council 30 British Council efficiency savings 31 Reducing costs and increasing turnover 32 Formal Minutes 35 Witnesses 36 List of printed written evidence 36 List of additional written evidence 36 FCO Performance and Finances 3 Summary The Foreign Affairs Committee has reaffirmed its long-standing practice of carrying out an annual inquiry into the FCO’s most recent Departmental Annual Report. Our present inquiry has focussed on the FCO’s financial situation and the implications of the Spending Review 2010 for its work and performance, and that of its associated body, the British Council. (We will report separately on the implications for the BBC World Service.) The FCO is one of the major departmental ‘losers’ in the Spending Review, certainly compared to the MOD and DFID, although the ‘core FCO’ function has to some degree been shielded from the full ferocity of the cuts falling on the overall ‘FCO family’ budget, with a greater share of the pain being borne by the other ‘family’ members, the British Council and the BBC World Service. Reductions in spending on the FCO, if they result in shortfalls in skilled personnel and technical support in key countries and regions, can have a serious effect in terms of the UK’s relations with foreign countries, out of all proportion to the amounts of money involved, especially in relation to the UK’s security and that of its Overseas Territories. It follows that cuts to the core FCO budget of even 10% may have a damaging effect on the Department’s ability to promote UK interests overseas. We note that these will come on top of previous cuts to the FCO’s budget in the very recent past, and a regrettable long- term trend for the FCO to lose out relative to other departments and agencies in the allocation of government spending. The FCO will also face cuts of 55% to its capital budget. For the next four years capital spending is likely to be focussed on security-related spending, to the neglect of other improvements to the FCO estate. The target of raising £50 million per year through selling existing buildings may be difficult to achieve, and may not secure savings in the long-term. It may create a unwelcome incentive to sell historic or prestigious buildings which have a potential long-term value to the FCO greater than any immediate monetary benefit likely to accrue from their sale. The FCO’s ‘localisation’ policy has brought benefits, but we do not believe that it is capable of indefinite extension. A further reduction in the opportunities for more junior UK-based staff to serve in overseas posts, and a consequent diminishing of experience and morale among FCO employees, could over time have a damaging effect on the quality of British diplomacy and the effectiveness of the FCO. We comment on the possible implications of the creation of the European External Action Service for the FCO’s global network of posts, and call on the present Government to reconfirm its predecessors’ undertaking that “the establishment of the EEAS will not lead to our Embassies being replaced with Union Delegations”. We welcome the introduction of the Foreign Currency Mechanism, which will protect the FCO against the effects of fluctuations in foreign exchange rates, but are concerned that it does not make allowance for differential inflation rates. We welcome the Government’s commitment to meet the international obligation to spend 4 FCO Performance and Finances 0.7% of gross national income on Overseas Development Assistance. However, there is a danger that the drive to reclassify FCO spending as ODA spending provides a cover for meeting the 0.7% target without increasing the money actually spent on ODA. We note that the removal of funding of peacekeeping operations from the FCO’s baseline will reduce the overall financial risks faced by the Department. The 25% and 16% real-terms cuts to the budgets of the British Council and BBC World Service respectively will pose severe challenges to those two organisations. The British Council faces great strain on its budget over the next four years. It will need to maximise its commercial income without compromising over its primary purpose as a promoter of cultural exchange. We recommend that the Council should give us detailed information on its strategy for implementing a 25% cut in spending, which may well trigger fundamental rethinking of the role and work of the Council. FCO Performance and Finances 5 Conclusions and recommendations 1. We conclude that the FCO is one of the major departmental losers in the Spending Review, certainly compared to the MOD and DFID, although we note that the ‘core FCO’ function has to some degree been shielded from the full ferocity of the cuts falling on the overall ‘FCO family’ budget, with a greater share of the pain being borne by the other ‘family’ members, the British Council and the BBC World Service. While it is not realistic to suppose that the FCO can be insulated from the need to scale back its spending and activities, in the context of the spending cuts being imposed across the entire public sector, we have particular concerns about its Spending Review settlement. (Paragraph 24) 2. We conclude that reductions in spending on the FCO, if they result in shortfalls in skilled personnel and technical support in key countries and regions, can have a serious effect in terms of the UK’s relations with other countries, out of all proportion to the amounts of money involved, especially in relation to the UK’s security and that of its Overseas Territories. It follows that cuts to the core FCO budget even of 10% may have a very damaging effect on the Department’s ability to promote UK interests overseas, given that these will come on top of previous cuts to the FCO’s budget in the very recent past, which our predecessor Committee described, as recently as March 2010, as “unacceptably disrupting and curtailing” the Department’s work and representing a threat to its effectiveness. We further conclude that the Spending Review settlement will accentuate the regrettable long- term trend for the FCO to lose out relative to other departments and agencies in the allocation of government spending. (Paragraph 25) 3. We conclude that the 25% and 16% real-terms cuts to the budgets of the British Council and BBC World Service respectively will pose severe challenges to those two organisations. We note the FCO’s arguments for redressing the balance of spending between the core FCO and the rest of the FCO family, in favour of the former, but we share the concerns that are likely to be felt in both the British Council and the World Service about the implications of the decision. (Paragraph 26) 4. We conclude that cuts of 50% in the FCO’s capital spending will severely impact on the Department’s estates management.