COMMITTEE FOR FINANCE AND PERSONNEL

OFFICIAL REPORT

(Hansard)

Outcome of the Strategic Stocktake

21 January 2009

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 McNarry
Mr Adrian McQuillan
Mr Declan O’Loan
Mr Ian Paisley Jnr
Ms Dawn Purvis
Mr Peter Weir

Witnesses:

Mr Michael Daly )
Mr Paul Montgomery ) Department of Finance and Personnel
Mr Richard Pengelly )

The Chairperson (Mr McLaughlin):

I welcome the witnesses from the Department of Finance and Personnel: Mr Michael Daly; Mr Paul Montgomery; and Mr Richard Pengelly. Good morning, gentlemen. The Committee has agreed that the session will be recorded by Hansard. I remind colleagues and everyone in the Public Gallery that mobile phones must be completely turned off because they interfere with the recording equipment.

Richard, are you going to offer a few pearls of wisdom in your opening remarks?

Mr Richard Pengelly (Department of Finance and Personnel):

I do not know about pearls of wisdom, but I will comment on the statement that the Minister of Finance and Personnel made yesterday on the 2008 strategic stocktake. Members have copies. Rather than go through the statement in detail, I will focus on some of the high-level points and then take questions. Is that is alright?

The Chairperson:

Yes, that is fine.

Mr Pengelly:

I will first provide context. There was no Budget process last year, mainly because of the absence of a national spending review and, consequently, of additional funding. The availability of additional funding through a national spending review would probably have meant that the challenge for the Assembly and Executive was how to allocate those funds in line with the high-level strategic Programme for Government. Had there been a Budget process, I do not think that there would have been a significant change of direction from the plans that are in place. The key priority in the Programme for Government is economic growth, and it has never been more of a priority than it is in the present turbulent times.

The Minister emphasised yesterday that he was concerned by the perception that a Budget process means more money for everybody. In the absence of additional funding, that Budget process is a zero-sum game; for every additional pound allocated to one area, a pound is removed from another. The Minister made the point that none of his Executive colleagues wants to discuss that as an option.

The Chairperson:

They do not want to surrender money.

Mr Pengelly:

A news headline last night described spending pressures of £1 billion. That figure represents the amount identified by the Departments. As the Committee’s report helpfully made clear, that was a largely speculative exercise. That is the nature of the game. I talked to one journalist yesterday, and I likened the process to selling a car; the first offer that you make for a car is never what you expect to pay. They were not even spending pressures. In some cases, Departments were seeking to start additional programmes.

The Chairperson:

Were they really aspirational statements?

Mr Pengelly:

Yes, absolutely. In the previous Budget process, the average ratio of bids submitted by Departments to ultimate allocations by the Executive was approximately 2:1. Therefore, it is not unreasonable to believe that less than half of those bids would have been subject to significant and substantive consideration by the Executive.

In response to a question from Mr Hamilton yesterday, the Minister made it clear that the reduced requirements that he expects over the next couple of years will mean that the level of net pressures is well manageable. In a sense, that is normal business. There is a normal level of churn in the system, and the pressures identified are manageable within that.

The Chairperson:

That is useful.

Ms Purvis:

In the last financial year, you said that around about £500 million was identified — you mentioned a bid ratio of 2:1. If the media are speculating that there is £1 billion in pressures and the ratio is 2:1; that means that there was probably £500 million of pressures in the last financial year. Why is the Minister confident that reduced requirements over the next two years will address those pressures?

Mr Pengelly:

The £1 billion is over two years. In reality, that is £500 million a year. That amounts to about £250 million each year, when split between current and capital. Every year, an amount well in excess of the figures that the Minister quoted yesterday comes back from current and capital reduced requirements. The core issues are manageable in that normal churn.

Ms Purvis:

The Minister said that he would urge Committees to be more challenging in relation to prioritisation and proposals. Will you expand on that, or clarify what he meant?

Mr Pengelly:

When we commission any process — whether that is a Budget process or an in-year monitoring process — individual Departments pool together their spending pressures, present those to their Committees and have discussions. The Minister was urging Committees to push back against some of those proposals from Departments. There is often a large amount of speculative bids. The Minister advocates a tough examination of bids and he wants Committees to push back against their Departments.

Ms Purvis:

Is that to address the funding proposals that already exist rather than introducing new ones?

Mr Pengelly:

The Minister certainly would not rule that out. He sees that as a valid role for Committees. Departments must be challenged. It may be that some of the issues that Departments put on the table do not align properly with the Assembly’s priorities; they may be overstated, or it might be the case that issues have not been brought forward. In any of those cases, it is valid for the Committees to put pressure on their Departments.

Ms Purvis:

I have a point in relation to the efficiency delivery plans that the Minister talked about in his statement. The Committee has expressed concern about the delay in publishing those plans. What work has the Department of Finance and Personnel done with other Departments in order to produce those delivery plans?

Mr Pengelly:

It is for the Departments to produce those plans. Michael has done some work on those. Our key role is to examine them, critique them and relay those comments to the Minister, to the Executive and to the Departments.

Mr Michael Daly (Department of Finance and Personnel):

As Richard said, we studied the efficiency delivery plans. As the Committee is aware, they were all supposed to be published. There are concerns because not all of them have been published at this stage — a year after the Budget was approved by the Assembly.

Ms Purvis:

Is that because of the quality of the plans?

Mr Daly:

I am not sure why. One Department has not published its plan. I am not sure of the background to that. Some of the plans that have been published are very much summaries. Therefore, it may be difficult for Committees scrutinising those plans to get into the detail of what is being put in place in order to deliver efficiencies. That concern has previously been registered at this Committee.

The Department’s key concern is that efficiency savings are made, rather than arbitrary cuts. Committees should be really getting into their Department’s plans and carefully scrutinising them. If those plans are not published, the Committees should make their Departments publish them.

Ms Purvis:

That is where the level of detail is really important. Anecdotal evidence suggests that the excuse of efficiency savings is being used a blunt exercise, rather than consideration being given to efficiencies. Are you hopeful that every Department will publish an efficiency delivery plan?

Mr Daly:

All but one has been published. Our colleagues in the Finance Department who interface with the other Departments’ supply teams have made it a priority to challenge the efficiency delivery plans, published or otherwise, as part of their normal engagement.

Ms Purvis:

Which Department has not published its efficiency delivery plan?

Mr Daly:

OFMDFM has not published.

The Chairperson:

Last November, the Committee was told that efficiency plans would be delivered, and that key findings would then be projected over the two-year period of the strategic stocktake. Two months later; where does that stand?

Mr Pengelly:

We have had a first look at all the efficiency delivery plans, with the exception of OFMDFM. In relation to the level of efficiencies that must be delivered as a whole, and given its size, OFMDFM’s budget is a small contribution. Nonetheless, it is important that the Department follows due process.

Transparency is a key motivation. As well as conducting a qualitative examination of the plans, the Department of Finance and Personnel wants to ensure that they are in place and available for scrutiny by the Assembly and the public. The lessons learnt from that were made all the more important by the Chancellor’s pre-Budget report (PBR) in November, which signalled that a further £5 billion in efficiencies will be leveraged out of the system in Whitehall for 2010-11.

The Chancellor’s Budget statement in March will indicate how that will wash across to Northern Ireland, although the Minister indicated yesterday that he will challenge the Chancellor on whether it should apply to a devolved Administration. We want to consider how Departments plan to deliver efficiencies, their progress in delivering them, and — where efficiencies are happening — whether there is scope to go further. We must also highlight any areas where there are no efficiencies, and where important services are being scaled back.

That involves deepening and expanding our knowledge base, which, to use that dreadful phrase, is very much an iterative process.

The Chairperson:

Does a key findings report exist, given that you have access to reports from the major spending Departments? If such a report exists, may the Committee have a copy of it?

Mr Pengelly:

We have recently provided the Minister with some analysis of key findings.

Mr Daly:

Yes, that has gone to the Minister, and if he has not already written to his colleagues, he will do so shortly.

Mr Pengelly:

We will certainly take that request back to the Department. At the moment, the issue being that not all efficiency plans have been published, we have submitted an analysis to the Minister who is writing to Executive colleagues to highlight that fact and the need to push forward. That is an issue for the Minister.

The Chairperson:

I am just making it clear that the Committee wants to see the process being complied with, and the Committee is very interested in seeing the key findings report arising from the exercise.

Ms Purvis:

Have there been any indications from the Treasury that more efficiency savings made as a result of the Chancellor’s announcement will be passed on to Northern Ireland? Will efficiency delivery plans that are to be published be flexible enough to take account of any additional efficiency savings?

Mr Pengelly:

As they stand, the efficiency delivery plans completely exclude that. The indications from the Chancellor in November were that the additional efficiencies would apply to Scotland, Wales and Northern Ireland. All three devolved Administrations are unhappy with that, and plan to speak to the Chancellor about it on the basis of the Barnett formula and the comprehensive spending review, the outcomes of which have been turned into definitive spending plans for the devolved Administrations. It would be a late stage at which to upset that process.

If the Chancellor’s statement were to be applied, they would amount to more than £100 million of additional efficiency savings in Northern Ireland in 2010-11. The current efficiency target for 2010-11 is something more than £700 million.

Mr Paul Montgomery (Department of Finance and Personnel):

Yes, it is £793 million.

Mr Pengelly:

Yes, £793 million: it is material both in absolute terms and proportionately, but the Minister has indicated that he will speak directly to the Treasury about that issue.

Mr McNarry:

To return to the reduced requirements, are your comments speculative or factual?

Mr Pengelly:

The level of reduced requirements is based on the empirical evidence of the past three years. Predicting what happens in the future can only ever be speculative, but that is our guesstimate of what is likely to happen based on what has happened in recent years.

Mr McNarry:

Is it fair to say that there is an anxiety that that might not go according to plan?

Mr Pengelly:

Not on our part, no.

Mr McNarry:

In respect of the pressures, do you believe that what is being asked is a solution in itself?

Mr Pengelly:

I am not anxious about the level of reduced requirements that materialise in the coming years being broadly in line with performance over recent years. Challenging times certainly lie ahead and the economic climate means that there will be spending difficulties. I am not confident that the issues that will represent difficult decisions for the Executive are articulated in the identified spending pressures. We will face situations in coming years that we do not know about today.

Mr McNarry:

What do we not know about? What do we need to know?

Mr Pengelly:

Oil prices have come down; however, we do not know what will happen to them in the future. We do not know what lies ahead for inflation, unemployment and the sorts of pressures those issues will crystallise.

Mr McNarry:

We did not anticipate, or factor in, the rise in oil prices. A lot of people knew of the rise, but the Department did not.

Mr Pengelly:

At the time that the Executive and the Assembly approved the Budget in January, oil prices were in the region of $90 a barrel for Brent crude. Oil prices peaked at about $140 a barrel a short time after, and they are now well below that level. There is always going to be volatility in a Budget process that looks three years ahead.

Mr McNarry:

Therefore, are you saying that oil is going to have a big impact on our future?

Mr Pengelly:

Oil is fundamental to some spending lines.

Mr McNarry:

How did the reduced requirements emerge? How have you reached the conclusions that you have reached? What is your expectancy? What must we avoid doing?

Mr Pengelly:

A reduced requirement arises when, at the conclusion of a Budget process, a Department is left with allocations for one or more years. Those allocations are based on a set of assumptions that the Department tabled during that Budget process. Those assumptions will concern a whole range of issues such as pay inflation, general inflation, and programmes and projects that individual Departments intend to roll out. The nature of public services means that there are also many demand-led programmes. Assumptions are made about all those services, which result in expenditure allocations.

Some of those assumptions change when the year in question comes around. If those assumptions change in a negative way, a Department will table a bid for additional resources. From our perspective, the assumptions may change in a positive way if, for example, there is a drop in demand-led services, or inflation and pay settlements are lower than anticipated. In that case, the Department acknowledges that it received money in the Budget process based on overstated assumptions. Therefore, the Department will not need to spend the money that it was given for those services. That money is returned through the in-year monitoring process. It is highlighted as a reduced requirement and given back to the Executive.

Mr McNarry:

Does it remain difficult to factor in a contingency?

Mr Pengelly:

Are you referring to the Budget-setting stage?

Mr McNarry:

Throughout the process, you are telling me that it is not speculative, and I understand that. DFP has all that information, but you are also saying that something could change tomorrow. Information is coming at DFP from 11 directions, perhaps more, yet you consistently state that there is no room for contingency.

Mr Pengelly:

We have said that there is a specific contingency; the monitoring system. Over the past few years, between £150 million and £220 million in current expenditure allocations has been returned to the Executive annually. Over the same period, the figure for capital expenditure has been between £110 million and £260 million. In effect, that is the contingency. If the Executive set aside an additional £200 million or £300 million, and shelved that amount of cash as a contingency —

Mr McNarry:

Therefore, it is a barometer rather than a contingency. You are relying on in-year monitoring to inform the Department about spending. There is no room for movement in that; it is not really a contingency.

Has OFMDFM explained its delay in providing an efficiency delivery plan? Does it have anything to do with an excess baggage of advisers and staff, the cost of which — I understand from your Minister — now costs a third of a million pounds more than in the previous Executive. I believe that that Department is top-heavy with non-productive people.

Mr Pengelly:

Those are issues for the Committee for the Office of the First and deputy First Minister. The response to my Department’s question about efficiency delivery plans was that they have not yet been cleared by Ministers for publication. Any explanation beyond that is an issue for OFMDFM.

Mr McNarry:

Is there no explanation beyond that? Is it just stated as fact that the plans have not yet been cleared?

Mr Pengelly:

Our position has been that efficiency delivery plans must be cleared by Ministers and published, but we have been told that the Ministers have not yet cleared them.

Mr McNarry:

I find that interesting, because I thought that I heard the First Minister lecturing everybody on efficiencies yesterday in the House.

Dr Farry:

I am sure that you meant to say that the structure was unproductive, rather than the individuals.

Mr McNarry:

I did. [Laughter.]

The Chairperson:

I am glad that that has been cleared up. Members must bear in mind that the Committee is not scrutinising OFMDFM.

Mr McNarry:

Nevertheless, the Committee is entitled to scrutinise its finances. I was merely asking about OFMDFM’s spending.

Mr Pengelly:

Clearly, the Committee for the Office of the First Minister and deputy First Minister will want to challenge the Department. With regard to the block perspective, Paul has reminded me that OFMDFM’s contribution to efficiency is less than 1% of the total. Therefore, it is a block issue.

Mr McNarry:

Surely its contribution to production is about the same as others, because it is a very small Department.

The Chairperson:

The reference to the monitoring rounds helps to inform our consideration on that issue. The Committee was also told that there would be a review of the monitoring round process for March 2009. I presume that that review is progressing. Is it on time? Will we have the benefit of that?

Mr Pengelly:

As I told the Committee previously, the review is progressing. It is a fairly light-touch review. The long term and clear objective is to improve the level and quality of financial management in Departments. Any substantive change to monitoring depends on a step change in the level of financial management and a reduction in underspend Therefore, the review is considering an improving — not improved — level of financial management. At present, it is fair to say that there is unlikely to be a significant change.

The Chairperson:

There is an absolute key requirement that the monitoring-round process works as part of a three-year Budget. That is the only way in which to take account of changing circumstances and priorities.

Mr Pengelly:

At the moment, there is an absolute necessity for a monitoring process. The key issue is how many rounds. At the moment, there are four rounds, and they are pretty labour intensive. However, Departments must have Executive approval in order to reallocate money internally. Two monitoring rounds create a potential six-month wait for a Minister, which is an issue. However, the number of rounds is being reviewed, and the Department will report back to the Committee on that issue.

The Chairperson:

The question is how seriously Departments take the earlier monitoring-round process in respect of project management, payment protections, and so on.

Mr Hamilton:

I want to return to the £1 billion figure. Last November, the Department expressed concern to the Committee about the robustness of a lot of the bids. What was done then and through yesterday’s ministerial statement to identify the true pressures in the system and force out the pressures that were slightly dubious? What money was pushed out at that time? Are you content that the remaining pressures are genuine and accurate?

I get frustrated because when Departments are asked about their pressures, they volunteer a multitude of things. If an individual were asked about their personal budget and what they would like, they will say a new house, a new car, a new everything. Those are not real pressures; merely things that they would like. Some figures that DFP is given may fall into that category, rather than be considered genuine pressures.

Mr Pengelly:

That is position in which the Department finds itself at the moment. This was a stocktake, rather than an allocation process. Issues identified by Departments have not been scrutinised to anything like the standard used for allocation purposes. I cannot be definitive, but if we were now making recommendations to the Executive about which, if any of these spending pressures, should be seriously considered for additional allocations, the number would probably be less than half.

However, the purpose of the strategic stocktake was to allow Departments to identify issues, on the basis that there will not be an allocation process until the June monitoring round. The stocktake obliged Departments to consider and air the issues. Between now and June, those spending pressures will be reviewed and whittled down. The nature of the process means that DFP has not yet gone into that phase. The concern was that, given the other issues across the block, it would have been largely nugatory work to become involved in that sort of dialogue, analysis and scrutiny, when there is no recommendation for the Executive to allocate or otherwise.

Mr Hamilton:

Yesterday, Chairman, you raised the terms of reference for Departments to identify pressures and how they might be met, first and foremost, within their own Department. There is not much evidence that that was done. It seems, rather, that a wish list was presented and that not much was given up. Such is the nature of the beast. Is the Department concerned that those terms of reference were almost completely ignored?

Mr Pengelly:

They were, and they certainly have not been followed up. That is a concern for my Department, and it is being discussed at official level with other Departments. Our greater difficulty was about the timing. All other thing being equal, when the returns came in, our approach would have been to throw them back to the Departments, with a demand that they include that information.

We knew, however, that there would not be any allocation as a result of the strategic stocktake, which had to be concluded. At present, key information from Departments is missing: good information that will serve as an evidence base for us as June approaches. There is time for us to go round that track again with the Departments. We thought it better not to hold up the strategic stocktake. It is preferable to publish the information in the way that it was yesterday.

Mr Hamilton:

The rest of us realise that there is no new money available. Have Departments realised that, or have they thrown everything out there, in the hope that, ultimately, some new money may be produced?

Mr McNarry:

Have Ministers, as well as Departments, done that? It is an interesting comment.

Mr Hamilton:

Clearly a Department includes a Minister.

However, that is a perpetual problem with all Departments, and it is a cause for concern that they have not realised that there is no new money available, and have opted for a wish list, rather than a pragmatic approach.

Mr Pengelly:

I suspect that at least some, if not most Ministers, realise that point. They attend Executive meetings and know the position. However, if one Department hears the other 10 identify many spending pressures — whether valid or not — the Minister who does not do so may be accused of failing to push their Department’s agenda.

Mr Hamilton:

In those circumstances, there is not much room for common sense to prevail.

The Chairperson:

There is a clear priority to ensure accurate and professional project and financial management. The Committee wants to track spending and to ensure that it is on-programme and in accordance with the agreed timeline. The phenomenon of underspend and the splurge at the end of the financial year, which is approaching, must be managed. We are trying to get control of that. If people still produce aspirational figures and play politics — covering their backs, or making arguments or bids to justify themselves is moving in the opposite direction. It is a tension that must be dealt with.

Mr Pengelly:

That is a valid point. A disproportionate amount of attention is given to bids in the monitoring rounds of the Budget process. Departments routinely spend around £8 billion or £9 billion, yet we become focused on the marginal exercise of their requests for a bit of additional money.

Following the conclusion of the Programme for Government and the public service agreement (PSA) process, all Departments were tasked with producing delivery plans. In parallel with the efficiency delivery plans, Departments were asked to produce detailed plans showing how they would meet the commitments and targets set by the Executive in the Programme for Government.

We are focusing on that, and we are determining whether Departments have the evidence base and the action plans to do the things that they are committed to do. After this session, there will be a session on gateway reviews, lessons learned and post project evaluations (PPEs), and I believe that David Thomson will be giving evidence on that.

In relation to capital investment, the Strategic Investment Board and OFMDFM have been working hard to put in place a delivery tracking system, which is a very intelligent system in which Departments will input details of planned capital investment, project milestones and key deliverables. The system has gone live in the last few days, so we can have access to that. We are building an evidence base. However, our focus is really on what is happening in the big blocks. In many ways this is a marginal issue.

Mr Hamilton:

You said that the stocktake will inform future monitoring rounds. I know that a review of the monitoring-round process is ongoing: how is that review going?

Mr Pengelly:

In the current climate, with the big agenda being the rolling out of delivery plans and the improvement of financial management in Departments, we will not be in a position to make a substantive and wholesale change to the monitoring system until two things are in place.

First, from a systems perspective, Account NI will need to be operational across all 11 Departments. There will be a phased roll out of that system over the next year or two. It will improve the real-time information that is available and the analysis of that information. Secondly, there is also still a need for some improvements in financial management. Hopefully improvements will become apparent this year, in the form of reduced levels of underspend. The process is ongoing, and we will be bringing details of that to the Committee.

Mr McQuillan:

As a follow on from Dawn’s question about efficiency savings; what more assurance can you give me, other than the delivery plans, that Departments are actually making efficiency savings, rather than root cuts? If you look at the way that the business end has been cut, that is nothing more than a root cut. How can you convince me that it is actually an efficiency saving?

Mr Pengelly:

The blunt answer is that there is little I can personally do to convince you. The Executive set a level of efficiencies, which was transcribed into individual targets for Departments, and the Departments were to produce and publish delivery plans. The Executive was always clear that it was for individual Departments to determine how the efficiencies would be delivered. The clear directive of the Executive was that there should be efficiencies rather than service reductions. All of the money that was made available through those efficiencies was re-allocated to front-line services. The key is the scrutiny and challenge of the efficiency delivery plans.

Mr McQuillan:

Who will scrutinise them?

Mr Pengelly:

They will be scrutinised by the Assembly Statutory Committees and by the public. Our role is to push Departments to make sure that the delivery plans are published, so that there is transparency, and that they are open to scrutiny. However, the Executive were clear that it is for individual Ministers and Departments to determine how they deliver efficiencies.

Mr McQuillan:

Yesterday, the Minister said that he had received an extra £100 million from the Treasury to assist with the issue of Civil Service equal pay, and there are ongoing negotiations with the unions about that. When will civil servants actually get some money in their hands?

Mr Pengelly:

A process of dialogue is ongoing, both with the unions and with internal analysis. As with any process of dialogue it is difficult to fix a timescale.

Mr McQuillan:

What is the process? What is the dialogue about?

Mr Pengelly:

It is about trying to reach agreement on how the issue, which is clearly a strategic one, should be resolved. I know that my colleagues in central personnel group are actively engaging with NIPSA in trying to find a way through that.

Mr McQuillan:

Is there no way of fixing a timescale?

Mr Pengelly:

I am not as involved as closely in the process as my colleagues. It would be difficult to fix a timescale, as it is with any negotiation, but I know that there is a sense of urgency on both sides.

Mr O’Loan:

You said that there was no point in having a Budget this year. Are we to understand that that is not merely a political decision, but is in the nature of the technical, detached advice that officials are giving?

Mr Pengelly:

The short answer is, yes. The Budget process, which ran for 18 months and concluded in January 2008, set firm spending plans for three years. It is clear, for those three years, that there will not be another national process or any additional funding from Treasury. Any Budget process now would involve marginal tweaks to plans; so, at a technocratic level, there was little value in having a Budget process. That was the advice we put to Ministers.

Mr O’Loan:

The strategic stocktake has been described as a glorified monitoring round.

Mr Hamilton:

By yourself, Mr O’Loan, and by your leader.

Mr O’Loan:

It was not by me; I think that I heard officials and, possibly, the Minister speaking in those terms, but, perhaps, it was repeated by me. The monitoring round statement contained information about the broad redistributions that yesterday’s statement did not contain. Yesterday’s statement does have appended tables, but there has not been sufficient time to analyse them yet. Will you give us a broad-brush treatment of the redistributions?

Mr Pengelly:

I cannot, because there were no redistributions. The strategic stocktake, as the Minister said, was about surveying the horizon and looking at the issues. Allocations will be made in the June monitoring round, and that is why there was no details of redistributions in the statement.

Mr O’Loan:

Will you describe the nature of the stocktake? What do the tables indicate?

Mr Pengelly:

They detail issues identified by Departments, but there was no redistribution.

Mr O’Loan:

The Minister said that the stocktake was akin to a glorified monitoring round, but we do not even have a glorified monitoring round. We have merely been provided with an indication of how the land will lie next year.

Mr Pengelly:

That is what a strategic stocktake sets out to do. It never aspired to be a monitoring round; it aspired to be a strategic stocktake.

Mr O’Loan:

Most of us expected more at this stage: that is interesting. Yesterday, the Minister referred to cuts in the block grant. Can you amplify that? Was that the first indication that we got of that, because it was the first time that I had seen it given any prominence? The Minister appeared to make a clear prediction of cuts to the block grant.

Mr Pengelly:

It came up earlier in conversation. In his November pre-Budget report, the Chancellor announced that there would be an additional £5 billion of efficiency savings from Whitehall Departments in 2010-11. He said that the details of the Whitehall Departments involved would be announced in March in the Chancellor’s Budget. He said that there would be negative Barnett consequentials as a result, so there will be a reduction in funding, through the Barnett formula, to Scotland, Wales and Northern Ireland. That was made clear before Christmas.

Yesterday, the Minister made it clear that he does not accept that position. At national level, there has been a comprehensive spending review, and there was a definitive outcome for Scotland, Wales and Northern Ireland, which was announced by the Treasury. The Administrations were told, in definitive terms, about the details of the fixed and final settlement for three years, and they were told not to expect any additions. The Minister of Finance and Personnel’s perspective is that if we are told that something is fixed and that we should not expect additions, we should not be expecting any subtractions.

Mr O’Loan:

Are we not talking about two different things? Are efficiency savings the same as cuts?

Mr Pengelly:

There is a slightly different context. During the most recent spending review, there were 3% cumulative efficiency savings — the money released through that efficiency agenda was available to the Executive for reallocation.

Mr O’Loan:

It was redistributed.

Mr Pengelly:

Yes. This time, the Chancellor has announced that he wants £5 billion of efficiencies from Whitehall Departments to pay for some of the measures that he announced in the pre-Budget report and some of the national initiatives. Therefore, those savings are funding the national initiatives, and the consequentials will not be returned to the Executive.

Mr O’Loan:

Is it a putative £5 billion worth of cuts by the Chancellor?

Mr Pengelly:

It is £5 billion of efficiency savings. The Chancellor is very specific that that will be an efficiency agenda. There should be no reduction in the quality of services; they should just be achievable.

Mr O’Loan:

Nonetheless, they will be cut by £5 billion.

Mr Pengelly:

Budgets will be cut.

Mr O’Loan:

It is different to the previous round — that is an important clarification. We will wait to see whether they are passed on in the Barnett consequentials.

The Chairperson:

The Minister gave us the health warning that if the consequentials were higher, we would hardly refuse them. Treasury will probably point that out as well.

Mr O’Loan:

I understand that the £900 million of extra funding corresponds to £400 million over each of two years, which will allow for the deferral of water charging; and £100 million, which will deal with the historical issues on Civil Service equal pay. Will you confirm that my understanding is right? Are there any conditions or understandings attached to that grant of money?

Mr Pengelly:

Your understanding is correct. However, I would add that it is not £900 million of additional funding. There are two components; you are correct in saying that the contribution to water is £400 million in each of the two years. However, that is not the Treasury giving the Executive £400 million in each of those years. This is a subtle point: Treasury is saying that it will pay for the cost that arises as a consequence of not introducing water charges. It will bear that cost, rather than giving us money.

The £100 million relates to access to additional money. Effectively, the Treasury is saying that some of the planned capital allocations in 2010-11 can be accelerated into earlier years and converted into current expenditure. We also have some additional borrowing available. It is not specifically linked to any issue, including equal pay; it is being provided to help the Executive address a range of pressures at this stage. However, those are issues for the Executive to consider in due course.

Mr O’Loan:

My final area of questions relates to the housing budget issue. I will use another example to get a comparison. A problem arose around the farm nutrients scheme, and the money that was intended to cover that scheme was not available. Am I right in thinking that all the necessary money to cover the scheme was made good in other ways?

Mr Pengelly:

As regards the farm nutrients scheme, I am not sure that I follow that money that was to be made available was not there.

Mr O’Loan:

Was the money not intended to come out of the proceeds of the sale of the Crossnacreevy site?

Mr Pengelly:

No. The Crossnacreevy site is not due to be sold until 2010-11. As regards the farm nutrients scheme, farmers are to install old slurry tanks to dispose of waste. Approvals were in place that would have rolled out over a period of time. However, there has been a downturn in the construction industry — especially in housing newbuilds. In the middle of last year, around seven construction firms were actively engaged in the farm nutrients scheme: by Christmas, over 300 were showing an interest — all the construction firms were flocking to do work for farmers. Given that commitments were in place, the pressure increased for the money to be paid. It was expected to be paid in the next financial year, and it will now be paid in this financial year.

The pressure was for £30 million from agriculture; £20 million was allocated in December, but that was not linked to the Crossnacreevy issue in any way.

Mr O’Loan:

Am I not right in thinking that the money was budgeted from somewhere, but that the funds were not realised and that it was necessary to make them good in this financial year?

Mr Pengelly:

No; they were budgeted to be incurred next year.

Mr O’Loan:

Is EU grant funding attached to the project?

Mr Pengelly:

An EU directive necessitates the installation of the tanks, but there was no EU funding.

Mr O’Loan:

I will come more directly to the housing issue. Money was allocated this year to the social housing budget. However, it was intended that a significant element of that money should come from a particular source, such as house sales and other property sales from DSD, but that did not materialise.

Across the whole Budget, is there any other significant issue, on that scale, in which Budget funds were allocated, there were no reduced requirements, and the source of the money dried up?

Mr Pengelly:

Unless my colleagues can tell me differently, that issue is largely specific to housing and DSD. The only other issue that comes to mind is in the Department of Health, Social Services and Public Safety: I think that that Department had plans to sell Belvoir Park Hospital, and it was anticipated that that would generate something in the region of £50 million. This year, the Department realised that that would only generate very small proceeds and decided to defer the selling of the hospital. However, the Department managed the issue within its own capital budget; it has not sought any additional funds for that. It re-phased some projects and programmes and managed the situation in-house.

Mr O’Loan:

Were the proceeds of that sale targeted at any particular project, in the same way that the Housing Executive’s house sales were?

Mr Pengelly:

It worked exactly in the same way, in that within the Housing Executive there was a receipt line for anticipated receipts, and, within the Health Department’s capital expenditure line there was a receipt line which was to be fulfilled by disposing of Belvoir Park Hospital.

Mr O’Loan:

In relation to housing over the next two years — and I can more or less take it for granted what your answer will be — do you anticipate any reduced requirements, particularly as the number of social houses built did not meet this year’s target and the Executive still has an overall target of 5,000 houses over the three-year period?

Mr Pengelly:

Experience suggests that there are never any reduced housing requirements in respect of newbuild targets.

Mr O’Loan:

Do you think that there might be reduced requirements in social housing?

Mr Pengelly:

Historical evidence shows that reduced requirements are never declared in that area.

Mr O’Loan:

There is a Housing Executive target to build 5,000 houses: are you telling the Committee that that target has been altered? Do you know something that we do not?

Mr Pengelly:

No: however, earlier we had a debate about the Department’s estimate of likely reduced requirements in future years. Those estimates are based on empirical evidence gathered over a number of years. You are asking what my expectations for reduced requirements are: to be specific, there has been no change whatsoever. The Programme for Government target is for 10,000 social and affordable units over a five-year period, and that remains the case.

There is an issue around the ability of the Department to deliver the required level of receipts in these difficult times: that is an issue that both Ministers have talked about at some length and are committed to working together on. From our perspective — and this goes beyond housing — there is an issue that in these current times, due to the simple economics of supply and demand, construction is becoming a lot cheaper. To an extent — although certainly not to the full extent — pressures through loss of receipts can be offset by lower construction costs.

Mr O’Loan:

That is only to some extent.

Mr Pengelly:

To some extent; but that can happen across the block, although we have not seen any articulation of that, and many Departments are not aware of it — it is an issue that we need to press them on.

Mr O’Loan:

Over the next two years, the broad description of the situation — as your table indicates — is that there will be a very significant deficit in the income anticipated by DSD in relation to social housing.

Mr Pengelly:

That depends on your context for the word significant. Within the housing budget, the planned level of receipts was £80 million. Approximately £10 million was generated resulting in a £70 million gap. That is clearly a very material and significant issue for DSD. However, across the block, there are gross expenditure plans totalling in excess of £1·5 billion. In the normal course of events, that £70 million is manageable next year.

Mr O’Loan:

What does the strategic stocktake offer? What advice are you giving to Ministers? There are major strategic issues to be dealt with — for example, providing social housing and supporting the construction industry so that it has some ability to forward plan — and at this stage, all you are doing is sketching out the problem and offering no remedy. Yes, there will be an opportunity to bid in future monitoring rounds; however, is that the best that you can do?

Mr Pengelly:

It is more than that, because I know that the Minister of Finance had a very long and specific meeting with the Minister for Social Development a few weeks ago in which he set out the issue in more detail as well as his expectations for next year.

From our perspective, the key point is that the capital position was particularly difficult this year because of Workplace 2010. There was a planned receipt of £175 million this year that did not materialise. Next year, we are not reliant on a single capital proceed to the same extent.

Therefore, a pressure to provide several tens of millions of pounds in an area that is a priority for the Executive seems to be clearly manageable in the context of the likely level of reduced requirements and the priority that the issue has been given this year, which the Minister of Finance has indicated that his Department intends to give it in future years also.

Mr McNarry:

I want to come back on the matter of slurry that you were talking about — although not by choice, considering the way that my stomach has been feeling over the last few days.

The Chairperson:

That is too much information.

Mr McNarry:

Richard, as I understood it, you said that, for practical necessities, money — allocated for building the slurry stores to facilitate the construction and farming industries — that had been budgeted for next year was used this year. That is very interesting. Was it difficult to do that? How was it done? Was it simply a practical decision?

Mr Pengelly:

It is not the case the money that was planned to be spent next year is being brought forward to be spent this year. The situation is that is an issue that we anticipated crystallising next year that would be covered by that Budget has crystallised this year. We do not have the ability to pull money forward from next year to this year.

Mr McNarry:

Then how did you find that money to be used this year?

Mr Pengelly:

We found it through the monitoring round. It was announced in the December monitoring round, when Departments identified reduced requirements. Those reduced requirements mean that money becomes available to the Executive to reallocate to deal with pressures that have been identified: this was one such pressure. At that point, the issue was of particular importance because of the work that, as I mentioned, it provides to 300 construction firms the length and breadth of the Province. Therefore, it was clearly a good issue in that respect, but the way that the money was acquired was through the normal monitoring procedure.

Mr McNarry:

Once the pressure was identified in the monitoring, were you able to send advance signals to the industry indicating that the funding may be allocated in order to ease the pressure on people, or was it all cloak and dagger?

Mr Pengelly:

I am not sure; clearly it is for the Department of Agriculture and Rural Development to liaise with the farming industry. I do not know what was, or was not, said. However, our approach with Departments is that they can indicate to industry that Ministers have tabled issues and that the Executive are considering them, but it would be a high-risk strategy for any Minister, in advance of Executive approval to say, on whatever basis, that the job is in hand.

Mr McNarry:

How long did it take to get Executive approval?

Mr Pengelly:

The returns from Departments were due around the first week of December, and the statement was made to the Executive on 15 December.

Mr McNarry:

Then it was a quick turnaround time? Would the same turnaround time apply if a similar issue arose?

Mr Pengelly:

That is the normal turnaround time for a monitoring round.

Mr Paisley Jnr:

The Department for Social Development appears to be a problem Department when it comes to managing money. That Department appears to have gambled public money and lost — the trouble is that it has lost big style.

From the figures that the Committee has, and based on the monitoring round, it seems that the Department was gambling on the premise that property prices and land prices would continue to rise beyond their June 2007 levels. Therefore, the Department acted negligently when it came to closing on a number of sales in Belfast and in County Antrim, particularly on the Ormeau Road and Adelaide Street, and in my constituency. The Department borrowed against potential deals that were not closed. As a result, the Government appears to have paid out twice to DSD.

In light of the fact that there appears to be no commercial nous at the top of DSD, how can we ensure that the handing of sales is managed centrally by the Department of Finance and Personnel rather than by a Department that does not appear to have the leadership to close deals?

The Chairperson:

I remind members that this is the Committee for Finance and Personnel. With respect to the latter part of the question, I am sure that Richard would not be so foolish as to scrutinise the Department for Social Development for our benefit.

Mr Pengelly:

I am comfortable with answering a couple of those questions. As regards the level of planned receipts in DSD’s budget, in the Budget that was agreed by the Executive and approved by the Assembly in January, the level of receipts against DSD was in line with levels that had been delivered in previous years.

The downturn in the market, when it happened, took us all by surprise. With the benefit of hindsight, most people can offer a full and detailed articulation of the whys and wherefores of a situation. However, the figure that was included was not out of line, and it was there as a result of a process that took place between DFP, DSD and the Executive.

The issue is within the ambit of the Department for Social Development, and, therefore, given the current volatility, I am not sure that it is something that I would be embracing enthusiastically with the Department of Finance and Personnel. However, as the matter is within the ambit of the Department for Social Development, it is not something that the Department of Finance and Personnel could become too closely involved with.

Mr Paisley Jnr:

Are you referring to the management of future land sales?

Mr Pengelly:

The management of land sales is clearly something that will be the subject of dialogue between the two Ministers and the Executive during subsequent Budget discussions, and an appropriate level of receipts will be agreed. That is, and will remain, a key issue in the Budget process. Once that figure is agreed, the Department and the Housing Executive must ensure delivery. All targets are subject to that process.

Mr Paisley Jnr:

Where a Department has already shown that it is unable to close commercial deals — and I am talking about a significant deal; the Ormeau Road deal was worth approximately £4 million — would you not learn a lesson from that and adopt the more overarching and strategic approach that DFP should manage such sales in future?

Mr Pengelly:

I do not know the specifics of that deal, and today’s meeting is not the appropriate place to comment. The Department of Finance and Personnel has expertise and experience in matters of finance. However, without commenting on people’s abilities, colleagues in the Department for Social Development — which is responsible for housing matters — know much more about closing housing deals than anyone in the Department of Finance and Personnel.

The more interesting dimension, and it is one that we need to consider, is that one of the recommendations in the capital realisation task force’s report was to establish a central assets-realisation team, comprising people with real-world experience of closing deals, to offer expertise and experience to help colleagues in all Departments. That is that answer to Mr Paisley Jnr’s substantive point about how to increase expertise in the system to deliver the Executive’s mandate.

The Chairperson:

If the market has changed, which is the case, and if the monitoring rounds are the mechanism by which we adjust projections and priorities and determine reallocations, did the strategic stocktake not provide an opportunity to factor in the realities of the change in the market? We are operating on established baseline figures, which included the review of the sale of assets. If it has not become redundant, that information has substantially changed for the worse.

Mr Pengelly:

That depends upon the definition of the word “significance”. The receipts issue is highly significant for DSD, but in respect of the Executive, a few tens of millions of pounds in the context of a gross investment of £1·5 billion is not a huge monetary issue.

The right time to intervene is in June. An intervention in January, given the potential volatility —

The Chairperson:

I do not suggest an intervention now, only that DFP must take account of the economic climate. The strategic stocktake should have recognised that.

Mr Pengelly:

The strategic stocktake gave Ministers an opportunity to identify the issues. It allowed the Minister of Finance and Personnel to see that a housing issue must be tackled. As the June monitoring round approaches, he will draw the attention of his Executive colleagues to that issue as something that must be managed. That was the purpose of the exercise.

Mr O’Loan:

I am glad that much of what Ian Paisley Jnr presented as fact has been refuted, particularly in respect of the level of receipts and their management by the Department for Social Development. I put on record that the inferences he drew have been refuted and are not supported by all members of the Committee.

Ms J McCann:

I have questions about underspend and the reduction of requirements.

End-year flexibility, access to accumulated moneys and the risk of those funds being returned to the Treasury were emphasised during yesterday’s ministerial statement and debate in the Assembly.

Mr Pengelly, you touched on the fact that there is no new money and that it is important that current projects are delivered as planned. You mentioned the publishing of delivery plans and tracking systems in order to build up an evidence base. What effective measures can be put in place to prevent Departments consistently underspending? You plan to create an evidence base and to identify what the Departments are doing; however, given that delivery plans must be kept on track, what can DFP do to avoid any underspend?

Mr Pengelly:

That is difficult because we are one part removed from Departments. We ask Departments to forecast, on a monthly basis, what their spend will be. My Department pursues that vigorously. Whether in this Committee, or in the Assembly, every time we ask the question, Departments tell us that they will spend every penny they have. Empirical evidence from previous years proves that that is not the case.

The Committee has examined that and found that aspirational bidding by Departments is among the major reasons for an underspend. In a Budget process, Departments will sometimes express a wish to do X, and request funding for that project. The Executive might find X a good, worthy service that will help to protect vulnerable people.

The problem arises when the Department finds itself with a sum of money that it did not expect to have, because its bid was speculative. Then suddenly, two months into the year, that Department wants to start a new programme or recruit staff. It draws up job specifications, advertises, recruits and trains. Meanwhile, project X slips behind its timescale, creating a domino effect and an underspend.

We are addressing that problem by forcing Departments to produce delivery plans. As part of the Budget process, we ask about key targets and what specific actions Departments will take to deliver them. If, in September of a financial year, there are plans to recruit staff for a £20 million or £30 million key programme, DFP will know that that programme will not be delivered, because those staff must be in place on 1 April.

The main driver is to force Departments to act. Both the previous and current Ministers of Finance put a lot of emphasis on the performance and efficiency delivery unit, which is trying to get Departments to focus absolutely on delivery — not just on nice announcements and what they would like to do, but on the underlying logistics of how to deliver those key spending programmes. That is not easy, but without the thought and development of action delivery plans, it becomes all the more difficult.

Ms J McCann:

Does DFP have a say in what Departments bid for? Does it have an oversight role that enables it to tell a Department whether a pressure that has been identified is not really a pressure; that it cannot be delivered on time? Who oversees that process? Departments seem to work in silos. There does not appear to be any oversight, particularly in finance and project management.

Mr Pengelly:

DFP has a key role. When a Department submits a bid, whether in a Budget process or in a monitoring round, supply teams, which are the interface between DFP and the Department, scrutinise and analyse the bid. Those supply teams gain an understanding of what the Department is doing, how it is doing it, and they push back against the Departments. That forms the basis of our advice to the Finance Minister. Given that the available resources always fall short of the bids lodged, we make recommendations to the Minister that he considers and amends as he sees fit. His recommendations to the Executive are based on that analysis.

The difficulty is that teams of two or three people scrutinise bids that come in from Departments the size of Regional Development; Health, Social Services and Public Safety; or Social Development. The teams can go only so far in investigating a Department’s preparedness for delivery. It is not an exact science, and that is why we are now forced down the route of requiring delivery plans. There is a delivery tracking system for capital investment, and DFP is trying to bring pressure to bear on Departments from all angles. Clearly, there is a need to improve, which is why we are driving that agenda.

Dr Farry:

I have a few short, factual questions. The 3% efficiency savings were accounted for from day one of the Budget. Was the Budget struck on the assumption that the 3% savings would be delivered?

Mr Pengelly:

Yes.

Dr Farry:

The DSD revenue figures show, for example, that the impact of rising unemployment on the Social Security Agency is estimated at £1·2 million in 2009-10 and the same in 2010-11. Should that be in annually managed expenditure as opposed to departmental expenditure limits?

Mr Pengelly:

No; the social security benefits score as annually managed expenditure; the administration of the programme scores as departmental expenditure limit. That is the staff cost of administering the programme.

Dr Farry:

Can those costs be claimed from the UK Government?

Mr Pengelly:

No.

Dr Farry:

Thank you. Another big issue for me is how definitive the list of pressures will become. In the long run, will it be a road map of Departments’ monitoring bids over the next two years, or is it a snapshot of where we are today? Might other pressures emerge over the next two years, as has happened in previous monitoring rounds?

Mr Pengelly:

You are right. The bids were commissioned in November. While that was a snapshot of November, we asked Departments to look forward two years. Doubtless, by the June monitoring round, some issues will have appeared that are not on that list. Equally, some issues may disappear. However, those will be marginal changes. Essentially, the Department now has the long list of issues that the Executive will consider in the coming years.

Dr Farry:

There is a potential gap of £1 billion to be met. The Minister and his Department argue that that will be filled by underspends. However, is there a danger and complacency about that, given that so many budgetary assumptions have been thrown up into the air by events over the past year to 18 months, because we are in a sui generis situation?

Mr Pengelly:

There is a clear danger about being too complacent. The point is that this is a list of spending pressures. It is the Department’s first cut at it, and the nature of the process is that on the first pass the aim will be high.

Based on all that we know, it is manageable. However, tough choices lie ahead. The process comes down to Departments tabling pressures for the Executive to consider. All things being equal, the Executive would like to respond positively to all of those pressures, but resource availability means that they will not be able to. Difficult choices lie ahead, but not at a projected cost in the region of £1 billion.

Dr Farry:

Is it possible to separate the process into three categories? I am wary because some aspects have already been announced. That is not legally binding, but creates an expectation that the Executive will follow through.

For example, lost income from the deferral of water charges was £235 million, which constitutes 25% of that £1 billion for one issue alone. Another £40 million has been earmarked in order to give the Department of Health first call on resources in monitoring rounds; again, that creates an expectation.

There are also the issues of increased costs, resulting in inescapable bids that must be met. Others are merely desirable bids. What is your sense of the balance between those three rough categories that I have outlined?

Mr Pengelly:

The deferral of water charges is an issue that simply must be managed. Those figures are based on the current cost base of Northern Ireland Water. There is a case for DFP and DRD to push back in an effort to reduce that cost, but there is a clear issue. Similarly, the Executive have given a commitment on funding to the Department of Health.

In relation to the other issues, it is difficult to strike a balance between essential and desirable bids. My guess is that desirable bids will become less achievable. However, the list focuses on things that Departments want to do, but for which they do not have the funding. Pressure must continue be maintained on areas within Departments, because everything that those Departments do is current.

Some spending programmes initiated a year or more ago were valid spending programmes in the context that applied at that time. In the different economic and political context that now exists, some of those programmes might have run their course. Therefore, individual Ministers must consider how priorities are set within their Departments.

Dr Farry:

That point touches on the concern and disappointment felt by many as a result of the Budget stocktake. There was a hunger for a more fundamental look at Budget baselines in the context of the economic downturn. Richard has rightly identified the logic of some programmes not being as relevant as they once were. The figures show that Departments are declaring increased cost pressures as a consequence of having to deliver their services in a more difficult economic climate.

However, I do not get the impression that Departments have the appetite or energy to place bids that specifically address the economic downturn. I regard that as remarkable in light of what other Governments around the globe are seeking to do. I appreciate that that is essentially a political question that must be addressed elsewhere, but I get no sense that Departments feel the need to do business differently, for instance, by designing new programmes that might ease the situation.

Mr Pengelly:

One reason why not much of what you have described is seen is that the Budget and the Programme for Government were drawn up around the Executive’s key priority of economic growth. A lot of the things that must be done in that context were already planned for in the strategy that was designed to drive forward the local economy. The fact that something is not included in the stocktake does not mean that it is not being done, or prioritised, by Departments.

Dr Farry:

I appreciate that the economy is central to those plans. However, the Programme for Government and the Budget were struck pre-recession. Perhaps, our politicians showed amazing foresight compared to their counterparts, but I doubt it.

Mr Pengelly:

A certain element of foresight was demonstrated in their prioritisation of economic growth. I cannot emphasise enough the extent to which a lot of action is being taken to which other areas are beginning to respond. Another interesting point is that people sometimes compare what is being done by the Executive with what the UK Government are doing, but they are comparing two completely different organisations. A better comparison is what Northern Ireland is doing compared to Scotland and Wales. We work closely with both, and have exchanged responses with them. The responses in Scotland, Wales and Northern Ireland show a remarkable similarity.

Dr Farry:

That is a debate for another day. The Scottish Executive are fast-tracking a lot of social housing, which we are not.

Mr Pengelly:

They are starting from a much lower baseline than us.

The Chairperson:

In relation to that broad area, there is a three-year settlement. The Executive must obtain Treasury permission if they want to move spending from one year to another. Will you explain what control we have of resources over that three-year period? What are the practicalities? An almost populist response to the downturn is to ask why we do not, or cannot, front-load capital expenditure.

Mr Pengelly:

In simple terms, in any individual year, the Executive have a budget for current expenditure and a budget for capital investment. They can move current expenditure to capital investment in any year, but they cannot move capital to current, which is the Treasury saying that investment is a good thing, but consumption is not.

The Executive have no capacity to move between years. The money that comes out of the Treasury’s Barnett formula is effectively set in stone, and the Executive have to manage within that.

The Chairperson:

OK. That seems to be it, Richard. It was a wide-ranging discussion. I am sure that there are other questions, so we may be back in touch with you. Thank you for your time.