Managing public money
July 2013 with
annexes revised as at September 2019
Managing public money
July 2013 with
annexes revised as at September 2019
© Crown copyright 2015
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ISBN 978-1-910835-51-7
PU1805
Contents
Page
Foreword
3
Chapter 1
Responsibilities
5
Chapter 2
Use of Public Funds
9
Chapter 3
Accounting Officers
15
Chapter 4
Governance and Management
21
Chapter 5
Funding
33
Chapter 6
Fees, charges and levies
41
Chapter 7
Working with others
47
Annex 1.1
The Comptrol er and Auditor General
57
Annex 2.1
Treasury approval of legislation
59
Annex 2.2
Delegated authorities
63
Annex 2.3
PAC Concordat of 1932
67
Annex 2.4
New services
69
Annex 3.1
The Governance Statement
73
Annex 4.1
Finance Directors
77
Annex 4.2
Use of models
81
Annex 4.3
Risk
83
Annex 4.4
Insurance
89
Annex 4.5
Senior Responsible Owner Accountability
95
Annex 4.6
Procurement
97
Annex 4.7
State aids
103
Annex 4.8
Expenditure and payments
105
Annex 4.9
Fraud
107
Annex 4.10
Losses and write offs
109
Annex 4.11
Overpayments
115
Annex 4.12
Gifts
121
Annex 4.13
Special payments
125
Annex 4.14
Remedy
131
Annex 4.15
Asset management
135
Annex 5.1
Grants
141
Annex 5.2
Protecting the Exchequer interest (clawback)
145
Annex 5.3
Treatment of income and receipts
149
Annex 5.4
Contingent Liabilities
151
Annex 5.5
Lending
159
Annex 5.6
Banking and managing cash
165
Annex 6.1
How to calculate charges
171
Annex 6.2
Charging for Information
175
Annex 6.3
Competition law
178
Annex 7.1
Forming and reforming ALBs
180
Annex 7.2
Drawing up framework documents
184
Annex 7.3
Trading funds
202
Annex 7.4
Using private finance
204
Glossary
206
Foreword
Every government needs credibility. Without it, no government can raise the
funds it needs for its policies – from taxpayers, from charge payers, or from
borrowers. Recent international events have provided object lessons in how
fragile sovereign credibility can be.
This handbook helps the UK government maintain public trust. It explains how
to handle public funds with probity and in the public interest. There is a lot of
common sense, with a little protocol about how to respect parliament’s
requirements.
The origins of this document trace back through the Bill of Rights to Magna
Carta. These events brought the monarchs of their day up against the
demands of those they governed that the funds they provided should be used
wisely. The principles which emerged also underpin the rule of law, for which
the UK gains international respect and trust.
In modern times it is the elected government that must account to
parliament; but the theory is the same. Integrity is the common thread.
Transparency and value for public money are the essential results.
Since I joined the Treasury three years ago I have come to realise how often
the basic principles in this handbook provide the answers to old and new
problems in government. The Treasury has long regarded upholding standards
of public administration as one of its fundamental responsibilities.
I urge everyone who works with public money to read, and to use, this
handbook. My staff are ready to help anyone who needs help in thinking
through the issues.
Danny Alexander
Chief Secretary to the Treasury
3
Foreword
about this document
i.
This document updates the version published in 2007. Like the original,
it sets out the main principles for dealing with resources in UK public sector
organisations Some of the specifics, especially those in the annexes, relate to
England rather than the devolved administrations, which have their own
detailed rulebooks. But the same basic principles generally apply in all parts of
the UK public sector, with adjustments for context.
ii.
The key themes also remain. They are the fiduciary duties of those
handling public resources to work to high standards of probity; and the need
for the public sector to work in harmony with parliament.
iii.
While these principles are invariant, the advice in this document cannot
stand forever. The law, business practices, and public expectations all change.
So public sector organisations can and should innovate in carrying out their
responsibilities, using new technology and adopting good business practice.
Throughout parliament always expects the government and its public servants
to meet the ethical standards in this document and to operate transparently.
iv.
As before, the main text of the document is intended to be timeless.
The Treasury will revise the annexes from time to time as the need arises. All
the text is available freely on the gov.uk website.
v.
Above all, nothing in this document should discourage the application
of sheer common sense.
4
1
Responsibilities
The relationship betw een the governm ent, acting on behalf of the Crow n, and
parliam ent, representing the public, is central to how public resources are m anaged.
M inisters im plem ent governm ent policies, and deliver public services, through public
servants; but are able to do so only where parliam ent grants the right to raise,
com m it and spend resources. It falls to the Treasury to respect and secure the rights
of both governm ent and parliam ent in this process.
1.1 Managing public money: principles
1.1.1 The principles for managing public resources run through many diverse organisations
delivering public services in the UK. The requirements for the different kinds of body reflect their
duties, responsibilities and public expectations. The demanding standards expected of public
services are set out in box 1.1.
Box 1.1: standards expected of all public services
honesty
impartiality
openness
accountability
accuracy
fairness
integrity
transparency
objectivity
reliability
carried out
in the spirit of, as well as to the letter of, the law
in the public interest
to high ethical standards
achieving value for money
1.1.2 The principles in this handbook complement the guidance on good governance in the
Corporate Governance Code1applying to central government departments. Some of the detail
applies to England only, or just to departments of state. There is separate guidance for the
devolved administrations. Where restrictions apply, they are identified.
1.1.3 Much of this document is about meeting the expectations of parliament. These
disciplines also deliver accountability to the general public, on whose behalf parliament
operates. The methods of delivery used should evolve as technology permits. Public services
should carry on their businesses and account for their stewardship of public resources in ways
appropriate to their duties and context and conducive to efficiency.
1.2 Ministers
1.2.1 In the absence of a written constitution, the powers used to deploy public resources are a
blend of common law, primary and secondary legislation, parliamentary procedure, the duties of
ministers, and other long-standing practices. This mix may of course change from time to time.
1 The Corporate Governance Code – see
https://www.gov.uk/government/publications/corporate-governance-code-for-central-government-departments
5
1 Responsibilities
1.2.2 As the
Corporate Governance Code makes clear, the minister in charge of a department is
responsible for its policy and business as part of the broad sweep of government policy
determined in Cabinet. He or she:
•
determines the policies of the departmental group;
•
chairs the departmental board;
•
allocates responsibilities among the ministers in the department;
•
chooses which areas of business to delegate to officials, and on what conditions;
•
looks to the department’s accounting officer (see chapter 3) to delegate within the
department to deliver the minister’s decisions and to support the minister in
making policy decisions and handling public funds; and
•
also has general oversight of other bodies on whose behalf he or she may answer in
parliament, including the department’s arms length bodies (ALBs).
1.2.3 The
Ministerial Code2 requires ministers to heed the advice of their accounting officers
about the proper conduct of public business. See section 3.4 for how the minister may direct
the accounting officer to proceed with a policy if a point of this kind cannot be resolved.
1.2.4 The minister in charge of a department may delegate defined areas of its business, or of
its parliamentary work, to his or her junior ministers. Ministers have wide powers to make
policies and to instruct officials.
1.2.5 Only ministers can propose legislation to parliament to raise public revenue through
taxation, or to use public funds to pursue their policy objectives. Specific primary legislation is
normally required to spend public funds (see section 2.1). Similarly, taxes may be collected, and
public funds may be drawn, only with parliamentary authority; and only as parliament has
authorised.
1.2.6 It is not normally acceptable for a private sector organisation to be granted powers to
raise taxes, nor to distribute their proceeds. Parliament expects these responsibilities to fall to
ministers, using public sector organisations.
1.2.7 The House of Commons (and not the House of Lords) enjoys the financial privilege to
make decisions on these matters.
1.3 Parliament
1.3.1 Parliament approves the legislation which empowers ministers to carry out their policies.
It also allows finance for services when it approves each year’s Estimates. See the
Estimates
Manual3 for more.
1.3.2 From time to time parliament may examine government activity. Select committees
examine policies, expenditure, administration and service delivery in defined areas. The
Committee of Public Accounts (PAC - see section 3.5) examines financial accounts, scrutinises
value for money and generally holds the government and its public servants to account for the
quality of their past administration.
2
https://www.gov.uk/government/publications/ministerial-code
3
https://www.gov.uk/government/publications/supply-estimates-guidance-manual
6
1 Responsibilities
1.4 The Treasury
1.4.1 Parliament looks to the Treasury to make sure that:
•
departments use their powers only as it has intended; and
•
revenue is raised, and the resources so raised spent, only within the agreed limits.
1.4.2 Hence it falls to the Treasury to:
•
set the ground rules for the administration of public money; and
•
account to parliament for doing so.
1.4.3 This document sets out how the Treasury seeks to meet these parliamentary expectations.
The key requirements are regularity, propriety, value for money and feasibility (see box 3.2). The
Treasury:
•
designs and runs the financial planning system4 and oversees the operation of the
agreed multiyear budgets to meet ministers’ fiscal policy objectives;
•
oversees the operation of the Estimates through which departments obtain
authority to spend year by year;
•
sets the standards to which central government organisations publish annual
reports and accounts in the
Financial Reporting Manual (
FReM). This adapts
International Financial Reporting Standards (IFRS) to take account of the public
sector context;
•
sets Accounts Directions for the different kinds of central government organisations
whose accounts are laid in parliament; and
•
may also work through the Cabinet Office to set certain standards applicable across
central government5.
1.5 Departments
1.5.1 Within the standards expected by parliament, and subject to the overall control and
direction of their ministers, departments have considerable freedom about how they organise,
direct and manage the resources at their disposal. It is for the accounting officer in each
department, acting within ministers’ instructions, and supported by their boards, to control and
account for the department’s business.
1.5.2 A departmental board, chaired by the senior minister, leads each department. Boards
can bring to bear skills and experiences from elsewhere in, and outside of, the public sector (see
section 4.1).
1.5.3 Within each department, there should be adequate delegations, controls and reporting
arrangements to provide assurance to the board, the accounting officer6 and ultimately ministers
about what is being achieved, to what standards and with what effect. These arrangements
4 See the Consolidated Budgeting Guidance for more -
https://www.gov.uk/government/publications/consolidated-budgeting-guidance
5
See https://www.gov.uk/government/publications/cabinet-office-controls-guidance-version-3-1
6 If there is a change of Accounting Officer in the course of the year, the Accounting Officer in place at the year end takes responsibility for the whole
year’s accounts, using assurances as necessary.
7
1 Responsibilities
should provide timely and prompt management information to enable plans to be adjusted as
necessary. Similarly ministers should have enough evidence about the impact of their policies to
decide whether to continue, modify or end them. This is discussed further in chapter 4.
1.5.4 In supporting ministers, civil servants should provide politically impartial advice. Should
they be asked to carry out duties which appear incompatible with this obligation, the
accounting officer should take the matter up with the minister concerned (see also the
Civil
Service Code7).
1.5.5 Departments often operate with and through a variety of partners to deliver their
ministers’ policies. It is important that these relationships operate in the public interest: see
chapter 7.
1.6 The Comptroller and Auditor General
1.6.1 Supported by the National Audit Office (NAO), the Comptroller and Auditor General
(C&AG) operates independently to help parliament scrutinise how public funds have been used
in practice. Further information about the role of the NAO is available on their website8 and in
annex 1.1.
1.6.2 The C&AG provides parliament with two sorts of audit:
•
financial audit of the accounts of departments and ALBs, covering:
–
assurance that accounts have been properly prepared and are free of material
misstatements9; and
–
confirmation that the underlying transactions have appropriate parliamentary
authority;
•
value for money reports assessing the economy, efficiency and effectiveness with
which public money has been deployed in selected areas of public business. A
programme of these reviews covers a variety of subjects over a period, taking
account of the risks to value for money and parliament’s interests.
1.6.3 The C&AG has a general right to inspect the books of a wide variety of public
organisations to further these investigations. When the NAO investigates any public sector
organisation, it should get full cooperation in provision of papers and other oversight. It is good
practice to draw the NAO’s attention to the confidentiality of any sensitive documents provided
in this process. It is then for the independent C&AG to judge what material can be published in
the public interest.
1.6.4 In addition, the C&AG publishes other independent reports to parliament. The PAC (see
section 3.5) may hold hearings to examine evidence on any of these reports and on other related
matters.
Annex 1.1
The Comptroller and Auditor General
7
http://www.civilservice.gov.uk/about/values
8 The NAO website address i
s http://www.nao.org.uk
9 See Audit Practice Note 10 of the Audit Practices Board on the FRC website
at Http://www.frc.org.uk
8
2
Use of Public Funds
This chapter explains the process for parliam entary authorisation of public resources.
Parliam ent consents in principle to the use of public funds through legislation to
enable specified policies. It then approves use of public resources to carry out those
policies year by year by approving Estim ates. O nly rarely can lesser authority suffice.
At the close of each financial year, parliam ent expects a clear account of the use of
the public funds it has authorised. Parliam ent expects the Treasury to oversee the
operation of these controls. The PAC m ay investigate specific issues further.
2.1 Conditions for use of public funds
2.1.1 Ministers have very broad powers to control and direct their departments. In general,
they may do anything that legislation does not prohibit or limit, including using common law
powers to administer their operations or continue business as usual.
2.1.2 Ministers also need parliamentary authority for use of public funds before each year’s
expenditure can take place. The full list of requirements is set out in box 2.1.
Box 2.1: requirements for use of public funds
•
budget cover in the collectively agreed multi-year budgets
•
with a few exceptions1, parliamentary authorisation for each year’s drawdown of funds through
an Estimate, which is then approved as a Supply and Appropriation Act (see section 2.2)
•
adequate Treasury consents (see section 2.3)
•
assurance that the proposed expenditure is regular and proper (section 2.4)
•
sufficient specific legal powers - though see section 2.5 for some limited exceptions
2.1.3 The Treasury runs the control process because parliament expects the Treasury to control
public expenditure as part of fiscal policy. The primary means through which the Treasury
controls public expenditure is multi-year budgets, agreed collectively at spending reviews. The
Consolidated Budgeting Guidance sets out the rules for their use. (See also chapter 4).
2.2 Using the Estimate
2.2.1 The requirements in box 2.1 are to some extent interrelated. The accounting officer of a
department (see also chapter 3) is responsible for ensuring that:
•
the Estimate(s) presented to parliament for the department’s annual expenditure
(consolidating its ALBs) are within the statutory powers and within the
government’s expenditure plans; and
•
use of resources is within the ambit of the vote and consistent with the Estimate(s)-
1 See section 5.3
9
2 Use of Public Funds
and must answer to parliament for stewardship of these responsibilities.
2.3 Treasury consents
2.3.1 Departments also need Treasury consent before undertaking expenditure or making
commitments which could lead to expenditure (see annex 2.1). Usually the Treasury agrees
some general approvals for each department subject to delegated limits and/or exclusions.
2.3.2 Some common approaches to setting delegations are shown in box 2.2 and are discussed
further in annex 2.2. It is good practice to review delegations from time to time to make sure
that they remain up to date and appropriate. Delegations can be tightened or loosened at
reviews, depending on experience.
Box 2.2: examples of approaches to delegated authorities
•
objective criteria for exceptions requiring specific Treasury scrutiny or approval
•
a sampling mechanism to allow specimen cases to be examined
•
a lower limit above which certain kinds of projects must achieve specific consent
2.3.3 In turn departments should agree with each of their arm’s length bodies (ALBs - the
public sector organisations they sponsor or finance) a similar set of delegations appropriate to
their business2 (see also chapter 7).
2.3.4 There is an important category of expenditure commitments for which the Treasury
cannot delegate responsibility. It is transactions which set precedents, are novel, contentious or
could cause repercussions elsewhere in the public sector. Box 2.3 gives examples. Treasury
consent to such transactions should always be obtained before proceeding, even if the amounts
in question lie within the delegated limits.
Box 2.3: examples of transactions requiring explicit Treasury consent
•
extra statutory payments similar to but outside statutory schemes
•
ephemeral ex gratia payment schemes, eg payments to compensate for official errors
•
special severance payments, eg compromise agreements in excess of contractual commitments
•
non-standard payments in kind
•
unusual financial transactions, eg imposing lasting commitments or using tax avoidance
•
unusual schemes or policies using novel techniques
2.3.5 It is improper for a public sector organisation to spend or make commitments outside the
agreed delegations. The Treasury may subsequently agree to give retrospective consent, but
only if the expenditure in question would have been agreed if permission had been sought at
the right time.
2.3.6 Sometimes legislation calls for explicit Treasury consent, eg for large or critical projects.
There are also Whitehall wide controls on key progress points for the very largest projects.3
In
2 Delegations to ALBs should never be greater than the delegated limits agreed between the Treasury and the sponsor department.
3 Through the Major Projects Authority, [
http://www.cabinetoffice.gov.uk/content/major-projects-authority], using powers delegated by the Treasury
10
2 Use of Public Funds
such cases it is unlawful to proceed without Treasury consent - and Treasury consent cannot be
given retrospectively.
2.4 Regularity and propriety
2.4.1 The concepts of regularity and propriety, fundamental to the right use of public funds,
are set out in box 2.4. The term
regularity and propriety is often used to convey the idea of
probity and ethics in the use of public funds – that is, delivering public sector values in the
round, encompassing the qualities summarised in box 1.1. Supporting this concept are the
Seven Principles of Public Life - the
Nolan principles4 - which apply to the public sector at large.
In striving to meet these standards, central government departments should give a lead to the
partners with which they work.
Box 2.4: regularity and propriety
Regularity: compliant with the relevant legislation (including EU legislation), delegated authorities
and following the guidance in this document.
Propriety: meeting high standards of public conduct, including robust governance and the relevant
parliamentary expectations, especially transparency.
2.4.2 Each departmental accounting officer should make sure that ministers in his or her
department appreciate:
•
the importance of operating with regularity and propriety; and
•
the need for efficiency, economy, effectiveness and prudence in the administration
of public resources, to secure value for public money5.
2.4.3 Should a minister seek a course of action which the accounting officer cannot reconcile
with any aspect of these requirements, he or she should seek instructions in writing from the
minister before proceeding (see chapter 3).
2.4.4 Should departments need to resolve an issue about regularity or propriety, they should
consult the relevant Treasury spending team. Similarly, ALBs should consult their sponsor
departments about such issues, and the department concerned may in turn consult the Treasury.
2.4.5 Neither improper nor irregular expenditure achieves the standards that parliament
expects. So any such expenditure must be noted in the department’s annual report and
accounts. If the discrepancy is material it can result in a qualification to the accounts. When
any expenditure of this kind comes to light, it should be drawn to the attention of both the NAO
and the Treasury. The immediate follow up action is to identify the source of any systematic
problems so that there is no recurrence. The PAC may also call the accounting officer to explain
the matter at a public hearing.
2.5 Securing adequate legal authority
2.5.1 Parliament usually authorises spending on a specific policy or service by approving
bespoke legislation setting out in some detail how it should work. It is not normally acceptable
to use a royal charter as an alternative to primary legislation, for this approach robs parliament
4
http://www.public-standards.gov.uk/
5 A more detailed description of value for money is at annex 4.4
11
2 Use of Public Funds
of its expectations for control and accountability. Departments should ensure that both they
and their ALBs have adequate legal cover for any specific actions they undertake.
2.5.2 The Treasury takes this requirement seriously. It is fundamental to the trust and
understanding between the government and parliament on which management of the public
finances is founded. In the Concordat of 1932 (see annex 2.3), the Treasury undertook that
departments would not spend without adequate legal authority.
2.5.3 There are some general exceptions. These kinds of expenditure do not require specific
legislation in order to avoid burdening parliamentary time:
•
routine matters covered by common law (the main examples are in box 2.5);
•
a very limited range of Consolidated Fund Standing Services (see section 5.3);
•
projects or services which are modest or temporary (see box 2.6)
Box 2.5: expenditure which may rely on a Supply and Appropriation Act
•
routine administration costs: employment costs, rent, cleaning etc
•
lease agreements, eg for photocopiers, lifts
•
contractual obligations to purchase goods or services (eg where single year contracts might be
bad value)
•
expenditure using prerogative powers such as defence of the realm and international treaty
obligations
2.5.4 In all the three cases in paragraph 2.5.3, departments may rely on the sole authority of a
Supply and Appropriation Act (the culmination of the Estimates process) without the need for
specific legal authority, provided that the other conditions in box 2.1 are met.
Box 2.6: modest or temporary expenditure which may rely on a Supply and
Appropriation Act
either services or initiatives lasting no more than two years, eg a pilot study or one off intervention
or
expenditure of no more than £1.75m a year (amount adjusted from time to time)
provided that there is no specific legislation covering these matters before parliament and existing
statutory restrictions are respected.
These conditions are demanding. Treasury consent is required before they may be relied on.
2.6 New services
2.6.1 When ministers decide on a new activity, all the conditions in box 2.1 must be met before
it can begin. In practical terms this means that most significant new policies which are intended
to persist require specific primary legislation.
2.6.2 Sometimes ministers want to start early on a new policy which is intended to continue
but whose enabling legislation has not yet secured royal assent. It may be possible to make
limited preparation for delivery of the new service before royal assent, but to do so it will usually
be necessary to consider borrowing from the Contingencies Fund (see annex 2.4). Access to this
Fund is controlled by the Treasury, subject to the conditions in box 2.7. Specific Treasury
consent is always required.
12
2 Use of Public Funds
Box 2.7: conditions for access to the contingencies fund (see also annex 2.5)
•
the proposed expenditure must be urgent and in the public interest, ie with wider benefits to
outweigh the convention of awaiting parliamentary authority (political imperative is not enough)
•
the relevant bill must have successfully passed second reading in the House of Commons
•
the legislation must be certain, or virtually certain, to pass into law with no substantive change
in the near future, and usually within the financial year
•
the department responsible must explain clearly to parliament what is to take place, why, and by
when matters should be placed on a normal footing.
Annex 2.1
Treasury approval of legislation
Annex 2.2
Delegated authorities
Annex 2.3
The PAC concordat of 1932
Annex 2.4
New services
13
14
3
Accounting Officers
This chapter sets out the personal responsibilities of all accounting officers in central
governm ent. Essentially accounting officers m ust be able to assure parliam ent and
the public of high standards of probity in the m anagem ent of public funds. This
chapter is draw n to the attention of all accounting officers w hen they a re appointed.
3.1 Role of the accounting officer
3.1.1 Each organisation in central government – department, agency, trading fund, NHS body,
NDPB or arm’s length body – must have an accounting officer. This person is usually its senior
official. The accounting officer in an organisation should be supported by a board structured in
line with the
Corporate Governance Code.
3.1.2 Formally the accounting officer in a public sector organisation is the person who
parliament calls to account for stewardship of its resources. The standards the accounting
officer is expected to deliver are summarised in box 3.1. The equivalent senior business
managers of other public sector organisations are expected to deliver equivalent standards.
3.2 Appointment of accounting officers
3.2.1 The Treasury appoints the permanent head of each central government department to be
its accounting officer. Where there are several accounting officers in a department, the
permanent head is the principal accounting officer.
3.2.2 Within departments, the Treasury also appoints the chief executive of each trading fund
as its accounting officer.
3.2.3 In turn the principal accounting officer of each department normally appoints the
permanent heads:
•
of its executive agencies, as agency accounting officers for their agencies; and
•
of other ALBs (including all NDPBs), as accounting officers for these bodies; and
•
at his or her discretion, additional accounting officers for defined part(s) of the
department’s business.
3.3 Special responsibilities of accounting officers
3.3.1 It is important that each accounting officer takes personal responsibility for ensuring that
the organisation he or she manages delivers the standards in box 3.1. In particular, the
accounting officer must personally sign:
•
the accounts
•
the annual report
•
the governance statement (see annex 3.1);
15
3 Accounting Officers
and having been satisfied that they have been properly prepared to reflect the business of the
organisation, must personally approve:
•
voted budget limits; and
•
the associated Estimates Memorandum.
Box 3.1: standards expected of the accounting officer’s organisation
Acting within the authority of the minister(s) to whom he or she is responsible, the accounting officer
should ensure that the organisation, and any ALBs it sponsors, operates effectively and to a high
standard of probity. The organisation should:
governance
•
have a governance structure which transmits, delegates, implements and enforces decisions
•
have trustworthy internal controls to safeguard, channel and record resources as intended
•
work cooperatively with partners in the public interest
•
operate with propriety and regularity in all its transactions
•
treat its customers and business counterparties fairly, honestly and with integrity
•
offer appropriate redress for failure to meet agreed customer standards
•
give timely, transparent and realistic accounts of its business and decisions, underpinning public
confidence;
decision-m aking
•
support its ministers with clear, well reasoned, timely and impartial advice
•
make all its decisions in line with the strategy, aims and objectives of the organisation set by
ministers and/or in legislation
•
take a balanced view of the organisation’s approach to managing opportunity and risk
•
impose no more than proportionate and defensible burdens on business;
financial m anagem ent
•
use its resources efficiently, economically and effectively, avoiding waste and extravagance
•
plan to use its resources on an affordable and sustainable path, within agreed limits
•
carry out procurement and project appraisal objectively and fairly, using cost benefit analysis and
generally seeking good value for the Exchequer as a whole
•
use management information systems to gain assurance about value for money and the quality
of delivery and so make timely adjustments
•
avoid over defining detail and imposing undue compliance costs, either internally or on its
customers and stakeholders
•
have practical documented arrangements for controlling or working in partnership with other
organisations, as appropriate
•
use internal and external audit to improve its internal controls and performance.
3.3.2 The accounting officer of a corporate arm’s length body should arrange for a board
member to sign the accounts as well as signing them himself or herself, if (unusually) he or she
is not a member of the board.
3.3.3 There are several other areas where accounting officers should take personal
responsibility:
•
regularity and propriety (see box 2.4), including securing Treasury approval for any
expenditure outside the normal delegations or outside the subheads of Estimates;
16
3 Accounting Officers
•
affordability and sustainability: respecting agreed budgets and avoiding
unaffordable longer term commitments, taking a proportionate view about other
demands for resources;
•
value for money: ensuring that the organisation’s procurement, projects and
processes are systematically evaluated to provide confidence about suitability,
effectiveness, prudence, quality, good value judged for the Exchequer as a whole,
not just for the accounting officer’s organisation (eg using the Green Book1 to
evaluate alternatives);
•
control: the accounting officer should personally approve and confirm their
agreement to all Cabinet Committee papers and major project or policy initiatives
before they proceed;
•
management of
opportunity and risk to achieve the right balance commensurate
with the institution’s business and risk appetite;
•
learning from experience, both using internal feedback (eg through managing
projects and programmes using techniques such as PRINCE2), and from right across
the public sector; and
•
accounting accurately for the organisation’s
financial position and
transactions: to
ensure that its published financial information is transparent and up to date; and
that the organisation’s efficiency in the use of resources is tracked and recorded.
3.3.4 In the case of principal accounting officers, these responsibilities apply to the business of
the whole departmental group.
3.4 Advice to ministers
3.4.1 Each departmental accounting officer should take care to bring to the attention of the
minister(s) to whom he or she is responsible any conflict between the minister’s instructions and
his or her duties. The accounting officer cannot simply accept the minister’s aims or policy
without examination. There is no set form for registering objections, though the accounting
officer should be specific about their nature. The acid test is whether the accounting officer
could justify the proposed activity if asked to defend it.
3.4.2 Accounting officers should routinely scrutinise significant policy proposals or plans to
start or vary major projects and then assess whether they measure up to the standards in box
3.1 so that they can identify any discrepancy2. The accounting officer should draw any such
problems to the attention of the responsible minister to see whether they can be resolved.
3.4.3 If the minister decides to continue with a course the accounting officer has advised
against, the accounting officer should ask for a formal written direction to proceed. An oral
direction should be confirmed in writing quickly. Examples of where this procedure is
appropriate are in box 3.2.
1
to https://www.gov.uk/government/publications/the-green-book-appraisal-and-evaluation-in-central-governent
2 The Treasury or the chair of the relevant Cabinet Committee may also ask for the accounting officer’s assessment of any novel proposal.
17
3 Accounting Officers
Box 3.2: when accounting officers should seek a direction
•
Regularity: if a proposal is outside the legal powers, parliamentary authority, or Treasury
delegations; or incompatible with the agreed spending budgets.
•
Propriety: if a proposal would breach parliamentary control procedures or expectations.
•
Value for m oney: if an alternative proposal, or doing nothing, would deliver better value, eg a
cheaper, higher quality or more effective outcome for the Exchequer as a whole.
•
Feasibility: where there is a significant doubt about whether the proposal can be implemented
accurately, sustainably, or to the intended timetable.
3.4.4 Directions of this kind are rare. It is good practice for accounting officers to discuss the
matter with the Treasury if time permits. The ultimate judgement in each case must lie with the
accounting officer personally.
3.4.5 When a direction is made, the accounting officer should:
•
copy the relevant papers to the C&AG and the TOA promptly. The C&AG will
normally draw the matter to the attention of the PAC, who will attach no blame to
the accounting officer;
•
follow the minster’s direction without further ado;
•
if asked, explain the minister’s course of action. This respects ministers’ rights to
frank advice, while protecting the quality of internal debate;
•
arrange for the existence of the direction to be published, no later than in the next
report and accounts, unless the matter must be kept confidential.
3.5 Public Accounts Committee
3.5.1 The PAC may hold public hearings on the accounts of central government organisations
laid in parliament (see section 1.6). In practice most PAC hearings focus on NAO value for
money studies. NAO seeks to agree the text of these reports with the accounting officer(s)
concerned so there is a clear undisputed evidence base for PAC scrutiny.
3.5.2 When a hearing is scheduled, the PAC normally invites the accounting officer(s) of the
relevant institution(s) to attend as witness(es). An accounting officer may be accompanied by
appropriate officials. Where it is appropriate, and the PAC agrees, an accounting officer may
send a substitute. The PAC may also invite other witnesses who may not be public servants to
give insight into the background of the subject in hand.
3.5.3 In answering questions, the accounting officer should take responsibility for the
organisation’s business, even if it was delegated or if the events in question happened before he
or she was appointed accounting officer. In response to specific PAC or Select Committee
requests, previous accounting officers may also attend relevant PAC hearings. Recalls of this
kind should be assessed case by case, depending on the circumstances. They are acceptable if
the business in issue was fairly recent, and where the former accounting officer has had an
opportunity to comment before publication on any NAO report which the PAC is to investigate.
3.5.4 The PAC expects witnesses to give clear, accurate and complete evidence. If evidence is
sensitive, witnesses may ask to give it in private. Witnesses may offer supplementary notes if the
information sought is not to hand at the meeting. Any such notes should be provided within
one week unless the PAC is willing to grant an extension. They should do so without delay.
18
3 Accounting Officers
3.5.5 The TOA (or an alternate) attends all PAC hearings. This enables the PAC to explore any
more general issues arising out of the hearing.
3.6 When the accounting officer is not available
3.6.1 Each public sector organisation must have an accounting officer available for advice or
decision as necessary at short notice.
3.6.2 When the accounting officer is absent and cannot readily be contacted, another senior
official should deputise. If a significant absence is planned, the accounting officer may invite the
Treasury (or the sponsor department, as the case may be) to appoint a temporary acting
accounting officer.
3.7 Conflicts of interest
3.7.1 Sometimes an accounting officer faces an actual or potential conflict of interest. There
must be no doubt that the accounting officer meets the standards described in box 3.1 without
divided loyalties. Possible ways of managing this issue include:
•
for a minor conflict, declaring the conflict and arranging for someone other than
the accounting officer to make a decision on the issue(s) in question;
•
for a significant but temporary conflict, inviting the Treasury (or the sponsor
department, as the case may be) to appoint an interim accounting officer for the
period of the conflict of interest; or
•
for serious and lasting conflicts, resignation.
3.8 Arm’s length bodies
3.8.1 The responsibilities of accounting officers in departments and in arm’s length bodies
(ALBs) are essentially similar. Accounting officers in ALBs must also take account of their special
responsibilities and powers. In particular, they must respect the legislation (or equivalent)
establishing the organisation and terms of the framework document agreed with the sponsor
department. See chapter 7 for more.
3.8.2 The framework document (or equivalent) agreed between an ALB and its sponsor always
provides for the sponsor department to exercise meaningful oversight of the ALB’s strategy and
performance, pay arrangements and/or major financial transactions, eg by monthly returns,
standard delegations and exception reporting. The sponsor department’s accounts consolidate
those of its ALBs so its accounting officer must be satisfied that the consolidated accounts are
accurate and not misleading.
3.8.3 Overall, the accounting officer of a sponsor department should make arrangements to
satisfy himself or herself that that the ALB has systems adequate to meet the standards in box
3.1. Similarly, the accounting officer of an ALB with a subsidiary should have meaningful
oversight of the subsidiary. It is not acceptable to establish ALBs, or subsidiaries to ALBs, in
order to avoid or weaken parliamentary scrutiny.
3.8.4 Exceptionally, the accounting officer of a sponsor department may need to intervene if an
ALB drifts significantly off track, eg if its budget is threatened, its systems are badly defective or
it falls into disrepute. This may include replacing some or all of the leaders of the ALB, possibly
even its accounting officer.
19
3 Accounting Officers
3.8.5 There are sensitivities about the role of the accounting officer in an ALB which is
governed by an independent board, eg a charity or company. The ALB’s accounting officer,
who will normally be a member of the board, must take care that his or her personal legal
responsibilities do not conflict with his or her duties as a board member. In particular, the
accounting officer should vote against any proposal which appears to cause such a conflict; it is
not sufficient to abstain.
3.8.6 Moreover, if the chair or board of such an ALB is minded to instruct its accounting officer
to carry out a course inconsistent with the standards in box 3.1, then the accounting officer
should make his or her reservations clear, preferably in writing. If the board is still minded to
proceed, the ALB accounting officer should then:
•
ask the accounting officer of the sponsor department to consider intervening to
resolve the difference of view, preferably in writing;
•
if the board’s decision stands, seek its written direction to carry it out, asking the
sponsor department to inform the Treasury;
•
proceed to implement without delay; and
•
follow the routine in paragraph 3.4.5.
3.8.7 This process is similar to what happens in departments (see section 3.4), allowing for the
special position of the organisation’s board, which is often appointed under statute.
3.9 In the round
3.9.1 It is not realistic to set firm rules for every aspect of the business with which an
accounting officer may deal. Sometimes the accounting officer may need to take a principled
decision on the facts in circumstances with no precedents. Should that happen, the accounting
officer should be guided by the standards in box 3.1 in assessing whether there is a case for
seeking a direction for any of the factors in box 3.2. It is essential that accounting officers seek
good outcomes for the Exchequer as a whole, respecting the key principles of transparency and
parliamentary approval for management of public resources.
3.9.2 Where time permits, the Treasury stands ready to help accounting officers think such
issues through. It is good practice to document decisions where the accounting officer has had
to strike difficult judgements, especially where they break new ground.
Annex 3.1
The Governance Statement
20
4
Governance and
Management
Public sector organisations should have good quality internal governance and sound
financial m anagem ent. Appropriate delegation of responsibilities and effective
m echanism s for internal reporting should ensure that perform ance can be kept on
track. G ood practice should be follow ed in procuring and m anaging resources and
assets; hiring and m anaging staff; and deterring w aste, fraud and other m alpractice.
Central governm ent departm ents have som e specific responsibilities for reporting,
including to parliam ent.
4.1 Governance structure
4.1.1 Each public sector organisation should establish governance arrangements appropriate to
its business, scale and culture. The structure should combine efficient decision making with
accountability and transparency.
4.1.2 In doing so, central government departments should be guided by the
Corporate
Governance Code1 . Each public sector organisation needs clear leadership, normally provided by
a board. Box 4.1 sets out best practice for departmental boards.
Box 4.1: best practice for boards in central government departments
•
chaired by the department’s most senior minister, with junior ministers as members
•
comparable numbers of official and non-executive members, including a lead non-executive and
a professionally qualified finance director (see annex 4.1)
•
meeting at least quarterly
•
sets the department’s strategy to implement ministers’ policy decisions
•
leads the department’s business and determines its culture
•
ensures good management of the department’s resources – financial, assets, people
•
decides risk appetite and monitors emerging threats and opportunities
•
steers performance to keep it on track using regularly updated information about progress
•
keeps an overview of its ALBs’ activities
4.1.3 It is good practice for ALBs to use similar principles. In many ALBs some structural
features, such as board composition, derive from statute but considerable discretion may
remain. In some organisations it is usual, or found valuable, for the board to include members
with designated responsibility or expertise, eg for regional affairs or for specialist professional
skills.
4.1.4 In order to carry out its responsibilities each board needs to decide, and document, how
it will operate. Box 4.2 outlines the key decisions. It is not exhaustive. Once agreed, the
working rules should be reviewed from time to time to keep them relevant. Boards should
1
https://www.gov.uk/government/publications/corporate-governance-code-for-central-government-departmentsfor both the code and the good
practice guidance
21
4 Governance and Management
challenge themselves to improve their working methods, so that their processes can achieve and
maintain good modern business practice.
Box 4.2: key decisions for boards
•
mission and objectives
•
delegations and arrangements for reporting performance
•
procedures and processes for business decision making
•
scrutiny, challenge and control of significant policies, initiatives and projects
•
risk appetite and risk control procedures, eg maintaining and reviewing a risk register
•
control and management of associated ALBs and other partnerships
•
arrangements for refreshing the board
•
arrangements for reviewing the board’s own performance
•
accountability – to the general public, to staff and other stakeholders (see section 4.13)
•
how the insights of non-executives can be harnessed
•
how often the board’s working rules will be reviewed
4.2 Working methods
4.2.1 The accounting officer of each organisation is accountable to parliament for the quality
of the administration that he or she leads. The administrative standards expected are set out in
the
Civil Service Code2 and the Ombudsman’s
Principles of Public Administration3. They allow
considerable flexibility to fit with each organisation’s obligations and culture. It is against these
standards that failure to deliver is assessed.
4.2.2 Another fundamental concept is the Treasury’s leadership position in managing public
expenditure, and setting the rules under which departments and their ALBs should deploy the
assets, people and other resources under their control. In turn each public sector organisation
should have robust and effective systems for their internal management. Box 4.3 outlines the
key decisions each organisation needs to make.
4.2.3 To help the Treasury carry out this task properly:
•
departments should provide the Treasury with accurate and timely information
about in-year developments - their expenditure, performance against objectives and
evolution of risk (eg serious unforeseen events or discovery of fraud);
•
ALBs should provide their sponsor departments with similar information; and
•
the established mechanisms for controlling and reporting public expenditure,
including Treasury support or approval where necessary, should be respected.
4.2.4 In particular, departments should consult the Treasury (and ALBs their sponsor
departments) at an early stage about proposals to undertake unusual transactions or financing
techniques. This applies especially to any transactions which may have wider implications
elsewhere in the public sector (see paragraph 2.3.4 and box 2.3).
2
http://www.civilservice.gov.uk/about/values
3
http://www.ombudsman.org.uk/improving-public-service/ombudsmansprinciples
22
4 Governance and Management
4.2.5 Working with the accounting officer, the finance director of each public sector
organisation has special responsibility for seeing that the standards described in this chapter are
respected. Annex 4.1.sets this out in more detail.
Box 4.3: essentials of effective internal decision making
choice
•
active management of the portfolio of risks and opportunities
•
appraisal of alternative courses of action using the techniques in the
Green Book, and including
assessment of feasibility to achieve value for money
•
where appropriate, use of models (see annex 4.2) or pilot studies to provide evidence on which
to make decisions among policy or project choices
•
active steering of initiatives, eg reviews to take stock at critical points of projects
operation
•
appropriate internal delegations, with a single senior responsible officer (SRO) for each
significant project or initiative, and a single senior person leading each end to end process
•
prompt, regular and meaningful management information on costs (including unit costs),
efficiency, quality and performance against targets to track progress and value for money
•
proportionate administration and enforcement mechanisms, without unnecessary complexity
•
use of feedback from internal and external audit and elsewhere to improve performance
•
regular risk monitoring, to track performance and experience and make adjustments in response
afterw ards
•
mechanisms to evaluate policy, project and programme outputs and outcomes, including
whether to continue, adjust or end any continuing activities
•
arrangements to draw out and propagate lessons from experience
4.3 Opportunity and risk
4.3.1 Embedded in each public sector organisation’s internal systems there should be
arrangements for recognising, tracking and managing its opportunities and risks. Each
organisation’s governing body should make a considered choice about its desired risk appetite,
taking account of its legal obligations, ministers’ policy decisions, its business objectives, and
public expectations of what it should deliver. This can mean that different organisations take
different approaches to the same opportunities or risks.
4.3.2 There should be a regular discipline of reappraising the opportunities and risks facing the
organisation since both alter with time and circumstances, as indeed may the chosen responses.
This process should avoid excessive caution, since it can be as damaging as unsuitable risk
taking. The assessment should normally include:
•
maintaining a risk register, covering identified risks and contingent risks from
horizon scanning;
•
reputational risks, since poor performance could undermine the credibility, and
ultimately the creditworthiness, of the Exchequer as a whole;
•
consideration of the dangers of maintaining the status quo;
•
plans for disaster recovery;
23
4 Governance and Management
•
appraisal of end to end risks in critical processes and other significant activities.
4.3.3 In making decisions about how to manage and control opportunity and risk, audit
evidence and other assurance processes can usefully inform choice. Audit, including internal
audit, can provide specific, objective and well-informed assurance and insight to help an
organisation evaluate its effectiveness in achieving its objectives. It is good practice for the audit
committee to advise the governing board of a public sector organisation on its key decisions on
governance and managing opportunities and risks. It is also a good discipline for this process to
include evaluating progress in implementing PAC recommendations, where they have been
accepted.
4.3.4 In turn the board should support the accounting officer in drawing up the governance
statement, which forms part of each organisation’s annual accounts. See annex 3.1. Further
guidance about managing risks is in annex 4.3 and the Orange Book.
4.4 Insurance
4.4.1 In the private sector risk is often managed by taking out insurance. In central
government it is generally not good value for money to do so. This is because the public sector
has a wide and diverse asset portfolio; a reliable income through its ability to raise revenue
through taxation; and access to borrowed funds more cheaply than any in the private sector. In
addition commercial providers of insurance also have to meet their own costs and profit
margins. Hence the public purse is uniquely able to finance restitution of damaged assets or deal
with other risks, even very large ones. If the government insured risk, public services would cost
more.
4.4.2 However, there are some limited circumstances in which it is appropriate for public sector
organisations to insure. They include legal obligations4, and occasions where commercial
insurance would provide value for money5. Further information about insurance generally is in
annex 4.4.
4.5 Control of public expenditure
4.5.1 The Treasury coordinates a system through which departments are allocated budget
control totals for their public expenditure. Each department’s allocation covers its own
spending and that of its associated ALBs. Within the agreed totals, it has considerable discretion
over setting priorities to deliver the public services for which it is responsible.
4.5.2 Each public sector organisation should run efficient systems for managing payments (see
box 4.4). It should also keep its use of public resources within the agreed budgets, take the
limits into account when entering into commitments, and generally ensure that its spending
profile is sustainable.
4.5.3 Any major project, programme or initiative should be led by a senior responsible owner
(SRO). It is good practice to aim for continuity in such appointments6.
4 eg ALBs should insure vehicles where the Road Traffic Act requires it
5 eg where private sector contractors take out single-site insurance policies because they are cheaper than each individual party insuring themselves
separately.
6 See annex 4.5.
24
4 Governance and Management
Box 4.4: essentials of systems for committing and paying funds
•
Selection of projects after appraisal of the alternatives (see the
Green Book), including the central
clearance processes for larger commitments.
•
Open competition to select suppliers from a diverse range, preferably specifying outcomes rather
than specific products, to achieve value for money (see annexes 4.6 and 4.7).
•
Where feasible, procurement through multi-purchaser arrangements, shared services and/or
standard contracts to drive down prices.
•
Effective internal controls to authorise acquisition of goods or services (including vetting new
suppliers), within any legal constraints.
•
Separation of authorisation and payment, with appropriate controls, including validation and
recording, at each step to provide a clear audit trail.
•
Checks that the goods or services acquired have been supplied in accordance with the relevant
contract(s) or agreement(s) before paying for them.
•
Payment terms chosen or negotiated to provide good value.
•
Accurate payment of invoices: once and on time, avoiding lateness penalties (see annex 4.8).
•
A balance of preventive and detective controls to tackle and deter fraud, corruption and other
malpractice (see annex 4.9).
•
Integrated systems to generate automatic audit trails which can be used to generate accounts
and which both internal and external auditors can readily check.
•
Periodic reviews to benefit from experience, improve value for money or to implement
developments in good practice.
4.6 Receipts
4.6.1 Public sector organisations should have arrangements for identifying, collecting and
recording all amounts due to them promptly and in full. Outstanding amounts should be
followed up diligently. Key features of internal systems of control are suggested in box 4.5.
4.6.2 Public sector organisations should take care to track and enforce debts promptly. The
presumption should be in favour of recovery unless it is uneconomic to do so.
Box 4.5: essential features of systems for collecting sums due
•
Adequate records to enable claims to be made and pursued in full.
•
Routines to prevent unauthorised deletions and amendments to claims.
•
Credit management systems to manage and pursue amounts outstanding.
•
Controls to prevent diversion of funds and other frauds.
•
Clear lines of responsibility for making decisions about pressing claims increasingly more firmly,
and for deciding on any abatement or abandonment of claims which may be merited.
•
Arrangements for deciding upon and reporting any write-offs (see annex 4.10). Audit trails
which can readily be checked and reported upon both internally and externally.
4.7 Non-standard financial transactions
4.7.1 From time to time public sector organisations may find it makes sense to carry out
transactions outside the usual planned range, eg:
•
w rite-offs of unrecoverable debts or overpayments;
25
4 Governance and Management
•
recognising losses of stocks or other assets;
•
long term loans or gifts of assets.
4.7.2 In each case it is important to deal with the issue in the public interest, with due regard
for probity and value for money. Annexes 4.10 to 4.12 set out what is expected when such
transactions take place in central government, including notifying parliament.
4.7.3 Where an organisation discovers an underpayment, the deficit should be made good as
soon as is practicable and in full. If there has been a lapse of time, for example caused by legal
action to establish the correct position, it may be appropriate to consider paying interest,
depending on the nature of the commitment to the payee and taking into account the
reputation of the organisation and value for money for the Exchequer as a whole (see also
section 4.11).
4.7.4 Similarly, public sector organisations may have reason to carry out current transactions
which would not normally be planned for. These might be:
•
extra contractual payments to service providers;
•
extra-statutory payments to claimants (where a similar statutory scheme exists);
•
ex gratia payments to customers (where no established scheme exists); or
•
severance payments to employees leaving before retirement or before the end of
their contract and involving payments above what the relevant pension scheme
allows.
4.7.5 Again it is important that these payments are made in the public interest, objectively and
without favouritism. The disciplines parliament expects of central government entities are set
out in annex 4.13, which explains the notification procedure to be followed for larger one-off
transactions of this kind. The steps to be considered when setting up statutory or extra-
statutory compensation schemes are discussed in annex 4.14.
4.8 Unusual circumstances
4.8.1 Sometimes public sector organisations face dilemmas in meeting their commitments.
They may have a legal or business obligation which would be uneconomic or inappropriate to
carry out assiduously to the letter. In such cases it can be justifiable to seek a pragmatic, just
and transparent alternative approach, appropriately reported to parliament in the organisation’s
annual accounts. One-off schemes of this kind are always novel and so require Treasury
approval, not least because they may also require legislation or have to rest on the authority of a
Supply and Appropriation Act (see section 2.5). Box 4.6 suggests precedented examples.
26
4 Governance and Management
Box 4.6: examples of one-off pragmatic schemes
•
A court ruling could mean that a public sector organisation owed each of a large number of
people a very small sum of money. The cost of setting up and operating an accurate payment
scheme might exceed the total amount due. The organisation could instead make a one-off
payment of equivalent value to a charity representing the recipient group.
•
A dispute with a contractor might conclude that the contractor owed a public sector
organisation an amount too big for it to meet in a single year while staying solvent. The
customer might instead agree more favourable payment terms, with appropriate safeguards, if
this arrangement provides better value for money.
4.9 Staff
4.9.1 Each public sector organisation should have sufficient staff with the skills and expertise to
manage its business efficiently and effectively. The span of skills required should match the
organisation’s objectives, responsibilities and resources, balancing professional, practical or
operational skills and policy makers, and recognising the value of each discipline. Succession
and disaster planning should ensure that the organisation can cope robustly with changes in the
resources available, including unforeseen disruption.
4.9.2 Public sector organisations should seek to be fair, honest and considerate employers.
Some desirable characteristics are suggested in box 4.7.
Box 4.7: public sector organisations as good employers
•
selection designed to value and make good use of talent and potential of all kinds
•
fairness, integrity, honesty, impartiality and objectivity
•
professionalism in the relevant disciplines, always including finance
•
arrangements to make sure that staff are loaded cost effectively
•
management techniques balancing incentives to improve and disciplines for poor performance
•
diversity valued and personal privacy respected
•
mechanisms to support efficient working practices, both normally and under pressure
•
arrangements for whistleblowers to identify problems privately without repercussions.
4.9.3 Similarly public sector employers have a right to expect good standards of conduct from
their employees. The qualities and standards expected of civil servants are set out in the
Civil
Service Code. Other public sector employees should strive for similar standards, appropriate to
their context.
4.10 Assets
4.10.1 All public sector organisations own or use a range of assets. Each organisation needs to
devise an appropriate asset management strategy to define how it acquires, maintains, tracks,
deploys and disposes of the various kinds of assets it uses. Annex 4.15 discusses how to set up
and use such a strategy.
4.10.2 It is good practice for public sector organisations to take stock of their assets from time
to time and consider afresh whether they are being used efficiently and deliver value for public
funds. If there is irreducible spare capacity there may be scope to use part of it for other
government activities, or to exploit it commercially for non-statutory business.
27
4 Governance and Management
4.11 Standards of service
4.11.1 Poor quality public services are not acceptable. Public sector organisations should
define what their customers, business counterparties and other stakeholders can expect of them.
4.11.2 Standards can be expressed in a number of ways. Examples include guidelines (eg
response times), targets (eg take-up rates) or a collection of customer rights in a charter. Even
where standards are not set explicitly, they may sometimes be inferred from the way the
provider organisation carries out its responsibilities; so it is normally better to express them
directly.
4.11.3 Whatever standards are set, they should be defined in a measurable way, with plans for
recording performance, so that delivery can be readily gauged. It is good practice to use
customer feedback, including from complaints, to reassess from time to time whether standards
or their proxies (milestones, targets, outcomes) remain appropriate and meaningful.
4.11.4 Where public sector organisations fail to meet their standards, or where they fall short
of reasonable behaviour, it may be appropriate to consider offering remedies. These can take a
variety of forms, including apologies, restitution (eg supplying a missing licence) or, in more
serious cases, financial payments. Decisions about financial remedies – which should not be
offered routinely - should include taking account of the legal rights of the other party or parties
and the impact on the organisation’s future business.
4.11.5 Any such payments, whether statutory or ex gratia, should follow good practice (see
section 4.13). Since schemes of financial redress often set precedents or have implications
elsewhere, they should be cleared with the Treasury before commitments are made, just as with
any other public expenditure out of the normal pattern (see sections 2.1 to 2.4).
4.12 Complaints
4.12.1 Those public sector organisations which deal with customers directly should strive to
achieve clear, accurate and reliable standards for the products and services they provide. It is
good practice to arrange for complaints about performance to be reviewed by an independent
organisation such as an ombudsman.
4.12.2 Often such review processes are statutory. The activities of central government
departments and the NHS are open to review by the PHSO7, whose
Principles of Good
Complaints Handling8 sets out generic advice on complaints handling and administration of
redress (see also annex 4.14). After investigation of cases of specific complaint, the PHSO can
rule on whether injustice or hardship can be attributed to maladministration or service failure,
and may recommend remedies, either for individual cases or for groups of similar cases. If
departments decline to follow the PHSO’s advice, they should lay a memorandum in parliament
explaining why.
7
http://www.ombudsman.org.uk/
8
http://www.ombudsman.org.uk/improving-public-service/ombudsmansprinciples
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4 Governance and Management
4.13 Transparency
4.13.1 All public sector organisations should operate as openly as is compatible with the
requirements of their business. In line with the statutory public rights9, they should make
available timely information about their services, standards and performance. This material
should strike a careful balance between protecting confidentiality and open disclosure in the
public interest.
4.13.2 All public sector organisations should adopt a publication scheme routinely offering
information about the organisation’s activities. They should also publish regular information
about their plans, performance and use of public resources.
4.13.3 The published information should be in sufficient detail, and be sufficiently regular, to
enable users and other stakeholders to hold the organisation and its ministers to account.
Benchmarks can help local users to evaluate local performance more easily.
4.13.4 The primary document of record for central government departments is the report and
accounts, which should consolidate information about the relevant ALBs. It should include a
governance statement (see annex 3.1).
4.13.5
In addition, the Treasury is responsible for publishing certain aggregate
information about use of public resources, for example Whole of Government Accounts (WGA)
consolidating all central and local government organisations’ accounts and comparisons of
outturn with budgets. The Office for National Statistics (ONS) also uses input from data
gathered by the Treasury to publish the national accounts.
4.13.6
In certain areas of public business it is also important or desirable to provide
adequate public access to physical assets. Unnecessary or disproportionate restrictions should
be avoided. Managed properly, this can be a valuable mechanism to promote inclusion and
enhance public accountability.
4.14 Dealing with initiatives
4.14.1 Public sector organisations need to integrate all the advice in this handbook when
introducing new policies or planning projects. Each is unique and will need bespoke treatment.
The checklist in box 4.8 brings the different factors together. It applies directly to central
government organisations but the principles will be of value elsewhere.
9 Eg Freedom of information act 2000, Data protection act 1998, Environment information regulations 2004 and the Re-use of public sector
information regulations 2005.
29
4 Governance and Management
Box 4.8: factors to consider when planning policies or projects
design
• Has the proposal been evaluated against alternative options, including doing nothing?
• Should there be pilot testing before full roll out?
• Are the controls agreed and documented clearly? Have the risks and opportunities been considered
systematically? Is the change process resilient to shocks? What contingencies might arise?
• Is the intended intervention proportionate to the identified need?
• What standards should be achieved? How will performance be tracked and assessed? Could the
proposal be simplified without loss of function?
• If partner(s) are involved, is the allocation of responsibilities appropriate?
• Will the proposal be efficient, effective and offer good value for money?
• Is the policy sustainable in the broadest sense? Should it have a sunset clause?
• Does the planned activity meet high standards of probity, integrity and honesty?
• Will the proposal deliver the desired outcome to time and cost?
• Does the accounting officer assess the initiative as compatible with the public sector standards?
control
• What prior agreement is required, if any?
• How will internal governance and delegation work? Will it be effective? Is it transparent? Should
there be an SRO?
• Is there adequate legislation? If not, what is needed to make the action lawful?
• Is there any conflict with European law, including limits on state aids?
• How will the proposal be financed? Is there budget and Estimate cover? Is it appropriate to charge
to help finance the service? Are charges set within the law?
• Is the proposed action within the department’s delegated authorities?
• What financial techniques will be used to manage rollout, implementation and operation?
• Are project and programme management techniques likely to be useful?
• How will the intended new arrangements be monitored and efficiency measured?
• How will feedback be used to improve outcomes?
• Does the design inhibit misuse and counter fraud? What safeguards are needed?
• How will the associated risks be tracked and the responses adjusted?
• What intervention will be possible if things go off track?
• Would it be possible to recover from a disaster promptly?
accountability
• How should parliament be told of the proposal and kept informed of progress?
• What targets will be used? Are they sufficiently stretching?
• Is public access called for? How?
• Is the policy or service fair and impartial?
• Will its administration be open, transparent and accessible?
• Should there be customer standards? How are complaints used to improve performance?
• Should there be arrangements for redress after poor delivery?
• Is enforcement required? If so, is it proportionate?
• Is an appeal mechanism needed?
• Is regulation called for?
learning lessons
• What audit arrangements (internal and external) are intended?
• What information about the activity will be published? How and how often?
• When and how will the policy or project be evaluated to assess its cost and benefits and to
determine whether it should continue, be adjusted, replaced or ceased?
30
4 Governance and Management
Annex 4 1
.
Finance Directors
Annex 4 2
.
Use of models
Annex 4 3
.
Risk
Annex 4 4
.
Insurance
Annex 4 5
.
Senior Responsible Owner Accountability
Annex 4 6
.
Procurement
Annex 4 7
.
State aids
Annex 4 8
.
Expenditure and payments
Annex 4 9
.
Fraud
Annex 4 1
. 0
Losses and write-offs
Annex 4 1
. 1
Overpayments
Annex 4 1
. 2
Gifts
Annex 4 1
. 3
Special payments
Annex 4 1
. 4
Remedy
Annex 4 1
. 5
Asset management
31
32
5
Funding
This chapter explores the m eans by w hich central governm ent organisations m ay
obtain funds in order to finance public expenditure. The Treasury operates disciplines
to respect parliam ent’s concern to prevent unauthorised expenditure.
5.1 The framework for public expenditure control
5.1.1 Most public expenditure is financed from centrally agreed multi-year budgets
administered by the Treasury, which oversees departments’ use of their budget allocations. In
the main, departments have considerable discretion about how they distribute these budget
allocations, which are expressed net of relevant income. The main source of receipts to be
netted off is fees and charges (see chapter 6).
5.1.2 The Treasury oversees and directs the rules that departments should respect in managing
their budgets. Departments are expected to live within their allocations for each financial year,
with some limited exceptions, eg for certain demand led services. The budgeting framework is
explained in the
Consolidated Budgeting Guidance, which is refreshed each year.
5.2 Grants
5.2.1 Each central government department decides how much of its budget provision it should
cascade to its ALBs in each year of the multi-year agreement. Departments may pay them grants
(for specific purposes) and grants-in-aid (unspecific support) to finance their spending; though it
is the net spending of the ALB that scores in the departmental budget. Annex 5.1 explains more
about grants.
5.2.2 Budgets and Estimates plan net spending and include all spending of ALBs however it is
financed. In general it is sensible to consider arrangements for protecting the Exchequer interest
through clawback of specific grants should the purposes for which they are agreed not
materialise (annex 5.2).
5.3 Estimates
5.3.1 The multiyear departmental budgets agreed collectively among ministers do not of
themselves confer authority to spend or commit resources. Parliamentary agreement, usually
through the Supply Estimate process, is also essential (see box 2.1).
5.3.2 Departmental Estimates are put to parliament covering one financial year at a time, in the
spring. Each covers the net expenditure of a department and its ALBs (ie all spending in budgets
and any voted spend outside of budgets). For the year ahead, the provision sought should be
taut and realistic, without padding. The
Supply and Estimates Guidance Manual has more
detail.
5.3.3 Before the summer recess, the provision sought in the Estimate is formally authorised in a
Supply and Appropriation Act, which sets net expenditure limits for the year. The Act is then
the legal authority for public expenditure within the ambit of the Estimate. The ambit itemises a
specific range of permitted activities and income streams for the year.
33
5 Funding
5.3.4 Within a financial year, there is some scope for transferring (through virement) provision
from one section or subhead to another within any of the control limits in the same Estimate.
There is scope for adjusting Estimate provision through a Supplementary Estimate late in the
year if circumstances change. A Supplementary Estimate should show all movements between
sections, even if they would otherwise have been dealt with through virement.
5.3.5 Departmental Select Committees may examine departmental witnesses on the plans
contained in Estimates. Usually such hearings take place after Estimates are laid in parliament
but before they are voted into law.
5.3.6 If there is underspending against Estimate provision in one year, it cannot automatically
be carried forward to a later year. If a department wants to spend resources it did not consume
in a previous year, it needs Treasury approval and must also obtain fresh parliamentary authority
to spend in the year(s) concerned.
5.3.7 Like budgets, Estimates are set net of income. But parliament needs to be made aware
of receipts since Estimates authorise gross expenditure, normally using statutory powers. Annex
5.3 explains more about of types of receipt. Chapter 6 contains guidance about setting and
adjusting fees and charges.
5.3.8 Occasionally an Estimate sets a negative limit for permitted resources. This happens if
income is expected to exceed the relevant gross expenditure. Similarly a Supplementary Estimate
can be negative if provision for spending is to fall within a given year.
5.3.9 A department’s Estimate for a year includes all spending within its agreed budget for that
year, as well as any voted non-budget spending. Not all of this amount requires voted
parliamentary approval since some items, such as Consolidated Fund Standing Services, are paid
direct from the Consolidated Fund. Hence only the voted parts of the Estimate requiring
parliamentary approval appear in the Supply and Appropriation Act. Of course the disciplines
on public funds (box 3.1) apply to all the activities described in the Estimate and accounts
whether within the Act or not.
5.4 Excess Votes
5.4.1 Accounting officers have an important role in overseeing the integrity of the Estimates for
which they are responsible. In particular, accounting officers are responsible for ensuring that
Estimates are in good order (see section 2.2).
5.4.2 The Treasury presents parliament each year with a Statement of Excesses to request
retrospective authority for any unauthorised resources consumed above the relevant limits or
outside the ambit of the Estimate. Parliament takes these excesses seriously. The PAC or
departmental select committee may call witnesses to account in person or ask for a written
explanation.
5.4.3 The Statement of Excesses includes two kinds of excess:
•
spending above the amount provided in an Estimate; and
•
irregular expenditure outside the ambit, eg on an unauthorised service.
34
5 Funding
5.4.4 Parliament usually regards the latter as particularly unsatisfactory because it means that
the department concerned has flouted parliament’s intentions1 and may have defective systems
of control. The auditor may identify such excesses as spending not covered by statutory powers,
even if the total amount spent does not exceed the voted limit.
5.4.5 Expenditure in excess of provision on an activity agreed by parliament is also to be
avoided since the authority of a Supply and Appropriation Act is just as essential as specific
statutory authority (box 2.1). It is possible, with Treasury agreement, to raise the amount in an
Estimate during the course of the year in a Supplementary. But otherwise accounting officers
should reduce, reprioritise or postpone use of resources to keep within the provision parliament
has agreed for the year.
5.5 Commitments
5.5.1 Parliament is not bound2 to honour ministers’ commitments unless and until there are
statutory powers to meet them and it authorises public funds to finance them (through an
Estimate) in a given year. This discipline is especially important when ministers plan a new
service.
5.5.2 Because commitments can evolve into spending, they should always be scrutinised and
appraised as stringently as proposals for consumption (box 4.8 may help). Some departments
may agree with the Treasury blanket authority for defined and limited ranges of non-statutory
commitments, eg indemnities for board members and commitments taken on the normal course
of business. All other non statutory commitments are novel, contentious or repercussive, so
Treasury approval is always essential before they are undertaken.
5.5.3 Public sector organisations should give parliament prompt and timely notice of any
significant new commitments, whether using existing statutory powers or to be honoured
through future legislation. Non statutory contingent liabilities (above a specified threshold)
should always be notified in this way. The process is set out in annex 5.4.
Box 5.1: contingent liabilities: notifying parliament
•
Parliament should be notified of uncertain liabilities in a meaningful way without spurious
accuracy. It is good practice to notify parliament if a previously notified liability changes
significantly, or can be clarified, eg if the timing can be firmed up.
•
If a contingent liability affects several departments but cannot confidently be allocated among
them, the relevant ministers should inform parliament in a pragmatic way. A single statement
may well suffice.
•
If, exceptionally, a new liability needs to remain confidential, the minister should inform the
chairs of the relevant select committee and the PAC; then inform parliament openly when the
need for confidentiality lifts.
•
Ministers should inform parliament if an ALB assumes a contingent liability which it could not
absorb within its own resources, since the risk ultimately lies with the sponsor department’s
budget.
1 Ie has breached the Concordat – see annex 2.3
2 Under the Concordat
35
5 Funding
5.5.4 The general rule is to err on the side of caution in keeping parliament informed of
emerging contingent liabilities. It is impossible to generalise about every possible set of
circumstances but some guidance is in box 5.1.
5.6 Tax
5.6.1 Public sector organisations should not engage in, or connive at, tax evasion, tax
avoidance or tax planning. If a public sector organisation were to obtain financial advantage by
moderating the tax paid by a contractor, supplier or other counterparty, it would usually mean
that the Exchequer as a whole would be worse off – thus conflicting with the accounting
officer’s duties (section 3.3). Thus artificial tax avoidance schemes should normally be rejected.
It should be standard practice to consult HMRC3 about transactions involving non-standard
approaches to tax before going ahead.
5.6.2 There is of course no problem with using tax advisers to help meet normal legitimate
requirements of carrying on public business. These include administration of VAT, PAYE and
NICs, where expert help can be useful and efficient.
5.6.3 Proposals to create new taxes in order to assign their proceeds to new spending
proposals are rarely acceptable. Decisions on tax are for Treasury ministers, who are reluctant to
compromise their future fiscal freedom to make decision.
5.7 Public dividend capital
5.7.1 Certain public sector businesses, notably trading funds and certain Health Trusts, are set
up with public dividend capital (PDC) in lieu of equity. Like equity, PDC should be serviced,
though not necessarily at a constant rate.
5.7.2 PDC is not a soft option. In view of the risk it carries, it should deliver a rate of return
comparable to commercial equity investments carrying a similar level of risk. There is scope for
the return to vary to reflect market conditions and investment patterns; but persistent
underperformance against the agreed rate of return should not be tolerated.
5.7.3 A department needs specific statutory power to issue PDC, together with supply cover to
pay it out of the Consolidated Fund. Sometimes instead of a specific issue of PDC, the
legislation establishing (or financially reconstructing) a public sector business deems an issue of
PDC to the new business. Dividends on PDC, and any repayments of PDC, are paid to the
sponsor department of the business.
5.7.4 Further information about the use of PDC is in section 7.8 (trading funds).
5.8 Borrowing by public sector organisations
5.8.1 Some public sector organisations, eg certain trading funds, are partly financed through
loans provided through the sponsor department’s Estimate; or from the National Loans Fund
(NLF). In these cases Treasury consent and specific legal powers are always required. Limits and
other conditions are common. See annex 5.5 for more.
5.8.2 NLF and Voted loans can only be made if there is reasonable expectation that the loan
will be serviced and repaid promptly. Similarly, when ALBs borrow, their sponsor departments
3 HMRC customer relationship manager or customer co-ordinator
36
5 Funding
explicitly stand behind them and so should scrutinise borrowers’ creditworthiness, not just
relying on their track records, in order to satisfy themselves that such loans are sound. For NLF
loans, if timely repayment could not realistically be expected, the loan would be unlawful.
5.8.3 Should a department become aware of concerns about the security of outstanding loans
(either its own or an ALB’s), it should warn the Treasury promptly and consider what action it
can take to reduce or otherwise mitigate any potential loss. If a loan becomes irrecoverable,
remedial treatment should be agreed with the Treasury and then notified to parliament.
5.8.4 The NLF cannot make a loss. So the interest rates charged on NLF loans, whether fixed or
variable, must be higher than the rates at which the NLF could raise funds for a similar period.
Early repayment is sometimes possible, eg if the borrower has windfall receipts, but never simply
to refinance on terms more favourable to the borrower because a fee is charged to match the
Exchequer costs when a loan ends early. This is because the NLF finances the amount
outstanding using money market instruments sold at the time the loan was made, and must
continue to service those instruments. So the Exchequer as a whole would make a loss if the
NLF offered cheaper replacement loans.
5.8.5 While NLF loans are repaid to the NLF, voted loans are repaid to the Consolidated Fund.
The treatment of repayments and interest payments in Estimates and accounts is discussed in
the
Consolidated Budgeting Guidance, the
Estimate Manual and the FReM. The Treasury
accounts for NLF transactions in the NLF’s accounts. Any proposed write-offs must be notified
to parliament after obtaining Treasury agreement: see annex 5.5
5.9 External borrowing
5.9.1 Public sector organisations may borrow from private sector sources only if the transaction
delivers better value for money for the Exchequer as a whole. Because non-government lenders
face higher costs, in practice it is usually difficult to satisfy this condition unless efficiency gains
arise in the delivery of a project (eg PFI). Treasury agreement to any such borrowing, including
by ALBs, is also essential. Nevertheless it can sometimes be expedient for public sector bodies to
borrow short term, for example by overdraft.
5.9.2 When a sponsor department’s ALB borrows, the department should normally arrange to
guarantee the loan to secure a fine rate. This is not always possible, eg when a guarantee
would rank as a state aid (see annex 4.7). A department which guarantees a loan normally4
needs a specific statutory power as well as Estimate provision. On exceptional occasions
temporary non-statutory loans may be possible.
5.9.3 The case for a guarantee should be scrutinised as thoroughly as if indeed a loan were
made. Since guarantees always entail entering into contingent liabilities, parliament must be
notified when a loan guarantee is given, using the reporting procedures in annex 5.4.
5.9.4 Occasionally there is a case for an ALB to borrow in foreign currency in its own name
rather than the government’s. Because this can affect the credit standing of the government as
a sovereign borrower, and may well cost more, it is essential to consult the Treasury beforehand.
The same principles apply to the borrowing of any bodies, such as subsidiaries, for which a
department’s ALBs are responsible.
4 The Concordat applies here in just the same way as to spending – see annex 2.3
37
5 Funding
5.10 Multiple sources of funding
5.10.1 Sometimes public sector organisations derive funding from more than one source.
Examples of funding other than voted funds include national insurance contributions (which are
dedicated to the National Insurance Fund), lottery funding and charitable funding. All of these
alternatives usually come with specific conditions attached.
5.10.2 Organisations in this position should segregate and account separately for the different
streams of funding so that they can apply the relevant terms and conditions to each. In
particular, where a source of funding is designated to a particular purpose, it is rarely
appropriate to use another instead. In those circumstances switching is novel and contentious
and thus requires Treasury approval.
5.10.3 When there is doubt about how to handle multiple streams of funding, it is good
practice to consult the Treasury.
5.11 Cash management
5.11.1 The various organisations in central government together handle very large flows of
public funds. At the end of each working day, the Exchequer must either borrow from the
money market or place funds on deposit with the money market, depending on the net position
reached after balancing outflows to finance expenditure against inflows from taxes and other
sources.
5.11.2 So there is considerable advantage to be gained for the Exchequer as a whole by
minimising this net position. In practice this means gathering balances together at the end of
each working day. In aggregate all these accounts make up the Exchequer Pyramid, managed
by the Treasury. Most funds are held with the Government Banking Service.
5.11.3 It is essential for central government organisations to minimise the balances in their
own accounts with commercial banks. Were each to retain a significant sum in its own account
with such banks, the amount of net government borrowing outstanding on any given day
would be appreciably higher, adding to interest costs and hence worsening the fiscal balance.
5.11.4 Each central government organisation should establish a policy for its use of banking
services. See annex 5.6 for guidance. Sponsor departments should also make sure that their
ALBs are aware of the importance of managing this aspect of their business efficiently and
effectively (see box 7.2).
5.12 Other financing techniques
5.12.1 Depending on its circumstances, purposes and risk profile, a public sector organisation
may consider using financial instruments provided by the commercial markets. Among these
techniques are foreign currency transactions and various hedging instruments designed to
control or limit business risks, for example those arising out of known requirements for specific
future purchases of market priced commodities. Mundane possibilities are use of credit or debit
cards, in order to secure faster settlements.
5.12.2 As with making decisions about other policies and projects, an organisation considering
using unfamiliar financing techniques should evaluate them carefully, especially to assess value
for money. The checklists in boxes 4.5 and 4.6 have reminders of factors that may need to be
considered. As such transaction(s) are almost always novel, contentious or repercussive, it is
essential to consult the Treasury.
38
5 Funding
5.12.3 Any organisation using a new or non-standard technique should ensure that it has the
competence to manage, control and track its use and any resulting financial exposures, which
may vary with time. In particular, departments should consult the Treasury before using
derivatives for the first time (and ALBs their sponsoring departments).
5.12.4 When assessing an unfamiliar financing technique, it is important to remember that
providers of finance and complex financial instruments intend to profit from their business. And
providers’ costs of finance are always inferior to the UK government’s cost of borrowing. So it is
usually right to be cautious about any novel techniques. The Treasury will always refuse
proposals to speculate. Offers which appear too good to be true usually are.
5.12.5 As with managing other business, parliament may ask accounting officers to justify any
decisions about use of financial transactions, especially if with hindsight they have not achieved
good value for money.
Annex 5.1
Grants
Annex 5.2
Protecting the Exchequer interest (clawback)
Annex 5.3
Treatment of income and receipts
Annex 5.4
Contingent liabilities
Annex 5.5
Departmental lending
Annex 5.6
Banking and cash management
39
40
6
Fees, charges and levies
Charges for services provided by public sector organisations norm ally pass on the full
cost of providing them . There is scope for charging m ore or less than this provided
that m inisters choose to do so, parliam ent consents and there is full disclosure.
Public sector organisations m ay also supply com m ercial services on com m ercial term s
designed to w ork in fair com petition w ith private sector providers. Parliam ent
expects proper controls over how , w hen and at w hat level charges m ay be levied.
6.1 Why charges matter
6.1.1 Certain public goods and services are financed by charges rather than from general
taxation. This can be a rational way to allocate resources because it signals to consumers that
public services have real economic costs. Charging can thus help prevent waste through badly
targeted consumption. It can also make comparisons with private sector services easier,
promote competition, develop markets and generally promote financially sound behaviour in the
public sector.
6.1.2 There are unavoidable reasons why policy on charging is important:
•
charges substitute for taxation (or, in the short term, borrowing) as a means of
government finance. Decisions on charging policy should therefore be made with
the same care, and to similar standards, as those on taxation;
•
for this reason, parliament expects to consider legislation on whether charges
should be levied; how they should be structured; and on charge levels;
•
international standards1 determine how income from charges is classified in the
national accounts. Certain charges are treated as taxes.
6.1.3 As in other areas of managing public funds, parliament expects the Treasury to make sure
that its interests are respected, including pursuit of efficiency and avoidance of waste or
extravagance. Because Estimates and budgets are shown net of income, special effort is
required to give parliament information about both gross and net costs, and about the sources
and amounts of income.
6.2 Basic principle
6.2.1 The standard approach is to set charges to recover full costs. Cost should be calculated
on an accruals basis, including overheads, depreciation (eg for start up or improvement costs)
and the cost of capital. Annex 6.1 sets out how to do this.
6.2.2 This approach is simply intended to make sure that the government neither profits at the
expense of consumers nor makes a loss for taxpayers to subsidise. It requires honesty about the
policy objectives and rigorous transparency in the public interest.
1 The Treasury and public accounts follow classification decisions taken by the Office for National Statistics, an independent organisation which is
guided by the international standards set out in the European System of Accounts
41
6 Fees, charges and levies
6.2.3 As elsewhere, organisations supplying public services should always seek to control their
costs so that public money is used efficiently and effectively. The impact of lower costs should
normally be passed on to consumers in lower charges. Success in reducing costs is no excuse for
avoiding the principles in this guidance.
6.2.4 This chapter applies to all fees and charges set by ministers and by an extensive range of
public bodies: departments, trading funds, NDPBs, the NHS, non-devolved services in Scotland,
Wales and Northern Ireland, and most public corporations. Departments should be able to
satisfy themselves that their ALBs can deliver the financial objectives for the services they charge
for. This chapter also applies when one public organisation supplies another with goods or
services; and to certain statutory local authority charges set by ministers.
6.3 Setting a charge: standard practice
6.3.1 When a charge for a public service is to be made, it is normally necessary to rely on
powers in primary legislation. The legislation should be designed so that ministers decide, or
have significant influence over, both the structure of the charge and its level. It is common to
frame primary legislation in general terms, using secondary legislation to settle detail.
6.3.2 Treasury consent is required for all proposals to extend or vary charging schemes. This
holds even if the primary legislation does not call for it, or the delegated authorities within
which the organisation operates would otherwise allow it.
6.3.3 It is sometimes possible to rely on secondary legislation rather than primary to determine
charges:
•
an order under s2(2) of the European Communities Act 1972 can introduce the
substantive policy for certain implementing EU legislation. Or if it is possible, an
order under s56 of the Finance Act 1973 can be used;
•
restructuring of charges can sometimes be achieved by an order under s102 of the
Finance (no 2) Act 1987 (see box 6.1).
Box 6.1: restructuring charges using S.102
•
A s102 order can extend or vary powers in existing primary legislation.
•
It can permit restructuring by specifying factors to be taken into account when setting fees.
•
Explicit prior Treasury consent is always essential.
But
•
A s102 order cannot create a power for new charges where no primary legislation exists.
•
Nor can it lift restrictions in (or in any other way undermine) primary legislation.
•
Parliament is usually sceptical because s102 substitutes secondary for primary legislation.
6.3.4 When deciding the level of a charge, it is important to define:.
•
the range(s) of services for which a charge is to be made;
•
how any categories of service are to be differentiated, if at all, in setting charges.
6.3.5 The standard approach is that the same charge should apply to all users of a defined
category of service, so recovering full costs for that category of service. Different charges may
42
6 Fees, charges and levies
be set for objectively different categories of service costing different amounts to provide. Box
6.2 shows how this can work.
Box 6.2: how different charges can apply to different categories of service
Different categories could be recognised by:
•
distinguishing supply differences, eg in person, by post or online
•
priorities, eg where a quicker service costs more
•
quality, eg charging more for a premium service with more features
•
recognising structural differences, where it costs more to supply some consumers.
6.3.6 However, different groups of customers should not be charged different amounts for a
service costing the same, eg charging firms more than individuals. Similarly, cross subsidies are
not standard practice, eg charging large businesses more than small ones where the cost of
supply is the same.
6.3.7 Charges within and among central government organisations should normally also be at
full cost, including the standard cost of capital. Any different approach would cause one party
to make a profit or loss not planned in budgets agreed by ministers collectively; while the
customer organisation(s) would conversely face charges higher or lower than full costs. A
number of objectionable consequences might flow from this. For instance, a question of state
aid could arise; or private sector consumers of the customer organisation might be charged
distorted fees.
6.3.8 Shared services (box 6.3) are a special case of charging within the public sector.
Box 6.3: shared services
It is often possible to make economies of scale by arranging for several public service organisations to
join together to deliver services cheaper, eg by using their joint purchasing power. One organisation
supplies the other(s). Since all the parties should lower their costs, the accounting officer of each
organisation should have no difficulty in recognising improved value for money for the Exchequer as a
whole and so justify going ahead.
Public sector organisations supplying (or improving) shared services should consult the Treasury at an
early stage of planning. Typically supplier organisations face the cost of setting up provision on a
larger scale than they need for their own use. As with setting up any new service, plans in budgets
should amortise initial costs so that they can be recovered over an appropriate period from the start of
the service. More detail on shared services is in section 7.5.
It is not acceptable for supplier organisations to plan to profit from, or subsidise, supply to customer
organisations in the public sector. Nor is it acceptable for accounting officers to resist shared services
just because the impact on their own organisation is not perceived to be favourable.
6.4 Setting a charge: non-standard approaches
6.4.1 Ministers’ policy objectives for a service where a charge is levied may not fit the standard
model in section 6.3. In such cases it may be possible to deliver the policy objective in another
way. Some ways of doing this are described below. Explicit Treasury consent, and often formal
legal authority, is always required for such variations. It is desirable to consult the Treasury at an
early stage to make sure that the intended strategy can be delivered.
43
6 Fees, charges and levies
Charging below cost
6.4.2 Where ministers decide to charge less than full cost, there should be an agreed plan to
achieve full cost recovery within a reasonable period. Each case needs to be evaluated on its
merits and obtain Treasury clearance. If the subsidy is intended to last, this decision should be
documented and periodically reconsidered.
Charging above cost
6.4.3 ONS normally classifies charges higher than the cost of provision, or not clearly related to
a service to the charge payer, as taxes. Such charges always call for explicit ministerial decision
as well as specific statutory authority. The Treasury does not automatically allow departments to
budget for net expenditure associated with above cost charges. Netting off, or netting off up to
full costs, may be agreed in certain instances, considering each case on its merits.
6.4.4 Sometimes when a change of this kind is classified as a tax, departments also propose to
assign its revenue. The Treasury always treat such proposals with caution (see 5.6.3).
Cross subsidies
6.4.5 Cross subsidies always involve a mixture of overcharging and undercharging, even if the
net effect is to recover full costs for the service as a whole. So cross subsidised charges are
normally classified as taxes. They always call for explicit ministerial decision and parliamentary
approval through either primary legislation or a s102 order.
Information services
6.4.6 In the public interest, information may be provided free or at low charge. This approach
recognises the value of helping the general public obtain the data they require to function in the
modern world. There are some exceptions - see annex 6.2.
6.5 Levies
6.5.1 Compulsory levies, eg payments for licences awarded by statutory regulators, or duties to
finance industry specific research foundations, are normally classified as taxation. Such levies
may be justified in the wider public interest, not because they provide a direct beneficial service
to those who pay them. Depending on the circumstances, the Treasury may allow regulators to
retain the fees charged if this approach is efficient and in the public interest.
6.5.2 As with other fees and charges, levies should be designed to recover full costs. If the
legislation permits, the charge can cover the costs of the statutory body, eg a regulator could
recover the cost of registration to provide a licence and of associated supervision. It may be
appropriate to charge different levies to different kinds of licensees, depending on the cost of
providing different kinds of licences (see box 6.2).
6.6 Commercial services
6.6.1 Some public sector services are discretionary, ie no statute underpins them. Services of
this kind are often supplied into competitive markets, though sometimes the public sector
supplier has a monopoly or other natural advantage.
6.6.2 Charges for these services should be set at a commercial rate. The rate should deliver a
commercial return on the use of the public resources deployed in supplying the service. So the
financial target should be in line with market practice, using a risk weighted rate of return on
44
6 Fees, charges and levies
capital relevant to the sector concerned. The rate of return used in pricing calculations for sales
into commercial markets should be:
•
for sales into commercial markets, in line with competitors’ assessment of their
business risk, rising to higher rates for more risky activities; or
•
where a public sector body supplies another, or operates in a market without
competitors, the standard rate for the cost of capital (see annex 6.1).
6.6.3 If a publicly provided commercial service does not deliver its target rate of return,
outstanding deficits should be recovered, eg by adjusting charges. Any objective short of
achieving the target rate of return calls for ministerial agreement, and should be cleared with
the Treasury. But discretionary services should never undermine the supplier organisation’s
public duties, including its financial objective(s).
6.6.4 It is important for public suppliers of commercial services to respect competition law.
Otherwise public services using resources acquired with public funds might disturb or distort the
fair operation of the market, especially where the public sector provider might be in a dominant
position: see annex 6.3.
6.7 Disclosure
6.7.1 It is important that parliament is fully informed about use of charges. Each year the
annual report of the charging organisation should give:
•
the amounts charged
•
full costs and unit costs
•
total income received
•
the nature and extent of any subsidies and/or overcharging
•
the financial objectives and how far they have been met.
6.7.2 To keep parliament properly informed, Estimates should display details of expected
income from charges. The Estimates Manual explains how the controls work.
6.7.3 The FReM sets out the information public sector organisations should publish in their
accounts. It should include analysis of income.
6.8 Taking stock
6.8.1 As with any other use of public resources, it is important to monitor performance so that
the undertaking can be adjusted as necessary to stay on track. It is good practice to review the
service routinely at least once a year, to check, and if appropriate revise, the charging level. At
intervals, a more fundamental review is usually appropriate, eg on a timetable compatible with
the dynamics of the service. Box 6.4 suggests some issues to examine.
45
6 Fees, charges and levies
Box 6.4: reviewing a public service for which a charge is made
•
Is it still right for a public sector body to use public resources to supply the service?
•
Are there any related services for which there might be a case for charging?
•
Does the business structure still make sense? Are the assets used for the service adequate?
•
How can efficiency and effectiveness be improved so that charges can be lower or offer better
value?
•
Is the financial objective right?
•
For a statutory (or other public sector) service, if full costs are not recovered, why not?
•
For a commercial service, does the target rate of return still reflect market rates?
•
Is it still appropriate to net off against costs any agreed charges above cost?
•
Is there scope to secure economies of scale by developing a shared service?
•
What developments might change the business climate?
•
Do any discretionary services remain a good fit for the business model and wider objectives?
•
Should any underused assets be redeployed, used to make a commercial return, or sold?
•
Would another business model (eg licensing, contracting out, privatising) be better?
Annex 6.1
How to calculate charges
Annex 6.2
Charging for information
Annex 6.3
Competition law
46
7
Working with others
It often m akes sense for public sector organisations to w ork w ith partners to deliver
public services. This chapter outlines how sponsor departm ents should keep track of
their ALBs, and w here necessary control their activities. It is im portant that the
public interest and the need to keep parliam ent inform ed are given priority in setting
up and operating these relationships.
7.1 The case for working in partnership
7.1.1 Public sector organisations may be able to deliver public services more successfully if they
work with another body. Central government departments may find it advantageous to
delegate certain functions to ALBs that can be free to concentrate on them without conflict of
interest. Or it may be helpful to harness the expertise of a commercial or civil society sector
organisation with skills and leverage not available to the public sector.
7.1.2 Any such relationship inevitably entails tensions as well as opportunities. The autonomy
of each organisation needs to be buttressed by sufficient accountability to give parliament and
the public confidence that public resources are used wisely.
7.1.3 It can be important that an ALB is demonstrably independent. This in itself does not
determine the ALB’s form or structure. Independence is achieved by specifying how the ALB is
to operate. Functional independence is compatible with financial oversight by the ALB’s parent
department and with accountability.
7.1.4 It is generally helpful to deal with any potential conflicts head on by deciding at the
outset how the relationship(s) between the parties should work. The key issues to tackle are set
out in box 7.1.
Box 7.1: Issues for partnerships with public sector members
•
The decision to engage with a partner should rest on evaluation of a business case assessed
against a number of alternatives, including doing nothing.
•
Conflicts of interest should be identified so that handling strategies can be agreed, eg by
establishing early warning processes or safeguards.
•
The cultural fit of the partners should be close enough to give each confidence to trust the
other.
•
Accountability for use of public funds should not be weakened.
The terms of engagement, including governance, should be documented in a fram ew ork
agreem ent or equivalent (see box 7.2).
7.2 Setting up new arm’s length bodies
7.2.1 When a sponsor department sets up a new ALB, the nature of the new body should be
decided early in the process. It is sensible for the functions of the new body to help determine
this choice. Annex 7.1 offers advice and sources of guidance on setting up a new ALB and
47
7 Working with others
compares the characteristics of agencies, non-departmental public bodies (NDPBs) and non-
ministerial departments (NMDs). Departments should consult the Treasury and the Cabinet
Office about making the choice.
7.2.2 In general, each new ALB should have a specific purpose, distinct from its parent
department. There should be clear perceived advantage in establishing a new organisation,
such as separating implementation from policy making; demonstrating the integrity of
independent assessment; establishing a specialist identity for a professional skill; or introducing a
measure of commercial discipline. It is sensible to be sceptical about setting up a new ALB,
since it will often add to costs.
7.2.3 ALBs cannot be given authority to make decisions proper to ministers, nor to perform
functions proper to sponsor departments. Only rarely is a non-ministerial department the right
choice as NMDs have limited accountability to parliament1. Nor is it acceptable to use a royal
charter to establish a public sector body since such arrangements deny parliament control and
accountability.
7.2.4 A sponsor department cannot relinquish all responsibility for the business of its ALBs by
delegation. It should have oversight arrangements appropriate to the importance, quality and
range of the ALB’s business. Normally new, large, experimental or innovative ALBs need more
attention from the sponsor than established or small ALBs doing familiar or low risk business.
And the sponsor department always needs sufficient reserve powers to reconstitute the
management of each ALB should events require it (see section 3.8). .
7.2.5 The sponsor department should plan carefully to make sure that its oversight
arrangements and the internal governance of any new ALB are designed to work together
harmoniously without unnecessary intrusion. The ALB also needs effective internal controls and
budgetary discipline so that it can live within its budget allocation and deliver its objectives. And
the sponsor department must have sufficient assurance to be able to consolidate its ALBs’
accounts with its own.
7.2.6 There is a good deal of flexibility about form and structure. It may be expedient, for
example, to set up an organisation which is eventually to be sold as a Companies Act company.
Or certain NDPBs may operate most effectively when constituted as charities. Mutual structures
can also be attractive. Innovation often makes sense. The standard models are all capable of a
good deal of customisation.
7.2.7 If the PAC decides to investigate an ALB, the accounting officers of both the ALB and its
sponsor department should expect to be called as witnesses. The PAC will seek to be satisfied
that the sponsor’s oversight is adequate.
7.3 What to clarify
7.3.1 When documenting an agreement with a partner, public sector organisations should
analyse the relationship and consider how it might evolve. The framework document (or
equivalent) should then be kept up to date as the partnership develops. Box 7.2 contains terms
which should always be considered for inclusion. The list is not exhaustive.
1 The sponsor department also has less control as each NMD has its own budget, Estimate and annual accounts. So if a ministerial department
transfers work to an NMD, there is a greater risk of excess votes in each.
48
7 Working with others
7.2: framework terms for partnership agreements
purpose
•
The aims of the relationship and its working remit.
•
Its standards, key objectives and targets.
governance and accountability
•
The legal relationship, including any financial or other limits.
•
Any statutory requirements relating to the functions of the partnership.
•
The governance of any ALB: its board structure, how its members are appointed (and
disappointed). How the partnership should work, eg regular meetings of senior people.
•
The extent to which any department is responsible to parliament for the conduct of a partner
(essential for partnerships between departments and ALBs).
•
Any other important features of the sponsorship role of the public sector partner, eg acting as
intelligent shareholder or consulting third parties.
•
How any relationships with departments other than the sponsor should operate.
•
Any arrangements for regular reporting on performance to the public and/or parliament.
•
Plans for any evolution (eg into a mutual) after a period of ALB status.
•
Any arrangements for successor activity, eg establishing similar partnerships elsewhere.
decision m aking
•
How strategic decisions about the future of the partnership will be made, with timetable, terms
for intervention, break points, dispute resolution procedures, termination process.
•
How the chain of responsibility should work, eg stewardship reporting, keeping track of
efficiency, risk assessment, project appraisal, management of interdependencies.
•
How the partnership will identify, manage and track opportunities and risks.
•
The status of the staff; and how they are to be hired, managed and remunerated.
•
How any professional input (eg medical, scientific) is to be managed and quality assured.
•
Arrangements for taking stock of performance and learning lessons from it.
•
Arrangements for intervention when necessary.
financial m anagem ent
•
The financial relationship of the partners, eg:
-
any founding capital (including assets, goods, financial sums or other valuables)
-
any periodic grants and their terms
-
how the partnership’s corporate plan and annual target(s) are to be agreed
-
how asset management and capital projects are to be decided and managed
-
how cashflow is to be managed, and current expenditure financed
-
the distribution of income and profit flows
-
any financial targets, eg return on capital employed (ROCE)
-
how any charges to customers or users are to be set
-
any agreed limits on the partnership’s business.
•
Monitoring, financial reporting, regular liaison and any other tracking arrangements.
•
Internal and external audit arrangements, with any relevant accounts directions.
•
Arrangements for consolidation of accounts (essential for ALBs)
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7 Working with others
7.3.2 In framing founding documentation, the partners should adopt a proportionate
approach. Parliament expects that public funds will be used in a way that gives reasonable
assurance that public resources will be used to deliver the intended objectives.
7.3.3 In this process the aim should be to put the accounting officers of the parties in a
position to take a well informed view on the current status of the relationship, enabling timely
adjustments to be made as necessary. It is good practice to develop structured arrangements
for regular dialogue between the parties to avoid misunderstandings and surprises.
7.3.4 Further advice about framework documents is in annex 7.2. It is important that such
documents fit the business to which they relate (rather than following precedent or copying a
standard model).
7.4 Agencies
7.4.1 Each agency is either part of a central government department or a department in its
own right. Agencies are intended to bring professionalism and customer focus to the
management and delivery of central government services, operating with a degree of
independence from the centre of their home departments. Some are also trading funds (see
section 7.8).
7.4.2 Each agency is established with a framework document on the lines sketched out in box
7.2. With the exception of those agencies which are trading funds (see section 7.8), they are
normally funded through public expenditure supplied by Estimates. Departments should consult
the Treasury and Cabinet Office about the preparation of their framework documents.
7.5 Departments working together
7.5.1 To promote better delivery and enhance efficiency, departments often find it useful to
work with other government departments (or ALBs). This can make sense where responsibilities
overlap, or both operate in the same geographical areas or with the same client groups -
arrangements loosely categorised as joined up government. Such arrangements can offer
opportunities for departments to reduce costs overall while each partner plays to its strengths.
7.5.2 Such relationships can be constituted in a number of different ways. Some models are
sketched in box 7.3. The list is not exhaustive.
Box 7.3: examples of joined up activities in central government
•
one partner can act as lead provider selling services (such as IT, HR, finance functions) to other(s)
as customers, operating under service level agreement(s)
•
cost sharing arrangements for common services (eg in a single building), allocated in line with an
indicator such as numbers of staff employed or areas of office space occupied
•
joint procurement using a collaborative protocol
•
a joint venture project with its own governance, eg an agency or wholly owned company, selling
services to a number of organisations, some or all of which may be public sector
•
an outsourced service, delivering to several public sector customers
7.5.3 Shared services often need funding to set up infrastructure, eg to procure IT. This could
be agreed in a spending review, or customers could buy in to the partnership by transferring
budget provision to the lead provider. Each of the accounting officers involved should be
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7 Working with others
satisfied that the project offers value for money for the Exchequer as a whole. The provider’s
charges should be at cost, following the standard fees and charges rules (see chapter 6).
7.5.4 In any joint activity, there must be a single accounting officer so that the lines of
responsibility are clear. If the PAC decides to investigate, the accounting officers of each of the
participants should expect to be summoned as witnesses.
7.6 Non-departmental public bodies
7.6.1 Non-departmental public bodies (NDPBs) may take a number of legal forms, including
corporates and charities. Most executive NDPBs have a bespoke structure set out in legislation
or its equivalent (eg a Royal Charter2). This may specify in some detail what task(s) the NDPB is
to perform, what its powers are, and how it should be financed. Sometimes primary legislation
contains powers for secondary legislation to set or vary the detail of the NDPB’s structure.
Annex 7.1 has links to more about NDPBs.
7.6.2 Each NDPB is a special purpose body charged with responsibility for part of the process of
government. Each has a sponsor department with general oversight of its activity. The sponsor
department’s report and accounts consolidates its NDPBs’ financial performance.
7.6.3 NDPBs show considerable variety of structures and working methods, with scope for
innovation and customisation. Some NDPBs may also need to work with other organisations as
well as with their sponsor. All this should be documented in the framework document (see
annex 7.2).
7.6.4 NDPBs’ sources of finance vary according to their constitution and function. Box 7.4
shows the main options available.
Box 7.4: sources of finance for NDPBs
•
specific conditional grant(s) from the sponsor department (and/or other departments)
•
general (less conditional) grant-in-aid from the sponsor department
•
income from charges for any goods or services the NDPB may sell
•
income from other dedicated sources, eg lottery funding
•
public dividend capital
7.6.5 In practice NDPBs always operate with some independence and are not under day-to-day
ministerial control. Nevertheless, ministers are ultimately accountable to parliament for NDPBs’
efficiency and effectiveness. This is because ministers: are responsible for NDPBs’ founding
legislation; have influence over NDPBs’ strategic direction; (usually) appoint their boards; and
retain the ultimate sanction of winding up unsatisfactory NDPBs.
7.7 Public corporations
7.7.1 Some departments own controlling shareholdings in public corporations or Companies
Act companies, perhaps (but not necessarily) as a step toward disposal. Public corporations’
powers are usually defined in statute; but otherwise all the disciplines of corporate legislation
2 This route is no longer used - see Section 2.5.
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7 Working with others
apply. The Shareholder Executive, which specialises in strategic management of corporates, may
be a good way of managing departments’ responsibilities as shareholders.
7.7.2 Sponsor departments should define any contractual relationship with a corporate in a
framework document adapted to suit the corporate context while delivering public sector
disciplines. The financial performance expected should give the shareholder department a fair
return on the public funds invested in the business. Box 7.5 offers suggestions. This approach
may also be appropriate for a trading fund, especially if it is to become a Companies Act
company in time.
7.7.3 A shareholder department may also use a company it owns as a contractor or supplier of
goods or services. It is a good discipline to separate decisions about the company’s commercial
performance from its contractual commitments, so avoiding confusion about objectives. So
there should be clear arm’s length contracts between the company and its customer
departments defining the customer-supplier relationship(s).
Box 7.5: outline terms for a relationship with a public corporation
•
the shareholder’s strategic vision for the business, including the rationale for public ownership
and the public sector remit of the business
•
the capital structure of the business and the agreed dividend regime, with suitable incentives for
business performance
•
the business objectives the enterprise is expected to meet, balancing policy, customer,
shareholder and any regulatory interests
•
the department’s rights and duties as shareholder, including:
-
governance of the business
-
procedure for appointments (and disappointments)
-
financial and performance monitoring
-
any necessary approvals processes
-
the circumstances of, and rights upon, intervention
•
details of any other relationships with any other parts of government
7.8 Trading funds
7.8.1 All trading funds are public corporations. Their activities are not consolidated with their
sponsor departments’ business. They must finance their operations from trading activity.
7.8.2 Each trading fund is set up through an order subject to affirmative resolution. Before an
order can be laid in parliament, the Treasury needs to be satisfied that a proposed trading fund
can satisfy the statutory requirement that its business plan is sustainable without additional
funding in the medium term. A period of shadow operation as a pilot trading fund may help
inform this assessment.
7.8.3 Each trading fund must be financed primarily from its trading income. In particular, each
trading fund is expected to generate a financial return commensurate with the risk of the
business in which it is engaged. In practice this means the target rate of return should be no
lower than its cost of capital. The actual return achieved may vary a little from one year to the
next, reflecting the market in which the trading fund operates.
7.8.4 The possible sources of capital for trading funds are shown in box 7.6. They are designed
to give trading funds freedom from the discipline of annual Estimate funding. The actual mix
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7 Working with others
for a given trading fund must be agreed with the sponsor department (if there is one) and with
the Treasury, subject to any agreed limits, eg on borrowing.
7.8.5 Further detail about trading funds is in annex 7.3. Guidance on setting charges for the
goods and services trading funds sell is in chapter 6.
Box 7.6: sources of capital for trading funds
•
public dividend capital (equivalent to equity, bearing dividends - see annex 7.4)
•
reserves built up from trading surpluses
•
long or short term borrowing (either voted from a sponsor department or borrowed from the
National Loans Fund if the trading fund is a department in its own right)
•
temporary subsidy from a sponsor department, voted in Estimates
•
finance leases
7.9 Non-ministerial departments
7.9.1 A very few central government organisations are non-ministerial departments (NMDs). It
is important that there is some clear rationale for this status in each case.
7.9.2 NMDs do not answer directly to any government minister. They have their own
accounting officers, their own Estimates and annual reports, and settle their budgets directly
with the Treasury. However, some ministerial department must maintain a watching brief over
each NMD so that a minister of that department can answer for the NMD’s business in
parliament; and if necessary take action to adjust the legislation under which it operates. A
framework document should define such a relationship.
7.9.3 This limited degree of parliamentary accountability must be carefully justified. It can be
suitable for a public sector organisation with professional duties where ministerial input would
be inappropriate or detrimental to its integrity. But the need for independence is rarely enough
to justify NMD status. It is possible to craft arrangements for NDPBs which confer robust
independence. Where this is possible it provides better parliamentary accountability, and so is
to be preferred.
7.10 Local government
7.10.1 A number of central government departments make significant grants to local
authorities. Some of these are specific (ring fenced). Most are not, allowing local authorities to
set out their own priorities.
7.10.2 Nevertheless parliament expects assurances that such decentralised funds are used
appropriately, ie that they are spent with economy, efficiency and effectiveness, and not wasted
nor misused. The quality of the assurance available differs from that expected of central
government organisations because local authorities’ prime accountability is to their electorates.
7.10.3 For these relationships a framework document is not usually the most fruitful approach.
Instead. Central government departments should draw up an annual account of how their
accounting officers assure themselves that grants to local government are distributed and spent
appropriately; and how underperformance can be dealt with. This account forms part of the
governance statement in the report and accounts of each department affected (see annex 3.1).
7.10.4 Similar considerations apply to the NHS and centrally funded schools.
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7 Working with others
7.11 Innovative structures
7.11.1 Sometimes central government departments have objectives which more easily fit into
bespoke structures suited to the business in hand, or to longer range plans for the future of the
business. Such structures might, for example, include various types of mutual or partnership.
7.11.2 Proposals of this kind are by definition novel and thus require explicit Treasury consent.
In each case, proposals are judged on their merits against the standard public sector principles
after examining the alternatives, taking account of any relevant experience. The Treasury will
always need to understand why one of the existing structures will not serve: eg the NDPB format
has considerable elasticity in practice. Boxes 4.8 and 7.2 may help with this analysis.
7.12 Outsourcing
7.12.1 Public sector organisations often find it satisfactory and cost effective to outsource some
services or functions rather than provide them internally. Candidates have included cleaning,
security, catering and IT support. A wider range of services is potentially suitable for this
treatment. Innovative approaches should be explored constructively.
7.12.2 The first step in setting up any outsourcing agreement should be to specify the service(s)
to be provided and the length of contract to be sought. At that stage it is usually desirable to
draw up an outline business case to help evaluate whether outsourcing makes financial and
operational sense. Any decision to outsource should then be made to achieve value for money
for the Exchequer as a whole.
7.12.3 It is good practice to arrange some form of competition for all outsourcing, as for other
kinds of procurement. In most cases, it is legally essential to open the competition to all firms in
the EU (see annex 4.7). If services are likely to be required at short notice - for example legal
services for advice on opportunities, threats or other business pressures which emerge with little
warning - it is good practice to arrange a competition to establish a standing panel of providers
whose members can be called upon to deal with rapidly emerging needs.
7.12.4 Contracting out does not dissolve responsibility. Public sector organisations using a
contractor should set in place systems to track and manage performance under the contract. It
may be appropriate to plan for penalties for disruption and/or failure if the contractor cannot
deliver. The PAC may need to be satisfied that the arrangements for contracting out entail
sufficient accountability for the use of public funds.
7.13 Private finance
7.13.1 Where properly constructed and managed, public sector organisations can use private
finance arrangements to construct assets and/or deliver services with good value for money.
Structured arrangements where the private sector puts its own funds at risk can help deliver
projects on time and within budget.
7.13.2 It is important to carry out a rigorous value for money analysis to determine whether
these benefits are likely to exceed the additional cost of using private finance. Contracting
organisations should also make sure that they are able to afford such arrangements over their
working lifetimes, taking account, as far as possible, of the risk of difficult future financial
environments. It is not good practice to embark on a private finance arrangement if it is
dependent on other separate financial transactions taking place during the project’s lifetime
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7 Working with others
7.13.3 Procurement using private finance is a flexible, versatile and often effective technique,
so it should be considered carefully as a procurement option. Contracts should normally be
built up using standard terms and guidance published by the Treasury (see Annex 7.4).
Departure from standard guidance needs to be approved by the Treasury.
7.14 Commercial activity
7.14.1 When public bodies have assets which are not fully used but are to be retained, it is
good practice to consider exploiting the spare capacity to generate a commercial return in the
public interest. This is essentially part of good asset management.
7.14.2 Any kind of public sector asset can and should be considered. Candidates include both
physical and intangible assets, for example land, buildings, equipment, software and intellectual
property (see annex 4.15). A great variety of business models is possible.
7.14.3 Such commercial services always go beyond the public sector supplier‘s core duties.
Because these assets concerned have been acquired with public funds, it is important that
services are priced fairly: see chapter 6. It is also important to respect the rules on state aids: see
annex 4.7. Central government organisations should work through the checklist at box 7.7.
Box 7.7: planning commercial exploitation of existing assets
•
define the service to be provided
•
establish that any necessary vires and (if necessary) Estimate provision exist
•
identify any prospective business partners and run a selection process
•
if the proposed activity is novel, contentious, or likely to set a precedent elsewhere, obtain
Treasury approval
•
take account of the normal requirements for propriety, regularity and value for money
7.14.4 While it makes sense to make full use of assets acquired with public resources, such
activity should not squeeze out, or risk damaging, a public sector organisation’s main objectives
and activities. Similarly, it is not acceptable to acquire assets just for the purpose of engaging
in, or extending, commercial activity. If a public sector supplier’s commercial activity demands
further investment to keep it viable, reappraisal is usually appropriate. This should consider
alternatives such as selling the business, licensing it, bringing in private sector capital, or seeking
other way(s) of exploiting the underused potential in the assets or business.
7.14.5
It is a matter of judgement when departments should inform parliament of the
existence, or growth, of significant commercial ventures. It is good practice to consult the
Treasury in good time on this point so that parliament can be kept properly informed and not
misled.
7.15 Working with civil society bodies
7.15.1 Central government organisations may find they can deliver their objectives effectively
through relationships with civil society bodies: ie charities, social, voluntary or community
institutions, mutual organisation, social enterprises or other not-for-profit organisations. Such
partnerships can achieve more than either the public or the civil society sector can deliver alone.
For example, using a civil society sector organisation can provide better insight into demand for,
and suitable means of delivery of public services.
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7 Working with others
7.15.2 It is good practice to plan relationships with civil society partners through a framework
document, as with other partnerships. Some guidelines on how these relationships can work
well in harmony with policy and spending decisions are in the Civil Society Compact3.
7.15.3 In this kind of relationship a public sector organisation may fund activities, make grants,
lend assets, or arrange other transfers to a civil society sector body performing or facilitating
delivery of services. It is desirable to build in safeguards to ensure that resources are used as
intended (see annex 5.2). This gives parliament confidence that voted resources are used for the
purposes it has approved.
7.15.4 The safeguards to be applied should be agreed at the start of the relationship.
Customisation in nearly always essential. It is often right to require clawback, ie to agree terms
in which public sector donors reclaim the proceeds if former publicly owned assets are sold.
Annex 7.1
Forming and reforming ALBs
Annex 7.2
Drawing up framework documents
Annex 7.3
Trading funds
Annex 7.4
Using private finance
3
https://www.gov.uk/government/publications/compact-the-agreement-between-government-and-the-voluntary-community-sector
56
Annex 1.1
The Comptroller and Auditor
A1.1
General
Supported by staff of the National Audit O ffice (N AO ), the Com ptroller and Auditor
G eneral (C& AG ) is the independent auditor of nearly all central governm ent
institutions. Using extensive statutory rights of access to records, the C&AG provides
direct advice and assurance to Parliam ent.
A 1.1.1 The C&AG is an officer of the House of Commons appointed by The Queen. He or she
is responsible for the audit of most central government institutions. This work is carried out
under his or her direction by NAO staff (se
e www.nao.org.uk) or by contracting out. NAO is in
the public sector but independent of central government.
A 1.1.2 The C&AG is appointed for a single non-renewable term of ten years; and can only be
removed from office by The Queen on an address by both Houses of Parliament. In carrying
out the statutory duties of the post, the C&AG is supported by the NAO’s statutory board, which
sets the strategic direction of the NAO. But the C&AG makes independent judgements,
including on which studies to carry out and how.
A 1.1.3 The NAO is financed by an Estimate presented by its board to the Public Accounts
Commission (TPAC), a select committee of the House of Commons. NAO’s expenditure may
include some non-statutory functions, if TPAC approves them.
Audit
A 1.1.4 In order to carry out financial audit work, the C&AG has extensive statutory rights of
access to information held by a wide range of public sector organisations. This material is also
required to compile Whole of Government Accounts, and extends to the records of many
contractors and recipients of grants. The C&AG also has a right to obtain information about,
and explanations of, any of this evidence.
A 1.1.5 The C&AG is responsible for the financial audit of virtually all central government
organisations, both their expenditure and revenue, and reports on them to Parliament. The
C&AG’s audits may include corporate organisations, where appropriate. Financial audits are
carried out in accordance with International Standards on Auditing (UK and Ireland).
A 1.1.6 In addition, the C&AG may carry out audits of particular areas of central government
expenditure to establish whether public funds have been used economically, efficiently and
effectively. Selection of these value for money (vfm) studies is the responsibility of the C&AG
alone. The C&AG has the same level of access for vfm examinations as for financial audit.
A 1.1.7 The C&AG does not normally need access to policy papers such as Cabinet, or Cabinet
Committee, papers. Public sector organisations should cooperate with NAO requests for access
to information, irrespective of its classification or other sensitivity. It can be important to work
closely with NAO to avoid publication of any information too sensitive for publication.
A 1.1.8 The Public Accounts Committee (PAC) may decide to examine witnesses on both
financial and vfm studies. The PAC may also initiate other hearings on related matters.
57
A1.1 The Comptroller and Auditor General
The Comptroller function
A 1.1.9 A small but important part of the C&AG’s responsibilities is oversight of payments from
the Consolidated Fund and the National Loans Fund. In response to requests from the Treasury,
NAO staff establish that the sums paid out of these funds each business day are made in
accordance with legislation. Once the authorisations (credits) are given, the Treasury may make
drawings from these funds to finance the Exchequer’s commitments.
58
Annex 2.1
Treasury approval of
A2.1
legislation
This annex sets out how departm ents should clear proposed legislation w ith the
Treasury w here there are financial im plications, either for expenditure or raising
revenue. M ore detailed guidance on the preparation of legislation and the legislative
process should be sought from departm ental parliam entary clerks.
Consulting the Treasury
A 2.1.1 When preparing legislation, departments must consult the Treasury:
•
before any proposals for legislation with financial implications are submitted to
ministers collectively for policy approval;
•
about any provisions included in legislation with financial and public service
manpower implications;
•
on the terms of Money Resolutions and Explanatory Notes; and
•
subsequently about any changes that are proposed to the agreed financial
provisions, eg during the legislation’s passage through Parliament.
A 2.1.2 Departments should make sure that they achieve Treasury agreement early in the
process and in any event before drafting instructions to Parliamentary Counsel are prepared.
Treasury consent
A 2.1.3 All legislation with a financial dimension should provide for specific Treasury consents
to any key changes in the implementation of the powers it contains. Examples of such triggers,
all requiring ministerial decisions, are in box A2.1A. Treasury consent is required to protect the
authority of the Chancellor of the Exchequer in matters of finance or establishment.
A 2.1.4 In principle, the Chancellor's authority is protected by:
•
the doctrine of the collective responsibility of ministers;
•
the need for Treasury approval of Estimates before they are presented to Parliament
and before resources consumed or expenditure incurred can be charged on the
Consolidated Fund;
but providing for statutory consent avoids any danger that the Chancellor might be committed
to legislation he or she would not have agreed.
59
A2.1 Treasury approval of legislation
Money resolutions
A 2.1.5 A money resolution is required1 for legislation which creates a charge upon public
funds, either by way of new resource expenditure or by remission of debt. Further advice on
money resolutions should be sought from Parliamentary Clerks.
A 2.1.6 The responsible department should clear the draft with the Treasury at official level.
When agreed, the Treasury will arrange for a copy initialled by the Financial Secretary to be
returned to Counsel.
Box A 2.1A : exam ples of legisla tion m atters w hich require explicit Treasury
approval
•
as a direct charge (a Consolidated Fund standing service), or
•
indirectly, ie “out of monies to be provided by Parliament” (through Estimates):
- expenditure proposals affecting public expenditure as defined in the current public expenditure
planning total, eg rates of grant
- contingent liabilities, including powers to issue indemnities or to give guarantees
- loans taken from the National Loans Fund (NLF)- provisions for writing off NLF debt
- use of public dividend capital (PDC)- provisions involving the assets and liabilities of the CF and
NLF- borrowing powers
- fees and charges, including changes in coverage
- the form of government accounts and associated audit requirements
- public service manpower
- pay and conditions (eg superannuation and early severance terms) of civil servants pay and
conditions of board members of statutory organisations
- creation of (or alteration to) new statutory bodies and related financial arrangements
- provisions affecting grant recipients, including grants in aid
- provisions on audit usually giving the C&AG right of access
Ways and Means resolutions
A 2.1.7 A ways and means resolution is required in the House of Commons where legislation
directs the payment of money raised from the public to the Consolidated Fund (this technically
constitutes the raising of money for the Crown to spend). Some legislation may require both a
money resolution and a ways and means resolution.
A 2.1.8 Departments should clear ways and means resolutions with the Treasury. Further advice
should be sought from parliamentary clerks.
Explanatory Notes
A 2.1.9 Except for finance, consolidation and tax law rewrite bills, departments should prepare
explanatory notes for all government bills. The main items to be covered are set out in box
A2.1B. Guidance on preparation is on the Cabinet Office website2.
1 By virtue of Standing Order 49 of the House of Commons
2
https://www.gov.uk/government/publications/guide-to-making-legislation
60
A2.1 Treasury approval of legislation
Box A 2.1B: legislation authorising exp end iture: exp lanatory notes
1. financial effects of the legislation:
•
estimates of expenditure expected to fall on
- the Consolidated Fund (CF), distinguishing between Consolidated Fund standing services and
- charges to be met from Supply Estimates; or the National Loans Fund (NLF)
•
estimates of any other financial consequences for total public expenditure (i.e. in addition to
costs which would fall on the CF or NLF) as defined in the current public-expenditure planning
total;
•
estimates of any effects on local government expenditure
2. effects of the legislation on public service manpower:
•
forecasts of any changes (or postponement of changes) to staff numbers in government
departments expected to result from the legislation;
•
forecasts of the likely effects to other public service manpower levels, for example in non-
departmental public bodies and local authorities.
61
62
A2.2
Annex 2.2
Delegated authorities
This annex expands on the requirement for departments to obtain Treasury consent to their public
expenditure and the process of delegated authorities.
A2.2.1
Treasury approval for expenditure is one aspect of the established understanding
convention that Parliament expects the Treasury to control all other departments in matters of
finance and public expenditure. Accounting officers are responsible (see first bullet of paragraph
3.3.3) for ensuring that prior Treasury approval is obtained in all cases where it is needed.
A2.2.2
The need for Treasury approval embraces all the ways in which departments might make
public commitments to expenditure, not just Estimates or legislation, important as they are. Box
A2.2A identifies the main ways in which the need can arise. It may not be exhaustive.
Box A2.2A:
where Treasury approval is required
•
public statements or other commitments to use of public resources beyond the agreed budget
plans
•
guarantees, indemnities or letters of comfort creating contingent liabilities
•
any proposals outside the department’s delegated limits
•
all expenditure which is novel, contentious or repercussive, irrespective of size, even if it appears
to offer value for money taken in isolation
•
where legislation requires it
•
fees and charges
Where Treasury approval has been overlooked, the case should immediately be brought to the
Treasury’s attention.
A2.2.3
Treasury approval:
•
must be confirmed in writing, even where initially given orally;
•
cannot be implied in the absence of a reply;
•
must be sought in good time to allow reasonable consideration before decisions
are required.
A2.2.4
Departmental ministers should be made aware when Treasury consent is required in
addition to their own.
Delegation
A2.2.5
Formally, Treasury consent is required for all expenditure or resource commitments. In
practice, the Treasury delegates to departments’ authority to enter into commitments and to
spend within predefined limits without specific prior approval from the Treasury (but see
A.2.2.12 for exceptions). Delegated authorities may also allow departments to enter into
63
commitments to spend (eg contingent liabilities) and to deal with special transactions (such as
some write-offs) without prior approval.
A2.2.6
Such delegated authorities strike a balance between the Treasury's need for control in
order to fulfil its responsibilities to Parliament and the department's freedom to manage within
its agreed budget limits and Parliamentary provision.
A2.2.7
Departments should not take general Treasury approval of an Estimate as approval for
specific proposals outside delegated limits even if provision for them is included in the Estimate.
A2.2.8
The Treasury may also work through the Cabinet Office to set certain expenditure
controls applicable across central government1.
Setting delegated authorities
A2.2.9
The standard terms for inclusion in delegated authorities are set out in box A2.2B. It is
best to set these out in a single document. Departments should appreciate that delegated
authorities for certain kinds of expenditure can be modified or removed entirely if the Treasury is
not satisfied that the department is using them responsibly.
A2.2.10
In establishing delegated authorities, the Treasury will:
•
agree with the department how it will take spending decisions (e.g. criteria and/or
techniques for investment appraisal, project management and later evaluation);
•
establish a mechanism for checking the quality of the department's decision-taking
(e.g. by reviewing cases above a specified limit, or giving full delegation but
requiring a schedule of completed cases of which a sample may be examined
subsequently); and
•
encourage delegation of authority within the department to promote effective
financial management. In general, authority should be delegated to the point
where decisions can be taken most efficiently. It is for the accounting officer to
determine how authority should be delegated to individual managers.
Box A2.2B:
standard terms for delegated authorities
•
a clear description of each item delegated
•
the extent of each delegation, usually in financial terms, but potentially also in qualitative terms,
eg all items of a certain kind to require approval
•
any relevant authorities, eg the enabling legislation or letter from a Treasury minister
•
the relevant budget provision
•
the relevant section of the department’s Estimate
•
any effective dates
•
arrangements for review.
A2.2.11
In turn departments should agree delegated authorities with their arm’s length bodies.
Delegations to ALBs should be no greater than departments’ own delegated authorities. In some
1 https://www.gov.uk/government/collections/cabinet-office-controls
64
cases express Treasury agreement may be required for some of their expenditure, eg very large
projects.
A2.2.12
There are some areas of expenditure and resource commitments which the Treasury
cannot delegate: see box A.2.2C.
Box A2.2C:
where authority is never delegated
•
items which are novel, contentious or repercussive, even if within delegated limits
•
items which could exceed the agreed budget and Estimate limits
•
contractual commitments to significant spending in future years for which plans have not been
set
•
items requiring primary legislation (eg to write off NLF debt or PDC)
•
any item which could set a potentially expensive precedent
•
where Treasury consent is a specific requirement of legislation
A2.2.13
Strictly, the Treasury cannot delegate its power of approval where there is a statutory
requirement for Treasury approval. But in practice it can be acceptable to set detailed and
objective criteria where Treasury approval can be deemed without specific examination of each
case. This may be appropriate to avoid a great deal of detailed case-by-case assessment. The
Treasury may ask for intermittent sampling to check that this arrangement is operating
satisfactorily.
Failure to obtain Treasury authority
A2.2.14
All expenditure which falls outside a department's delegated authority and has not been
approved by the Treasury, is irregular. It cannot be charged to departmental Estimates. Similarly,
any resources committed or expenditure incurred in breach of a condition attached to Treasury
approval is irregular.
A2.2.15
Where resource consumption or expenditure is irregular, the Treasury may be prepared
to give retrospective approval if it is satisfied that:
•
it would have granted approval had it been approached properly in the first place;
and
•
the department is taking steps to ensure that there is no recurrence.
Requests for retrospective approval should follow the same format as requests submitted on
time.
A2.2.16
If the Treasury does not give retrospective approval or authorise write-off of irregular
expenditure, the department must inform the NAO. The Treasury may also draw the matter to
the attention of the responsible accounting officer. The C&AG may then qualify his or her
opinion on the account and the PAC may decide to hold an oral hearing. In the case of voted
expenditure, the Treasury will present an excess vote to Parliament to regularise the situation.
A2.2.17
It is unlawful to commit resources or incur expenditure without Treasury consent,
where such consent is required by statute. In such cases retrospective consent cannot confer
legality. Such consumption cannot, therefore, be regularised.
A2.2.18
In cases of unlawful expenditure, the responsible accounting officer must note the
department’s accounts accordingly and notify the NAO. It will then be for the C&AG to decide
65
whether to report on the matter to Parliament with the relevant accounts and whether to draw
it to the attention of the PAC.
A2.2.19
The C&AG and the Treasury cooperate closely on questions of authority for expenditure.
The C&AG may bring a department’s attention to any cases where the department:
•
has ignored or wrongly interpreted a Treasury ruling;
•
is attempting to rely on a mistaken delegated authority, eg where the delegation
has been changed or where consent was given oral y only;
•
has committed resources or incurred expenditure which the Treasury might not
have approved had it been consulted.
A2.2.20
Departments should bring such cases to the attention of the Treasury, indicating clearly
the NAO interest. The Treasury and NAO keep each other in touch with such cases.
66
Annex 2.3
A2.3
PAC Concordat of 1932
Chapter 2 explains that Parliam ent expects both specific legislation and Parliam entary
authority for each year’s expenditure to be in place for continuing expenditure. It
expects the Treasury to police this requirem ent. This annex sets Parliam ent’s
concerns in context.
A 2.3.1 The PAC has had long standing concerns about how the government gains authority
from Parliament for each area of spending.
A 2.3.2 In the mid 19th century it became customary for governments to gain Parliamentary
authority for some areas of expenditure simply by use of the Contingencies Fund, without
troubling to obtain specific powers for them. Shortly after its formation in 1862, the PAC
protested about this practice, partly because it involved less stringent audit. It urged that the
Contingencies Fund should be used only for in-year funding of pressing needs, and that all
continuing and other substantive spending should be submitted to the Estimates process with
due itemisation.
A 2.3.3 By 1885 the PAC had become concerned that the authority of the Estimate and its
successor Appropriation Act was not really sufficient either:
“… cannot accept the view in a legal, still less in a financial, sense that the distinct terms
of an Act of Parliament may be properly overridden by a Supplementary Estimate
supported by the Appropriation Act … this matter … is one of great importance from a
constitutional point of view ...”
A 2.3.4 While the Treasury agreed in principle, the practice did not die out because in 1908 the
PAC again complained:
“… while it is undoubtedly within the discretion of Parliament to override the provisions
of an existing statute by a vote in Supply confirmed by the Appropriation Act, it is
desirable in the interests of financial regularity and constitutional consistency that such a
procedure should be resorted to as rarely as possible, and only to meet a temporary
emergency”.
A 2.3.5 The PAC reverted to the issue in 1930 and again in 1932, citing a number of cases
involving various departments. It was concerned to specify how far an annual Appropriation Act
could be regarded as sufficient authority for the exercise of functions by a government
department in cases where no other specific statutory authority exists. It took the view that:
“… where it is desired that continuing functions should be exercised by a government
department, particularly where such functions may involve financial liabilities extending
beyond a given financial year, it is proper, subject to certain recognised exceptions, that
the powers and duties to be exercised should be defined by specific statute”.
A 2.3.6 In reply, the Treasury Minute said:
“… while it is competent to Parliament, by means of an annual vote embodied in the
Appropriation Acts, in effect to extend powers specifically limited by statute,
67
A2.3 PAC Concordat of 1932
constitutional propriety requires that such extensions should be regularised at the earliest
possible date by amending legislation, unless they are of a purely emergency or non-
continuing character”.
“… while … the Executive Government must continue to be allowed a certain measure
of discretion in asking Parliament to exercise a power which undoubtedly belongs to it,
they agree that practice should normally accord with the view expressed by the
Committee that, where it is desired that continuing functions should be exercised by a
government department (particularly where such functions involve financial liabilities
extending beyond a given year) it is proper that the powers and duties to be exercised
should be defined by specific statute. The Treasury will, for their part, continue to aim at
the observance of this principle”.
A 2.3.7 With this Concordat, the matter still lies.
A 2.3.8 Use of the Supply and Appropriation Acts as authority for expenditure is discussed in
annex 2.4.
68
Annex 2.4
A2.4
New services
Chapter 2 outlines how public spending is authorised by parliam ent, controlled by
the Treasury, and accounted for in public. This annex explores som e lim ited
exceptions to the rule that all spending should rest on specific legislation.
A 2.4.1 Chapter 2 (box 2.1) sets out the essential conditions for authorisation of public
spending. New services are exceptions, ie services for which parliament would normally expect
to provide authorising legislation but has not yet done so. They can include altering the way in
which an existing service is delivered as well as services not previously delivered.
When the Supply and Appropriation Act suffices
A 2.4.2 Notwithstanding the general rules ion box 2.1, in some circumstances it is not necessary
to have specific enabling legislation in place. Parliament accepts that agreement to the
Estimate1 is sufficient authority for the kinds of expenditure listed in boxes 2.5 or 2.6. The
content of these boxes is reproduced in box A2.4A. They can all be considered part of business
as usual.
Box A 2.4A : Expenditure parliam ent accepts m ay rest on a Supply and
A p p rop riations A ct
•
routine administration costs: employment costs, rent, cleaning etc;
•
lease agreements, eg for photocopiers;
•
expenditure using prerogative powers, notably defence of the realm and international treaty
obligations;
•
temporary services or continuing services of low cost, provided that there is no specific legislation
covering these matters before parliament and existing statutory restrictions are respected,
specifically
o initiatives lasting no more than two years, eg a pilot study or one off intervention; or
o expenditure of no more than £1.75m a year (amount adjusted from time to time).
A 2.4.3 It is important not to exceed these limits. The Treasury has agreed in the Concordat
(see annex 2.3) to seek to make sure they are respected. So departments should consult the
Treasury before relying upon them.
Anticipating a bill
A 2.4.4 In addition, parliament is prepared to accept that departments may undertake certain
preparatory work while a bill is under consideration and before royal assent. Examples are listed
in box A2.4B.
1 Which becomes a Supply and Appropriation Act once it has been through its parliamentary stages
69
A2.4 New services
Box A 2.4B: expenditure that can be incurred before royal assent
•
pilot studies informing the choice of the policy option (because this process is part of designing,
modifying or even deciding to abandon the policy);
•
scoping studies designed to identify in detail the implications of a proposal in terms of staff
numbers, accommodation costs and other expenditure to inform the legislative process;
•
in-house project teams and/or project management boards;
•
use of private sector consultants to help identify the chosen policy option, assist with scoping
studies or other work informing the legislative process;
•
work on the legislative process associated with the new service.
A 2.4.5 Departments may be able to finance activities such as those in box A2.4B out of their
2
existing resources. When this happens, departments should make sure that the ambit of the
relevant Estimate covers the planned expenditure.
A 2.4.6 It is also important to understand in which areas of new business parliament
does
expect the normal rigour for authorisation (box 2.1) to apply. For the avoidance of doubt, some
examples are shown in box A2.4C.
Box A 2.4C : expenditure w hich m ay not norm ally incurred before royal assent
•
significant work associated with preparing for or implementing the new task enabled by a bill,
eg renting offices hiring expert consultants or designing or purchasing significant IT equipment;
•
recruitment of chief executives and board members of a new public sector organisation;
•
recruitment of staff for a new public sector organisation.
Providing for a new service
A 2.4.7 Some new services go well beyond the examples in box A2.4B. They include such
things as paying a new grant, providing a new registration service, transforming the delivery of
existing service or setting up a new public sector organisation. Even if a bill providing for a new
service is before parliament, the activity the bill provides for cannot normally go ahead before
royal assent. It is therefore good practice to plan the timetable for achieving the new service so
that it is compatible with the bill timetable.
A 2.4.8 Sometimes it is convenient to use a paving bill to provide the necessary powers to get a
new service under way quickly. A paving bill can provide powers to allow expenditure which
would be nugatory if the subsequent detailed legislation for the new service does not proceed,
eg employing consultants to design a significant IT or regulatory system. Paving bills are usually
short, though they may be contentious (and time consuming) as they can prompt parliamentary
discussion of the underlying substance of the measure.
A 2.4.9 Departments which do not use paving bills may want to make an early start on
legislation contained in a bill during its passage through parliament. Usually the spending in
question lacks both adequate statutory underpinning and authorisation in Estimates.
2 See para 3.9 of the Estimates’ Manual
70
A2.4 New services
A 2.4.10 In these circumstances there is a risk that allowing the spending to proceed might be
wasteful if royal assent is not achieve as expected. So it is good practice to try to find other
ways of making progress with the policy without anticipating royal assent.
A 2.4.11 If, nevertheless. a department wants to spend early on matters to be empowered by
a bill before parliament, it may make a claim for an advance from the Contingencies Fund with a
3
plan to repay it out of the next Estimate when agreed . The spending must meet the conditions
in box A2.4D.
Box A 2.4D : Criteria for draw ings on the Contingencies Fund
•
the bill in question must have reached second reading in the Commons; and
•
the bill must be virtually certain to achieve royal assent with minimal change, preferably within a
year; and
•
genuine urgency in the public interest, ie where postponing expenditure until after royal assent
would:
o cause additional wasteful expenditure or
o lose (not just defer) efficiency savings; or
o cause other damage or public detriment.
A 2.4.12 The Treasury judges applications for access to the Contingencies Fund cautiously and
on their merits. It is important to note that neither political imperative nor ministerial preference
is relevant to making this assessment.
A 2.4.13 In rare circumstances a Contingencies Fund advance may be awarded to make senior
appointments to a new public sector body being set up under a bill. When this is allowed, the
people appointed must be clear that if for any reason the legislation fails, the provisional
appointments would have to be cancelled.
Notifying parliament
A 2.4.14 The instances described in this annex all mean that parliament has less control over
certain items of public expenditure than it would normally expect. Departments should therefore
take great care to keep parliament informed of what is happening and why.
A 2.4.15 A timely written ministerial statement giving the amounts involved and their timing is
the essential minimum before Contingencies Fund resources can be released. If possible an oral
explanation at second reading, or a separate oral statement, is desirable. In addition there
should be:
•
notes in the explanatory memorandum and impact assessment to the relevant bill;
and
•
notes in the relevant Estimate - especially important if a department wants to
anticipate secondary legislation which a bill will empower.
A 2.4.16 If the effect of the measure changes significantly, parliament should be given timely
information to keep it abreast of developments.
3 Se section 5..8 of the Estimates Manual
71
A2.4 New services
A 2.4.17 It is good practice to keep the Treasury informed of the disclosure intended. The
Treasury pulls all information about anticipation of parliamentary agreement together and
publishes it annually at the close of each session.
Directions
A 2.4.18 The exceptions in this annex to the requirements of box 2.1 provide a lot of scope for
pragmatic progress of essential government business. The advice in this annex may be regarded
as judicious extensions of the requirements of propriety, and acceptable only if parliament is not
misled.
A 2.4.19 But sometimes even these easements are not enough. If the Accounting Officer is
unable to design the minister’s policy to fit within the standards in this annex, he or she will
need to seek a ministerial direction (see section 3.4). The usual rules about disclosure of course
apply.
72
A3.1
Annex 3.1
The Governance Statement
It is fundamental to each accounting officer’s responsibilities to manage and control the resources
used in his or her organisation. The governance statement, a key feature of the organisation’s annual
report and accounts, manifests how these duties have been carried out in the course of the year. It
has three components: corporate governance, risk management and, in the case of some
departments, oversight of certain local responsibilities.
Purpose
A3.1.1
Each accounting officer (AO) delegates responsibilities within his or her organisation so
as to control its business and meet the standards set out in box 3.1 (see chapter 3). The systems
used to do this should give adequate insight into the business of the organisation and its use of
resources to allow the AO to make informed decisions about progress against business plans
and if necessary steer performance back on track. In doing this the AO is usually supported by a
board.
A3.1.2
These responsibilities are central to the AO’s duties. To carry them out the AO needs to
develop a keen sense of the risks and opportunities the organisation faces. In the light of the
board’s assessment of the organisation’s appetite for risk, the AO needs to decide how to
respond to the evolving perceived risks.
A3.1.3
The governance statement, for which the AO takes personal responsibility, brings
together all these judgements about use of public resources as part of the annual report and
accounts. It should give the reader a clear understanding of the dynamics and control structure
of the business. Essentially, it records the stewardship of the organisation. Supplementing the
accounts, it should provide a sense of the organisation’s vulnerabilities and resilience to
challenges.
Preparing the governance statement
A3.1.4
The governance statement is published in each organisation’s annual report and
accounts. It should be assembled from work through the year to gain assurance about
performance and insight into the organisation’s risk profile, its responses to the identified and
emerging risks and its success in tackling them.
A3.1.5
There is no set template for the governance statement.
A3.1.6
The AO and the board have a number of inputs into this process:
•
the board’s annual review of its own processes and practices, informed by the views
of its audit committee on the organisation’s assurance arrangements;
•
insight into the organisation’s performance from internal audit, including an audit
opinion on the quality of the systems of governance, management and risk control;
•
feedback from the delegation chain(s) within the organisation about its business, its
use of resources, its responses to risks, the extent to which in year budgets and
73
other targets have been met, and any other internal accountability mechanisms;
including:
–
bottom-up information and assessments to generate a full appreciation of
performance and risks as they are perceived from within the organisation;
–
end-to-end assessments of processes, since it is possible to neglect
interdependent and compounded risks if only the components are considered;
–
a high level overview of the organisation’s business so that systemic risks can
be considered in the round;
–
any evidence from internal control failures or poor risk management;
–
potentially, information from whistleblowers;
–
material from any arm’s length bodies (ALBs) connected with the organisation
which may shed light on the performance of the organisation or its board.
A3.1.7
It is important that the governance statement covers the material factors affecting the
organisation in the round, not neglecting the more serious (if remote) risks1, emerging
technology and other cutting edge developments. It should also mention any protective security
concerns in suitably careful terms2, with details reported to the external auditor.
Content of governance statement
A3.1.8
With the board’s support, it is for the AO to decide how to:
•
organise the governance statement;
•
take account of input from within the organisation and from the board and its
committees;
•
where relevant, integrate information about the organisation’s ALBs, some of which
may be material to the consolidated organisation;
•
provide an explanation of how the department ensures that use of any resources
granted to certain locally governed organisations (including the NHS) is satisfactory.
See A3.1.12.
A3.1.9
Box A3.1A summarises subjects that should always be covered.
A3.1.10
All the items in this box are important. The risk assessment is critical. This is where the
AO, supported by the board, should discuss how the organisation’s risk management and
internal control mechanism work, and why they were chosen to deliver reasonable assurance
about prevention, deterrent or other appropriate action to manage the actual and potential
problems or opportunities facing the organisation. Avoiding lengthy description of process, it
should assess the evidence about the effectiveness in practice of the risk management processes
in place. In doing so it should face frankly up to any revealed deficiencies as risks have
materialised.
1 Including the external risks identified in the National Risk Assessment
2 As set out in the Security Policy Framework
74
Box A3.1A:
essential features of the governance statement
•
the governance framework of the organisation, including information about the board’s
committee structure, its attendance records, and the coverage of its work;
•
the board’s performance, including its assessment of its own effectiveness;
•
highlights of board committee reports, notably by the audit and nomination committees;
•
an account of corporate governance, including the board’s assessment of its compliance with
the
Corporate Governance Code, with explanations of any departures;
•
information about the quality of the data used by the board, and why the board finds it
acceptable;
•
where relevant (for certain central government departments), an account of how resources made
available to certain locally governed organisations are distributed and how the department gains
assurance about their satisfactory use;
•
a risk assessment (see annex 4.3), including the organisation’s risk profile, and how it is
managed, including, subject to a public interest test:
- any newly identified risk
- a record of any ministerial directions given
- a summary of any significant lapses of protective security (eg data losses).
A3.1.11
In putting together the governance statement, the AO needs to take a view on the
extent to which items are significant enough to the welfare of the organisation as a whole to be
worth recording. There are no hard and fast rules about this. Some factors to take into account
are suggested in box A3.1B.
Box A3.1B:
deciding what to include in the governance statement
•
might the issue prejudice achievement of the business plan? – or other priorities?
•
could the issue undermine the integrity or reputation of the organisation?
•
what view does the board’s audit committee take on the point?
•
what advice or opinions have internal audit and/or external audit given?
•
could delivery of the standards expected of the AO (box3.1) be at risk?
•
might the issue make it harder to resist fraud or other misuse of resources?
•
does the issue put a significant programme or project at risk?
•
could the issue divert resources from another significant aspect of the business?
•
could the issue have a material impact on the accounts?
•
might national security or data integrity be put at risk?
Accounting officer system statements
A3.1.12
Government departments should include in their governance statements a summary
account of how they achieve accountability for the grants they distribute to local government,
schools, similar local government organisations and/or the NHS. It should cover:
•
an account of how resources are distributed, eg in response to needs or desired
change;
•
how the AO gains assurance about probity in the use of public funds;
75
•
how the AO achieves or encourages value for money in the local use of grants, eg
through local arrangements which provide incentives to achieve good value;
•
the use the AO makes of disaggregated information about performance, including
investigating apparent outliers and/or requiring those responsible locally to explain
their results.
A3.1.13
This part of the governance statement should usually be backed by an accounting
officer systems statement, which are published on gov.uk.3 Guidance on accounting officer
system statements can be found online.4 The system statement must be clear on the core data
and information flows that the system will rely on. An understanding of these core data
requirements should be developed collaboratively with the entities to be included within the
system statement and with users to meet the need for effective accountability locally and
nationally.
A3.1.14
Accounting officer system statements should evolve to reflect improving practice.
Where a Department proposes making major changes, it should contact Treasury and also
consider consulting the relevant Parliamentary committees by providing them with a draft and
the opportunity to comment.
External audit
A3.1.15
The organisation’s external auditor will review the governance statement for its
consistency with the audited financial statement. The external auditor may report on:
•
any inconsistency between evidence collected in the course of the audit and the
discussion of the governance statement; and/or;
•
any failure to meet the requirement to comply with or explain departures from the
Corporate Governance Code or any other authoritative guidance.
3
See, https://www.gov.uk/government/collections/accounting-officer-system-statements
4 See,
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/626226/pu2074_accounting_officer_guidance_2017.
pdf
76
Annex 4.1
A4.1
Finance Directors
It is governm ent policy that all departm ents should have professional finance
directors reporting to the perm anent secretary w ith a seat on the departm ental
board, at a level equivalent to other board m em bers. It is good practice for all other
public sector organisations to do the sam e, and to operate to the sam e standards.
This annex sets out the m ain duties and responsibilities of finance directors.
The finance function
A 4.1.1 The finance director of a public sector organisation should:
•
be professionally qualified1;
•
have board status equivalent to other board members;
•
report directly to the permanent head of the organisation;
•
be a member of the senior leadership team, the management board and the
executive committee (and/or equivalent bodies).
A 4.1.2 This demanding leadership role requires a persuasive and confident communicator with
the stature and credibility to command respect and influence at all levels through the
organisation. Its main features are described in box A4.1A. Many of the day-to-day
responsibilities may in practice be delegated, but the finance director should maintain oversight
and control. In large part these duties consist of ensuring that the financial aspects of the
accounting officer’s responsibilities are carried through to the organisation and its arm’s length
bodies (ALBs) in depth.
A 4.1.3 The finance function should maintain a firm grasp of the organisation’s financial
position and performance. Supporting the accounting officer, the finance director should
ensure that there is sufficient expertise in depth, supported by effective systems, to discharge
this responsibility and challenge those responsible for the organisation’s activities to account for
their financial performance. It is important that financial management is taken seriously
throughout each public sector organisation.
Financial leadership
A 4.1.4 The finance director is responsible for leadership of financial responsibilities within the
organisation and its ALBs. He or she should ensure that the information on which decisions
about the use of resources are based is reliable. Box A4.2B explains some specific responsibilities
of the role.
1 The term professional finance director in this context means both being a qualified member of one of the five bodies comprising the Consultative
Committee of Accounting Bodies (CCAB) in the UK and Ireland, ie the Chartered Institute of Public Finance and Accountancy, the Institute of Chartered
Accountants in England and Wales, the Institute of Chartered Accountants of Scotland, the Institute of Chartered Accountants in Ireland, the
Association of Chartered Certified Accountants, or having equivalent professional skills and/or qualifications; and having relevant prior experience of
financial management in either the private or the public sector.
77
A4.1 Finance Directors
Box A 4.1A : the role of the finance director
governance
•
financial leadership, both within the organisation and to its ALBs, at both a strategic and
operational level
•
ensuring sound and appropriate financial governance and risk management
•
leading, motivating and developing the finance function, establishing its full commercial
contribution to the business
•
planning and delivering the financial framework agreed with the Treasury or sponsoring
organisation against the defined strategic and operational criteria
•
challenging and supporting decision makers, especially on affordability and value for money, by
ensuring policy and operational proposals with a significant financial implication are signed-off
by the finance function
internal controls
•
co-ordinating the planning and budgeting processes
•
applying discipline in financial management, including managing banking, debt and cash flow,
with appropriate segregation of duties
•
preparation of timely and meaningful management information
•
ensuring that delegated financial authorities are respected
•
selection, planning and oversight of any capital projects
•
ensuring efficiency and value for money in the organisation’s activities
•
provision of information and advice to the Audit Committee
•
leading or promoting change programmes both within the organisation and its ALBs
external links
•
preparing Estimates, annual accounts and consolidation data for whole of government accounts
•
liaison with the external auditor
•
liaison with PAC and the relevant Select Committee(s)
Box A 4.1B: financial m anagem ent leadership
•
providing professional advice and meaningful financial analysis enabling decision makers to take
timely and informed business decisions
•
maintaining a long term financial strategy to underpin the organisation’s financial viability within
the agreed framework
•
developing and maintaining an effective resource allocation model to optimise outputs
•
ensuring financial probity, regularity and value for money
•
developing and maintaining appropriate asset management and procurement strategies
•
reporting accurate and meaningful financial information about the organisation’s performance
to ONS, parliament, the Treasury and the general public
•
setting the strategic direction for any commercial activities
•
acting as head of profession in the organisation
78
A4.1 Finance Directors
Internal financial discipline
A 4.1.5 The finance director should maintain strong and effective policies to control and
manage use of resources in the organisation’s activities. This includes improving the financial
literacy of budget holders in the organisation. Similarly, he or she should ensure that there are
similar disciplines in the organisation’s ALBs. These should all draw on best practice in
accounting and respect the Treasury’s requirements, including, where relevant, accounts
directions. These responsibilities are described in box A4.1C.
Box A 4.1C : financial control
•
enforcing financial compliance across the organisation while guarding against fraud and
delivering continuous improvement in financial control
•
applying strong internal controls in all areas of financial management, risk management and
asset control
•
establishing budgets, financial targets and performance indicators to help assess delivery
•
reporting performance of both the organisation and its ALBs to the board, the Treasury and
other parties as required
•
value management of long term commercial contracts
•
ensuring that the organisation’s capital projects are chosen after appropriate value for money
analysis and evaluation using the Green Book
A 4.1.6 Individual finance director posts will of course have duties specific to their organisations
and contexts in addition to those delineated in this annex. But all finance director posts should
seek to operate to these standards as an essential minimum.
79
80
Annex 4.2
A4.2
Use of models
In m odern governm ent m odelling is im portant. It can guide policy developm ent; help
determ ine im plem entation plans; and suggest how policies m ay evolve. M odels
should be controlled and understood in their proper context, w ith effective quality
assurance, so that they can be used to good effect.
Control and governance
A 4.2.1
Supported by the board, the accounting officer of a central government
organisation should oversee the use and quality assurance (QA) of models within the
organisation. There should be sufficient feedback for the accounting officer to be able to track
progress and adjust the process.
A 4.2.2 Each business critical model should be managed by a senior responsible officer (SRO) of
sufficient seniority and experience, supported by experts and specialists, to understand the use
of the model in context. Project and programme management techniques can be useful. It is
good practice to avoid changing the SRO frequently.
A 4.2.3
Each model is limited by the quality of its input data and founding assumptions.
So the results of any model need to be treated with a degree of scepticism. It is vital to build
sufficient governance into each model to help its users understand the value and weaknesses of
its results. The apparent precision of mathematical models should not mislead uses into putting
more weight on them than can be justified. Transparency should be the norm in the
development and use of all models.
Quality assurance
A 4.2.4 Whatever the complexity of the model, its governance should include an element of
structured critical challenge to provide a sense check. It can take a number of forms: for
example a steering group, a project board or outside assessment. New or untried models tend
to require more QA than those using recognised techniques.
A 4.2.5 In an organisation using a great deal of modelling, it is good practice for the
accounting officer to appoint a QA champion. Effective QA demands dispassionate scrutiny by
people disengaged with the project but with sufficient knowledge and experience to help steer
the model into a successful approach. There may be a case for ensuring that different models
in different parts of the organisation use consistent approaches.
A 4.2.6 It is always good practice to evaluate the risks associated with any model so that the
ultimate users of the model can appreciate what it can and cannot deliver. Sophisticated
models may demand specialist expertise and leadership but the vital element of constructive lay
oversight should never be skimped. Otherwise there can be a danger that flaws are overlooked
because the experts concentrate on the technical complexities.
A 4.2.7 In managing a model, the SRO should consciously decide how it can provide good
value for money. There is no point, for instance, in data collection to a high degree of accuracy
81
A4.2 Use of models
if the assumptions used in the model cannot be exact. Similarly, there is a stronger case for
investing in a model if it forms a central part of a decision making process.
A 4.2.8 References:
QA of government models:
https://www.gov.uk/government/publications/review-of-quality-
assurance-of-government-models
Guidance on long term financial modelling:
http://www.gad.gov.uk/services/Modelling/Modelling.html
82
Annex 4.3
A4.3
Risk
Each public sector organisation should have system s for identifying and m anaging
risk – both opportunities and threats – suited to its business, circum stances and risk
appetite. The board should lead the assessm ent and m anagem ent of risk, and
support the accounting officer in draw ing up the governance statem ents (see annex
3.1).
The case for managing risk
A 4.3.1 Every public sector organisations faces a variety of uncertainties, both positive and
negative, which can affect its success in delivering its objectives, budget and value for money.
So the board of each public sector organisation should actively seek to recognise both threats
and opportunities, and to decide how to respond to them, including how to set internal
controls.
A 4.3.2 Managing risk should be integrated into the normal management systems of each
public sector organisation so that it can achieve its goals and maintain a reputation of credibility
and reliability. It is for each accounting officer (AO), supported by the board, to decide how.
A 4.3.3 The board should make a strategic choice about the style, shape and quality of risk
management within each organisation. This is risk tolerance, ie the extent to which the
organisation is willing to accept loss or detriment either in the performance of its regular
services or in order to secure better outcomes. Different risk tolerances will apply to different
circumstances, eg mission critical programmes or policies might find service failure scarcely
tolerable, whereas investment bodies may care more about achieving financial success even at
the price of some failures. Boards should be willing to take a proportionate approach so that
less important risks do not crowd out the vital ones.
Risk management in practice
A 4.3.4 The board’s strategic guidance on risk appetite should permeate each organisation’s
programmes, policies, processes and projects. It should determine how delegations and
reporting arrangements work so that departures from plan can be picked up and dealt with
promptly.
A 4.3.5 Feedback from working level should also inform each board reassessment of risk. Thus
risk management should be a continuous cycle of assessment and feedback, responding to new
information and developments. The essentials of the process are summarised in box A4.3A.
A 4.3.6 Each organisation should decide how this cycle should work, in line with its
circumstances, priorities and working practices. The final word must always be for the AO
supported by the board, taking a broad and connected view across the whole organisation.
83
A4.3 Risk
Box A 4.3A : outline of the risk m anagem ent cycle
1
The board defines the organisation’s risk tolerance.
2
The organisation identifies and categorises its risks.
3
The organisation assesses the risks identified: how likely their possible impact, identifying which
are beyond tolerance and when.
4
The board scans the horizon for any remote overlooked risks.
5
The board decides which risks matter and what action should be taken, if any.
6
Downward delegation of management, coupled with upward reporting of risks through the
organisation enables the board to track performance
7
Using this feedback, the board takes a rounded overview, and may adjust decisions eg on
tolerance or on response.
8
Back to step 1 and iterate as the board chooses.
Identifying risks
A 4.3.7 It is important to capture all the organisation’s risks so that they can be evaluated
properly in context.
A 4.3.8 There is value in getting each part of the organisation to think through its own risks. At
working level operational risks may loom large. It may only be at board level that it is really
possible to scan the horizon for emerging trends, problems or opportunities that might change
the organisation’s working environment. Some of the critical risks that are easily overlooked are
shown in box 4.3B.
Box A 4.3B: exam p les of risk w hich are easily m issed
•
Inform ation security risks: unsecured digital information can be misplaced or copied.
•
High im pact low probability risks: remote risks with serious effect if they happen.
•
O pportunity risks: where some choices may close off other alternatives;.
•
End to end risks: which emerge when an operational chain fails simultaneously in several
places in a linked set of processes.
•
Inter-organisational risks; which can cause failure of the organisation’s business because of
links to partners, suppliers and other stakeholders.
•
Cum ulative risks: which happen if several risks precipitate at once, eg in response to the same
trigger.
A 4.3.9 As well as drawing on risk assessment from within the organisation, it may be valuable
to use an external source to make sure that nothing important has been overlooked. Sometimes
different public sector organisations can help each other out in this way, to their mutual
advantage. And it can be useful to get staff to work together to consider the subject, eg in
facilitated groups.
A 4.3.10 Once the organisation’s risks have been identified, it is possible to draw up a risk
register. This is a list of recognised risks which can be kept up to date and which the board can
review regularly. Each organisation needs to decide how to prioritise its total risk exposure so
that the board can take an informed strategic approach to risk for the organisation as whole.
84
A4.3 Risk
Responding to risk
A 4.3.11 Each organisation needs to decide whether, and if so how, to respond to its identified
risks. Some standard responses are listed in box A4.3C.
Box A 4.3C : som e standard responses to risk
Treat: a common response. Treatment can mean imposing controls so that the organisation can
continue to operate; or setting up prevention techniques. See box 4.3D for possible treatments.
Transfer: another organisation might carry out an activity in which it is more expert. Insurance is
not usually open to public sector organisations (see annex 4.4) but other forms of transfer are, eg
using a payroll bureau. Some risks cannot be transferred, especially reputational risk. So delegating
organisations should retain oversight of their agents, with scope for remedial action when necessary.
Term inate: it may be best to stop (or not to start) activities which involve intolerable risks or those
where no response can bring the residual risk to a tolerable level, eg failing projects where it is
cheaper to start again. This option is not always available in the public sector, which sometimes has
to shoulder difficult risks – typically remote but potentially serious ones – which the private sector can
choose to avoid.
Tolerate: for risks where the downside is containable with appropriate contingency plans; for some
where the possible controls cannot be justified (eg because they would be disproportionate); and for
unavoidable risks, eg terrorism.
Take the opportunity: boards may embrace some risks, accepting their downside perhaps with
controls or preventative action, in the expectation of beneficial outcomes. Avoiding all risk can be as
irresponsible as disregarding risk.
A 4.3.12 In choosing responses, the acid test is whether the residual risk can be made
acceptable after action. All controls should be realistic, proportionate to the intended reduction
of risk, and offer good value for money. The more common types are listed in box A4.3D.
Box A 4.3D : com m on controls
Preventive action: measures to eliminate or limit undesirable outcomes, eg improving training or
risk awareness; or stopping transfer of digital information using datasticks. Beware of imposing
unnecessary costs or damaging innovation.
Corrective controls: measures to deal with damaging aspects of realised risks, eg clauses to
recover the cost of failure of a contract. Includes contingency planning.
Directive controls: measures designed to specify the way in which a process is carried out to rule
out some obvious potential damage, eg hygiene requirements.
Detective controls: measures to identify damage so that it can be remedied quickly. Especially
useful where prevention is not appropriate, but can be a useful cross check elsewhere, eg stock
controls.
A 4.3.13 However it is treated, it is usually impossible to eliminate all risk. It would often be
poor value for money to do so were it possible. So it is good practice to associate application of
controls with contingency planning to cope with resolution of damage when risks precipitate.
Many organisations find it useful to dry run these plans: first to check that they work, second to
make sure they are proportionate and third to boil out any unnecessary features they may have.
85
A4.3 Risk
The Board
A 4.3.14 Risk management is a key governance task for the board. It should take a strategic
view of risk in the organisation in the round1, factoring together all the relevant input it can
reasonably use. For example, it may consider to what extent risks interact, cumulate or cancel
each other out. And consideration of risk should feature in all the board’s significant decisions.
A 4.3.15 It is good practice for the board to consider risk regularly as part of its normal flow
of management information about the organisation’s activities. It is good practice for each layer
of management to give upward assurance about its performance, so reinforcing responsibility
through the structure.
A 4.3.16 It is up to each board to decide how frequently it wants to consider risk. Some set
regular timetables to consider the whole risk register, while some choose to look at parts of the
risk register in a regular sequence. Scrutiny of this kind enables the board to assess
developments in context and make confident decisions about their relevance and significance.
A 4.3.17 It is good practice for the board to make these assessments on the advice of its Audit
Committee, though it should form its own view. Audit committees can also add value by
chasing up implementation of the organisation’s responses to PAC reports. Each Audit
Committee should be chaired by a non- executive board member, drawing on input from the
organisation’s internal reporting and internal audit functions.
A 4.3.18 Having weighed the identified risks, the board should also seek to distinguish
unidentified risks, some of which may be remote. Box 4.3B offers some possibilities though it is
not exhaustive. This process may lead the board to reconsider its strategy on risk tolerance.
A 4.3.19 A useful focus of board risk work is supporting the AO in preparation of the
governance statement for publication in its annual report (se annex 3.1). It should include an
account of how the organisation has responded to risk and what it is doing both to contain and
manage risk; and also to rise to opportunities.
A 4.3.20 More generally, the board should make sure that lessons are learned from the
organisation’s experience. This applies particularly to perceived failures, eg an unforeseen risk or
a crystallised risk which turned out more damaging than expected. But it is equally true of
successes, especially those where risk was managed well, to see whether there is anything to be
gained by repeating effective techniques elsewhere.
A 4.3.21 Finally, the board should consider whether the organisation’s risks are being treated
appropriately. If damage has been prevented, it may be possible to adjust the existing response
to risk to achieve equally successful results by less expensive or less invasive techniques, eg
replacing physical controls with security cameras.
Departmental Groups
A 4.3.22 Nearly all government departments sponsor one or more arm’s length bodies (ALBs)
for which they take ultimate responsibility while allowing them a degree of (or sometimes
considerable) independence (see chapter 7). The accounts of these ALBs are consolidated with
their sponsor department’s accounts, emphasising that the sponsor stands behind them.
1 For example using enterprise risk management or an equivalent technique for embedding risk management in organisational management such as
that on the Institute of Risk Management website
http://www.theirm.org/knowledge-and-resources/online-resource-centre/enterprise-risk-
management/erm-general/guide-to-enterprise-risk-management-protiviti-2006/
86
A4.3 Risk
A 4.3.23 It follows that each department board should consider the group’s risk profile
including the businesses of its ALBs. The potential liabilities of some ALBs (eg in the nuclear
field) can be so great that they may overshadow the department’s own, so this is essential
hygiene.
A 4.3.24 References:
The Orange Book:
https://www.gov.uk/government/publications/orange-book
Other Treasury risk guidance:
http://webarchive.nationalarchives.gov.uk/20130129110402/http://www.hm-
treasury.gov.uk/psr_governance_risk_riskguidance.htm
NAO report on Managing risks in government
: http://www.nao.org.uk/report/managing-risks-in-
government/
GAD’s practical guide to strategic risk management:
http://www.gad.gov.uk/Knowledge_Centre/Strategic_Risk_Management.html
87
88
Annex 4.4
A4.4
Insurance
Central governm ent organisations should not generally take out com m ercial insurance
because it is better value for m oney for the taxpayer to cover its ow n risks. H ow ever,
there are som e circum stances w here com m ercial insurance is appropriate. This annex
sets out the issues to be considered. This guidance applies to departm ents and their
arm s-length bodies.
A 4.4.1 Central government organisations should not normally buy commercial insurance to
protect against risk. Since the government can pool and spread its own risks, there is little need
to pay the private sector to provide this service. In general it is cheaper for the government to
cover its own risks.
A 4.4.2 However, in certain circumstances, as part of forming a risk management strategy, the
accounting officer in a public sector organisation may choose to purchase commercial insurance
to protect certain parts of the organisation’s portfolio. Such decisions should always be made
after cost benefit analysis in order to secure value for money for the Exchequer as a whole.
Some acceptable reasons for using insurance are set out in box A4.4A.
Box A 4.4A : w here com m ercial insurance m ay b e justified
•
Building insurance as a condition of the lease and where the lessor will not accept an
indemnity: commercial insurance may be taken out where the cost of accommodation, together
with the cost of insurance, is more cost effective than other accommodation options.
•
O verall site insurance: private sector contractors and developers usually take out a single-site
insurance policy because it is cheaper than each individual party insuring themselves separately.
So a client organisation may be able to cover its risks at little or no extra cost.
•
Insurance of boilers and lifts: which may be a condition of taking out a lease, and typically
involves periodic expert inspection designed to reduce the risk of loss or damage.
•
Com m ercial initiatives: because these activities are outside the government’s core
responsibilities, losses on a department’s discretionary commercial activities could reduce
resources available for its core activities (see chapter 7). It will usually therefore make sense to
insure them. Any goods used for services sold to other parts of central government should not,
however, be insured.
•
W here com m ercial insurance is integral to a project : eg, where private contractors
insist, it may be appropriate to purchase insurance even if the net benefit is negative. But this
may be a sign that the project needs restructuring to avoid any requirement to buy commercial
insurance, perhaps through letters of comfort or statements of support. The costs and benefits
of taking out insurance should be included in the appraisal of the project as a whole.
A 4.4.3 Some ALBs may be in a slightly different position to central government departments.
Box A4.4B gives examples of some items they may choose to insure commercially.
89
A4.4 Insurance
Box A 4.4B: item s A LBs m ay insure
•
items the ALB is required to insure, eg vehicles where the Road Traffic Acts require it.
•
physical assets where a cost benefit analysis supports the case for insurance and the sponsor
department agrees.
•
goods owned by ALBs receiving less than 50% of their income from the Exchequer (through
grant-in-aid or fees and charges). Commercial insurance protects the risk to the Exchequer from
claims from third parties.
•
items used by an ALB for income generation schemes to supplement the approved level of public
spending. Commercial insurance is appropriate to cover the risks lest costs or losses could not
be met out of receipts.
Appraising the options
A 4.4.4 Decisions on whether to buy insurance should be based on objective cost-benefit
analysis, using guidance in the
Green Book1. Box A4.4C outlines some factors which are often
worth considering in such assessments.
Box A 4.4C : costs and benefits w hich could be included in assessm ents
Costs:
•
the insurance premium which may be paid
•
the administrative cost of managing claims with the insurance company
Benefits:
•
transfer of risk, valued at the expected compensation for the insured losses
•
claims handling, where the insurance company will manage claims against third parties
•
the value of guaranteed business recovery: the potential reduction in the time taken to reinstate
losses, reducing business interruption
Setting fees and charges
A 4.4.5 If a central government organisation insures risks arising in supplying a service for which
a fee or charge is levied, the actual premium payments should be included in the calculation of
costs when deciding the fee or charge. Similarly, where a central government organisation self-
insures, the notional cost of premium payments should be taken into account. See Chapter 6
for further details.
Claims administration
A 4.4.6 Managing claims against third parties can be time-consuming and require expert
attention. Insurance companies may be better placed than public sector organisations to deal
with claims economically and efficiently. So contracting-out claims administration to an
insurance company might be more cost-effective than retaining the work in-house.
1
https://www.gov.uk/government/publications/the-green-book-appraisal-and-evaluation-in-central-governent
90
A4.4 Insurance
Reporting
A 4.4.7 Departments should inform their Treasury spending team of:
•
any decision to use the services of commercial insurance companies
•
any reviews of insurance, or alternatives to insurance, that might contain lessons of
wider application.
A 4.4.8 In turn ALBs should consult their sponsor departments in similar circumstances.
Dealing with losses
Uninsured losses (except traffic accidents)
A 4.4.9 Where a loss occurs or a third-party claim is received, public sector organisations should
initially consider whether the loss should be made good or the claim accepted. Thus:
•
loss of or dam age to assets: the question of repair or replacement should
always be carefully considered, taking account of the need for the asset and current
policies. This decision is, in effect, a new investment decision and should be
appraised accordingly;
•
third-party claim s: the justification for the claim should be carefully considered
with appropriate legal advice.
A 4.4.10 If the organisation decides to repair or replace an asset, or meet a third party claim, it
should normally expect to meet the cost from within its existing allocations. The Treasury does
not routinely entertain bids for additional resources in such cases. If a bid did arise the Treasury
would consider it on its merits and in the light of the resources available, in the same way as
other bids for increases in provision. Similarly, ALBs should not normally expect their sponsor
departments to meet claims for reimbursement of loss.
Insured losses
A 4.4.11 Public sector organisations should make insurance claims in accordance with the
terms of the policy.
A 4.4.12 ALBs may retain amounts paid under commercial insurance policies to meet
expenditure resulting from losses or third-party claims. If it is decided not to replace or to repair
an insured asset, the sponsor department may reduce any grant in aid payable to the ALB.
Claims between public sector organisations
A 4.4.13 If two uninsured departments are involved in an incident causing loss to one or other,
it is immaterial to the Exchequer whether one claims on the other for the damage. For small
claims it would not be value for money for the Exchequer to make interdepartmental
adjustments in the case of minor damage. Similar waiver arrangements should apply up to
mutually agreed limits between other public sector organisations. But waiver arrangements of
this kind are not appropriate where there are rights of claim against third parties.
A 4.4.14 Box A4.4D shows how to proceed when one central government organisation makes
a larger claim against one or more others.
91
A4.4 Insurance
Box A 4.4D : handling claim s betw een public sector organisations
Insurance status
settlem ent of claim s
All insured
Insurers settle claims
All uninsured
Organisation(s) at fault negotiate about whether to
reimburse the other(s)
Organisation at fault uninsured, other
Insured organisation claims on its insurance policy.
organisation(s) insured
Uninsured organisation(s) deal with claims from the
insurers on the basis of strict legal liability
Organisation at fault insured, other
Uninsured organisation(s) seek financial satisfaction
organisation(s) uninsured
through the insurers of the organisation(s) at fault
Vehicles
A 4.4.15 Most ALBs insure third-party vehicle claims to comply with the Road Traffic Acts.
Public sector organisations that are not insured for traffic accidents should refer any third-party
claims, either for or against, to the Treasury Solicitor who acts on behalf of the government.
A 4.4.16 Many claims between public sector organisations involving damage to, or loss caused
by, vehicles, can be handled using the arrangements in paragraph A4.4.13.
A 4.4.17 Vehicles travelling in other EU countries must comply with Directives. These require
vehicles of a member state operating in another’s territory to be covered by insurance to the
extent required by the legislation in territory of the journey, unless there are acceptable
alternative arrangements, eg indemnities.
Loans
A 4.4.18 When government assets are loaned to a body other than a public sector organisation
which does not insure, it is important to protect the interests of the lending organisation. So
the borrower should insure against damage or loss of the assets from the time of receipt and
against claims by third parties including its own employees. An indemnity by the borrower is an
acceptable substitute if the lender is satisfied that the borrower could and would meet any
damage or other loss.
A 4.4.19 Public sector organisations are usually expected to meet the cost of insuring any
government assets (eg. equipment or stores) held by a contractor in the normal course of
business. The cost of any insurance against risks arising from negligence or wilful misconduct by
the contractor's employees should be borne by the contractor. These arrangements should be
explicitly set out in the relevant contract.
A 4.4.20 Public sector organisations which borrow objects of value from a non-government
body should normally offer the owner an indemnity against damage or loss. Such indemnities
should leave no doubt as to the extent and duration of the borrowing organisation's liability.
And they may need to be reported if they fall within the parliamentary reporting requirements
(see annex 5.4).
A 4.4.21 Borrowers should only take out commercial insurance for loaned items of value if the
owner insists upon it, or if the borrower has reason to believe that commercial insurance would
be more cost effective than giving an indemnity.
92
A4.4 Insurance
Employers’ liability
A 4.4.22 The Crown is not bound by the Employers' Liability (Compulsory Insurance) Act 1969.
So departments need not insure the risks outlined in the Act. Decisions on whether to insure
should be taken on value for money grounds after an appraisal. Similarly, parliamentary bodies
such as the National Audit Office, the Parliamentary Commissioner (Ombudsman) and the
Independent Parliamentary Standards Authority need not insure against employers’ liability risks
as they are exempted under the Employers’ Liability (Compulsory Insurance) (Amendment)
Regulations 2011 (SI 2011/686).
A 4.4.23 A body funded by grant in aid need not insure against employers' liability risks. This is
because the Employers' Liability (Compulsory Insurance) Regulations 1998 (SI 1998/2573)
provide exemption for any body (or person who may be an employer) holding a certificate issued
by a government department. Again, the decision on whether to insure will depend on a value
for money assessment. If the organisation chooses not to insure, responsibility for the issue of
certificates in accordance with the Act rests with the department responsible for paying grant in
aid, provided that it is satisfied that this is the appropriate course.
A 4.4.24 The scope of the certificate should be strictly confined to the risks with which the
Employers' Liability (Compulsory Insurance) Act 1969 is concerned, and may not be extended to
any other risks. It should be in the form set out in Box A4.4E. Departments should ensure that
the circumstances in which certificates have been issued are reviewed from time to time, so that
certificates may be revoked if circumstances change.
Box A 4.4E: form of exem ption certificate
In accordance with the provisions of paragraph 1 of Schedule 2 of the Employers' Liability
(Compulsory Insurance) Regulations 1998 (SI 1998/2573), the Minister of ....../Secretary of State
for...... hereby certifies that any claim established against [here specify the body or person] in respect
of any liability to [here specify the employees involved] of the kind mentioned in section 1(1) of the
Employers' Liability (Compulsory Insurance) Act 1969 will, to any extent to which it is otherwise
incapable of being satisfied by the aforementioned employer, be satisfied out of moneys provided by
parliament.
93
94
Annex 4.5
Senior Responsible Owner
A4.5
Accountability
Civil servants appear in front of Select Com m ittees on behalf of their M inisters and
under their directions because it is the M inister, w ho is accountable to Parliam ent for
the evidence given to the Com m ittee. Senior Responsible O w ners are in a special
position.
A 4.5.1 Senior Responsible Owners (SRO) for Major Projects (as defined in the Government’s
Major Project Portfolio) are in a special position in that they are expected to account for and
explain the decisions and actions they have taken to deliver the projects for which they have
personal responsibility. This line of accountability should be made clear to SROs in their
published appointment letter.
A 4.5.2 The Government publishes on an annual basis a list of the SROs for the Government’s
Major Project Portfolio (as defined by the Major Projects Authority).
A 4.5.3 Where a Committee wishes to take evidence from an SRO of one of these major
projects it will be on the understanding that the SRO will be expected to account for the
implementation and delivery of the project and for their own actions. Appointment letters will
make clear the point at which an SRO becomes directly accountable for the implementation of
the project in question. The SRO will also be able to disclose to the Committee where a Minister
or official has intervened to change the project during the implementation phase in a way which
has implications for cost and/or timeline of implementation. In this respect the SRO should also
be able to disclose their advice about any such changes.
A 4.5.4 Accounting Officers are ultimately accountable for the performance of all the business
under their control, including major projects for which an individual SRO has direct
accountability and responsibility. And in this respect, if a Select Committee calls for evidence
from an SRO, the Accounting Officer of the department may also be called to support the SRO
at a hearing.
A 4.5.5 This line of direct accountability for SROs does not alter the special position and
relationship of Accounting Officers with the PAC.
A 4.5.6 Further information is available in Cabinet Office guidance for officials from
departments and agencies on giving evidence to Parliamentary Select Committees (the
Osmotherly Rules
) https://www.gov.uk/government/publications/departmental-evidence-and-
response-to-select-committees-guidance .
95
96
Annex 4.6
A4.6
Procurement
It is im portant to secure value for m oney in asset m anagem ent through sound
procurem ent. Public sector organisations should norm ally acquire goods and services
through fair and open com petition, acting on Cabinet O ffice advice. This annex
provides an overview of the policy fram ew ork for public procurem ent.
A 4.6.1 Good procurement practice demands that public sector organisations buy the goods,
works and services they need using fair and open procurement processes, guarding against
corruption and meeting the standards in MPM. European Union (EU) law and World Trade
Organisation (WTO) agreements underpin these principles. The specific responsibilities are set
out in box A4.6A.
Box A 4.6A : checklist of key purchasing responsibilities
G eneral
•
value for money, normally through competition;
•
compliance with legal obligations under EU rules and other international agreements;
•
follow Government Procurement Service1 policies and standards on public procurement.
M anagem ent approach
•
leadership on the importance of procurement in delivering objectives;
•
define roles and responsibilities of key staff, with adequate separation of duties;
•
promote awareness (including in ALBs) of the importance of procurement policy and the GPS
guidance.
Planning and engagem ent
•
clarify objectives of procurement from the start
•
consider how the procurement strategy could attract a diverse range of suppliers including SMEs
and civil society organisations;
•
consider collaborative or shared procurement with other organisations to maximise purchasing
power;
•
design procurement strategy and engage with the market early and well before competition
starts;
•
consult GPS on any difficult legal issues.
Skills
•
use procurement professionals throughout;
•
ensure that there is sufficient skills capacity in undertaking and managing procurements and
projects.
Review
•
apply the GatewayTM review process;
•
draw issues which may have wider implications to the Cabinet Office’s attention.
1
https://www.gov.uk/government/organisations/crown-commercial-service
97
A4.6 Procurement
A 4.6.2 This guidance is intended to be fully consistent with the UK's EU and international
obligations. It does not create any rights or legal obligations.
Value for money
A 4.6.3 Value for money is a key concept (see paragraph 3.3.3 and box A4.6B). It means
securing the best mix of quality and effectiveness for the least outlay over the period of use of
the goods or services bought. It is not about minimising up front prices. Whether in
conventional procurement, market testing, private finance or some other form of public private
partnership, finding value for money involves an appropriate allocation of risk.
Box A 4.6B: securing value for m oney
Cost: the key factor is whole life cost, not lowest purchase price. Whole life cost takes into account
the cost over time, including capital, maintenance, management, operating and disposal costs. For
complex procurements, whole-life cost can be very different from initial price.
Q uality: paying more for higher quality may be justified if the whole life cost is better, for example,
taking into account maintenance costs, useful life and residual value. The purchaser should determine
whether increased benefits justify higher costs.
Perspective: each public sector organisation’s procurement strategy should seek to achieve the best
value outcome for the Exchequer as a whole, not just for the organisation itself. This should be
designed in before the invitation to tender is published.
Collaborative procurem ent: in the vast majority of cases, standardising and aggregating
procurement requirements will deliver better value for money. Public sector organisations, including
smaller ones, should therefore collaborate as far as possible on procurement in line with GPS practice.
A 4.6.4 Purchasers need to develop clear strategies for continuing improvement in the
procedures for acquisition of goods, works and services. Public sector organisations should
collaborate with each other, following guidance, in order to secure economies of scale, unless
they can achieve better value for the Exchequer as a whole some other way. Smaller suppliers
should have fair access to see if they able to deliver better value for money.
Legal framework
A 4.6.5 Public sector organisations are responsible for ensuring that they comply with the law
on procurement (see box A4.6C) taking account of Cabinet Office guidance2. EU Treaty
principles apply to all procurement, and there are specific EU rules that apply to most contracts
where the estimated value exceeds a specified threshold.
The user’s requirement
A 4.6.6 Procurement should help deliver relevant departmental and government-wide strategies
and policies. The procuring organisation should establish that the supply sought is really
needed, is likely to be cost effective and affordable. And the published specification should
explain clearly what outcomes are required, since this is crucial to obtaining the supply required.
Once it is decided that third party procurement appears better value for money than provision
in-house, a range of models should be considered, for example employee-led mutuals and joint
ventures as well as more traditional outsourcing.
2 Cabinet Office guidance
: https://www.gov.uk/government/organisations/crown-commercial-service
98
A4.6 Procurement
Box A 4.6C : the legal fram ew ork for public procurem ent
•
EU procurement and remedies rules (the Treaty and procurement directives)
•
international obligations, notably WTO agreements
•
domestic legislation, including subordinate legislation implementing directives;
•
contract and commercial law in general
•
relevant Court of Justice of the European Union case law
•
domestic case law
The procurement process and suppliers
A 4.6.7 Competition promotes economy, efficiency and effectiveness in public expenditure.
Works, goods and services should be acquired through competition unless there are convincing
reasons to the contrary, and where appropriate should comply with EU and domestic advertising
rules and policy. The form of competition chosen should be appropriate to the value and
complexity of the goods or services to be acquired.
A 4.6.8 Public sector organisations should aim to treat suppliers responsibly to maintain good
reputations as purchasers (see box A4.6D), taking account of the government’s Procurement
pledge to help stimulate economic growth3.
Box A 4.6D : relationships w ith suppliers
•
high professional standards in the award of contracts
•
clear procurement contact points
•
adequate information for suppliers to respond to the bidding process
•
the outcome of bids announced promptly (in accord with EU standards)
•
feedback to winners and losers on request on the outcome of the bidding process
•
high professional standards in the management of contracts
•
prompt, courteous and efficient responses to suggestions, enquiries and complaints
A 4.6.9 In carrying out efficient sourcing projects, central government should follow best
practice.
A 4.6.10 One such approach is LEAN approach4 whose principles are designed to make doing
business with government more efficient and cost-effective (for both buyers and suppliers) to
support economic growth.
A 4.6.11 During the evaluation stage of sourcing, it is important to for public sector procuring
organisations to:
•
establish the propriety of candidate suppliers – taking account of the requirement
to exclude those convicted of, for example, fraud, theft, fraudulent trading or
cheating HMRC;
3
Procurement Pledge (
http://www.cabinetoffice.gov.uk/resource-library/our-procurement-pledge)
4
https://www.gov.uk/government/publications/lean-sourcing-guidance-for-public-sector-buyers
99
A4.6 Procurement
•
assess suppliers’ economic and financial standing to gain confidence of their
capacity to carry out fully what the buyer requires within the pre-determined
timescale and deliver value for money;
•
secure value for money (see box A.4.6B), using relevant and consistent criteria for
evaluating the key factors (cost, size, sustainability, design etc).
Contracts
A 4.6.12 In drawing up contracts, purchasers should, where possible:
•
use model terms and conditions developed in the light of collective experience and
which may help avoid prejudicing the position of others using the same supplier;
•
avoid variation of price clauses in contracts of less than two years' duration; and
•
Include prompt payment clauses.
A 4.6.13 Purchasers cannot enter into contracts with other parts of the legal entity to which
they belong, so different parts of the Crown cannot contract with each other. Instead internal
agreements which fall short of being contracts are used (typically service level agreements).
These may have all the hallmarks of contracts other than scope for legal enforcement. Since
service level agreements between bodies which are not part of the Crown may be subject to EU
procurement rules, it is usually wise to take legal advice when entering into them.
Central purchasing bodies and agencies
A 4.6.14 Central government organisations are required to use the services and collaborative
procurement deals managed by the Government Procurement Service on behalf of government5.
A 4.6.15 If public sector purchasers employ private sector agents to undertake procurement on
their behalf they should:
•
require compliance with the law (see box A4.6C);
•
ensure clear allocation of responsibilities; and
•
where appropriate, obtain the agent’s indemnity against any costs incurred as a
result of its failure to comply with the legal framework on its behalf.
Taxation
A 4.6.16 Central government bodies should:
•
base procurement decisions independent of any tax advantages that may arise from
a particular bid;
•
avoid contractors using offshore jurisdictions, consistent with EU and other
international obligations and the government’s stated objectives on tax
transparency and openness;
•
be vigilant in not facilitating tax arrangements with suppliers or their agents that
are detrimental or disadvantageous to the Exchequer. Public sector organisations
5
Cabinet Office guidance:
https://www.gov.uk/government/organisations/crown-commercial-service
100
A4.6 Procurement
need to take special care in relation to the tax arrangements of public appointees
(see Cabinet Office guidance6);
•
employ internal management processes to ensure that transactions that give rise to
questions of propriety of tax arrangements are brought to the accounting officer’s
or, if necessary, ministers’ attention.
A 4.6.17 In the case of bids under the Private Finance (PF2), it is particularly important to ensure
that comparisons of competing bids take account of any tax planning by bidders. The Treasury’s
Green Book provides for a tax adjusted Public Sector Comparator to allow for the (usually)
material tax difference between a PF2 option and the wholly public sector alternative. It would
be inappropriate to apply this to bids where tax planning has cancelled out this effect.
A 4.6.18 Public procurement projects involving the transfer of real estate or assets that are likely
to appreciate in value can often give rise to specific tax issues, in particular liability to capital
gains tax. If public sector organisations are negotiating with bodies that wish to structure
procurement proposals in this way, they should consult the Treasury and HMRC at an early stage
to identify the likely tax implications and assess the proposal for propriety generally.
Further guidance
A 4.6.19 Central sources of guidance on procurement and related issues include:
•
the Government Procurement Service of the Cabinet Office
(
https://www.gov.uk/government/organisations/crown-commercial-service)
•
the Treasury’s Green Book on project appraisal and evaluation in central
government
(
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/179
349/green_book_complete.pdf.pdf);
•
Department for Business, Innovation and Skills on state aid rules
(
https://www.gov.uk/state-aid);
•
Cartels and bid-rigging
(
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/284
413/oft435.pdf ); and
•
HM Revenue and Customs on tax avoidance issues
(
http://www.hmrc.gov.uk/avoidance/).
Guidance on the EU rules (available on the Government Procurement website) is also published
by the European Commission, but public sector organisations are advised not to seek advice
from the Commission without first consulting their own and their sponsor department’s
procurement units, who may, in turn, consult the Cabinet Office.
6
Cabinet Office guidance: Procurement Policy Note – Tax arrangements of Public Appointees
101
102
Annex 4.7
A4.7
State aids
W hile a great deal of public expenditure is not classified as state aid, any funding
favouring a particular com pany or sector could be subject to the EU rules and, in
certain circum stances, require notification to the Com m ission.
A 4.7.1 Article 107(1) of the EU Treaty prohibits in principle any form of preferential
government assistance – state aid - to commercial undertakings. The purpose is to prevent
distortion of competition within the EU.
A 4.7.2 There is no precise definition of state aid. Box A4.7A provides a statement of principle.
Its battery of tests may need to be applied to a wide variety of policies since for these purposes
commercial undertakings can include public organisations, charities and not-for-profit
organisations if they engage in economic activities or compete with commercial organisations.
And the European Commission may judge that even small amounts of aid could distort
competition. It is sometimes possible to escape the last test on tradable activity for very small
scale and localised assistance.
Box A 4.7A : characteristics of state aids
•
the aid is granted by a member state or through state resources (including eg lottery
distributions and European funds)
•
it favours certain commercial undertakings
•
it distorts or threatens to distort competition
•
the activity is tradable between member states.
All four tests have to be met for the state aid rules to apply.
A 4.7.3 However, a measure meeting all the tests in box A4.7A is not automatically illegal.
Article 107 sets out circumstances when state aid can be considered permissible – eg to
encourage cultural and regional development. European Commission frameworks and
guidelines also enable member states to target market failures in order to achieve desirable
policy outcomes, eg to facilitate competitiveness through research spending, improve access to
venture capital for small firms, support the environment, help provide access to training, or
encourage regional development.
A 4.7.4 Before state aid can be given, the public organisation responsible should notify the
Commission and obtain approval. This process, which can take 6-9 months, must be conducted
through the state aid teams in BIS, DEFRA or DfT depending on the type of aid.
A 4.7.5 The General Block Exemption Regulation (GBER) exempts a number of types of aid from
the need for prior notification. The GBER covers aid for regional development, SMEs, risk
capital, research, development and innovation, environmental protection, disadvantaged
workers and training. As long as the aid meets the strict conditions set out in the regulations,
member states simply have to inform the Commission and confirm compliance with the
regulation within 20 days of implementing it, rather than going through the notification
process.
103
A4.7 State aids
A 4.7.6 There is also a de minimis regulation which allows member states to give small amounts
of aid (200,000 euros over a three-year period) to any enterprise of any size (with certain
restrictions) as long as a number of administrative procedures are completed.
A 4.7.7 When designing policies, it is wise to consider early whether state aids rules apply. This
allows time to work out whether any exemptions are available; or if necessary to seek
Commission agreement. The sources in box A4.7B are a good place to start. Depending on the
context, queries on aid should be referred to Defra (agriculture), DfT (transport) or the Treasury
(banks). Questions on all other aid should be referred to BIS.
Box A 4.7B: further guid ance
The BIS State Aid Unit website –
www.bis.gov.uk/policies/europe/state-aid
State aid approval process flowchart
https://www.gov.uk/government/publications/state-aid-
notification-flowcharts
European Commission State aid website –
www.ec.europa.eu/comm/competition/index_en.html
104
Annex 4.8
A4.8
Expenditure and payments
As part of the process of authorising and controlling com m itm ents and expenditure
of public funds, public sector organisations should tim e their expenditure and
paym ents to provide good value for public m oney.
A 4.8.1 Public sector organisations should use good commercial practice in managing the flows
of expenditure and commitments they deal with. Box 4.3 has some sound high level principles.
These need to be interpreted in the context of each organisation’s business, in line with current
legislation and using modern commercial practice. The actual techniques used may thus change
from time to time and from place to place.
A 4.8.2 In particular, public sector organisations should;
•
explain payment procedures to suppliers;
•
agree payment terms at the outset and stick to them;
•
pay bills in accordance with agreed terms, or as required by law;
•
tell suppliers without delay when an invoice is contested; and
•
settle quickly when a contested invoice gets a satisfactory response.
A 4.8.3 Public sector organisations are also bound by legislation1 aiming to ensure that in
commercial transactions, the payment period does not exceed 30 calendar days after the debtor
receives an invoice. Further advice is available from the Cabinet Office and BIS.
A 4.8.4 However, the Government recognises that the public sector should set a strong example
by paying promptly. Central government departments should aim to pay 80% of undisputed
invoices within 5 days. They should also include a clause in their contracts requiring prime
contractors to pay their suppliers within 30 days. The principles in Box 4.4 must still be applied
to all payments. Further guidance is available2 .
Payments outside the normal pattern
A 4.8.5 Payments in advance of need should be exceptional, and should only be considered if a
good value for money case for the Exchequer can be made. Even then, as advance payments
lead to higher Exchequer financing costs, such payments are novel and contentious and require
specific Treasury approval. Advance payment should never be used to circumvent expenditure
controls or budgetary limits.
A 4.8.6 In particular, it is not good value for money for public sector organisations to act as a
source of finance to contractors who have access to other forms of loan finance. So advance
payments to contractors (ie payments made before equivalent value is received in return) should
1 The Late Payment of Commercial Debts (Interest) Act 1998 (as amended by The Late Payment of Commercial Debt Regulations 2002 (SI 1674) and the
Late Payment of Commercial Debt Regulations 2013).
2 The Prompt Payment Code
http://www.promptpaymentcode.org.uk./
105
A4.8 Expenditure and payments
only be considered if, for example, a price discount commensurate with the time value of the
funds in question can provide a good value for money case. Exceptions to these guidelines,
which would not normally require specific Treasury approval, include:
•
service and maintenance contracts which require payment when the contract
commences, provided that the service is available and can be called on from the
date of payment;
•
grants to small voluntary or community bodies where the recipient needs working
capital to carry out the commitment for which the grant is paid and private sector
finance would reduce value for money;
•
minor services such as training courses, conference bookings or magazine
subscriptions, where local discretion is acceptable; and
•
prepayments up to a modest limit agreed with the Treasury, where a value for
money assessment demonstrates clear advantage in early payment.
A 4.8.7 Interim payments may have an element of prepayment and so public sector
organisations should consider them carefully before agreeing to them. However, if they are
genuinely linked to work completed or physical progress satisfactorily achieved, preferably as
defined under a contract, they may represent acceptable value for public funds. Taking legal
advice as necessary, organisations should, however, consider whether:
•
the contractor’s reduced need for working capital should be reflected in reduced
prices;
•
the contractor should provide a performance bond in the form of a bank guarantee
to deal with possible breach of contract.
A 4.8.8 Public sector organisations should not, however, use interim payments to circumvent
public spending controls. For example, it is not acceptable to make payments where value has
not been received, simply to avoid underspending.
A 4.8.9 Deferred payments are generally not good practice. They normally mean paying more
to compensate the contractor for higher financing costs and are thus poor value for money (at
the margin the Exchequer can always borrow more cheaply than the private sector). So any
proposal for deliberate late payment is potentially novel and contentious. Any central
government organisation considering deferred payments must thus seek Treasury approval
before proceeding.
106
Annex 4.9
A4.9
Fraud
G overnance in public sector organisations includes arrangem ents for preventing,
countering and dealing w ith fraud. This annex provides further detail.
A 4.9.1 Accounting officers are responsible for managing public sector organisations’ risks,
including fraud. Each organisation faces a range of fraud risks specific to its business, from
internal and external sources. The risk of a given fraud is usually measured by the probability of
its occurring and its impact in monetary and reputational terms should it occur.
A 4.9.2 In broad terms, managing the risk of fraud involves:
•
assessing the organisation’s overall vulnerability to fraud;
•
identifying the areas most vulnerable to fraud risk;
•
evaluating the scale of fraud risk;
•
responding to fraud risk;
•
measuring the effectiveness of the fraud risk strategy; and
•
reporting fraud.
The most effective way to manage the risk of fraud is to prevent it from happening by
developing an effective anti-fraud culture.
A 4.9.3 For guidance on all these areas, see Tackling Internal Fraud1 and Tackling External
Fraud2.
Assessing vulnerability to fraud
A 4.9.4 Each organisation should identify, itemise and assess how it might be vulnerable to
fraud, covering the risks in some detail. Fraud should be always considered as a risk for the
departments’ risk register.
Evaluating the scale of fraud risk
A 4.9.5 Public sector organisations should evaluate the possible impact and likelihood of the
specific fraud risks it has identified. These should be reviewed regularly. From this, each
organisation should deduce a priority order for managing its fraud risks and target its
interventions accordingly. This will inform decisions about the actions to be taken to manage
fraud risk effectively.
1
http://webarchive.nationalarchives.gov.uk/20130129110402/http://www.hm-treasury.gov.uk/psr_managing_risk_of_fraud.htm
2
http://www.nao.org.uk/report/good-practice-in-tackling-external-fraud-2/
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A4.9 Fraud
Responding to fraud risk
A 4.9.6 The organisation’s response to fraud risk should be customised to the risks it faces.
Typically it will involve some or all of the following.
•
Developing a Fraud Policy Statement, a Fraud Risk Strategy and a Fraud Response
Plan (key documents that every organisation should have).
•
Developing and promoting an anti-fraud culture, maybe through a clear statement
of commitment to ethical behaviour to promote awareness of fraud. Recruitment
screening, training and maintaining good staff morale can also be important.
•
Allocating responsibilities for the overall and specific management of fraud risk so
that these processes are integrated into management.
•
Establishing cost-effective internal systems of control to prevent and detect fraud.
•
Developing the skills and expertise to manage fraud risk effectively and to respond
to fraud effectively when it arises.
•
Establishing well publicised avenues for staff and members of the public to report
suspicions of fraud.
•
Responding quickly and effectively to fraud when it arises.
•
Establishing systems for investigations into allegations of fraud.
•
Using Internal Audit to advise on fraud risk and drawing on their experience to
strengthen control.
•
Taking appropriate action (criminal, disciplinary) against fraudsters and seeking to
recover losses.
•
Continuously evaluating the effectiveness of anti-fraud measures in reducing fraud.
•
Working with stakeholders to tackle fraud through intelligence sharing, joint
investigations, etc.
A 4.9.7 It is good practice to measure the effectiveness of actions taken to reduce the risk of
fraud. Assurances about these measures can be obtained from Internal Audit, stewardship
reporting, control risk self assessment, monitoring or from other review bodies.
Reporting fraud
A 4.9.8 Public sector organisations should retain records of internal frauds discovered and
actions taken, including an assessment of the value of any losses. They may need to contribute
to occasional reports and analysis of frauds.
A 4.9.9 Public sector organisations should also provide the Cabinet Office (Fraud, error and debt
team) with details, of any novel or unusual frauds (or attempted frauds) so that this information
can be shared more widely. Public sector organisations should also consider reporting frauds
and suspected fraud to the NAO.
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A4.10 Annex 4.10
Losses and write offs
This annex sets out what is expected when departments and their arms length bodies (ALBs) incur
losses or write off the values of assets, including details of when to notify parliament.
A4.10.1
As parliament does not agree or approve advance provision for potential future losses
when voting money or passing specific legislation, such transactions when they arise are subject
to greater scrutiny and control than other payments. Public sector organisations should only
consider accepting losses and write-offs after careful appraisal of the facts (including whether all
reasonable action has been taken to effect recovery – see Annex 4.11), and should be satisfied
that there is no feasible alternative. In dealing with individual cases, departments must always
consider the soundness of their internal control systems, the efficiency with which they have
been operated, and take any necessary steps to put failings right.
A4.10.2
The guidance in this chapter relates to cash and fiscal losses. It is not intended for losses
that do not impact on the fiscal position. For example, erroneous debit balances that result in an
accounting adjustment but not a cash loss should not be disclosed in the losses statement.
Levels of delegation
A4.10.3
Departments have delegated authority to deal with all losses, unless there are specific
delegations put in place, subject to paragraph A4.10.4. Box A4.10A provides examples of the
different categories of loss.
Box A4.10A:
examples of losses
Losses
•
cash losses: physical losses of cash and its equivalents (eg credit cards, electronic transfers)
•
realised exchange rate and hedging losses: losses due to fluctuations in exchange rates or
hedging instruments
•
losses of pay, allowances and superannuation benefits paid to civil servants, members of the
armed forces and ALB employees: including overpayments due to miscalculation,
misinterpretation, or missing information; unauthorised issues; and other causes
•
losses arising from overpayments: of social security benefits, grants, subsidies etc
•
losses arising from failure to make adequate charges: eg for the use of public property.
Losses of accountable stores
•
losses through fraud, theft, arson or any other deliberate act
•
losses arising from other causes.
Fruitless payments and constructive losses
Claims waived or abandoned
109
Consulting the Treasury
A4.10.4
When departments identify losses and write-offs, they should consult the Treasury,
using the guidance in Box A4.10B, irrespective of the amount of money concerned, if they:
•
involve important questions of principle;
•
raise doubts about the effectiveness of existing systems;
•
contain lessons which might be of wider interest;
•
are novel or contentious;
•
might create a precedent for other departments in similar circumstances;
•
arise because of obscure or ambiguous instructions issued centrally.
A4.10.5
Similarly, ALBs should consult their sponsor departments about similar cases. In turn
departments may need to consult the Treasury.
Box A4.10B:
consulting the Treasury on losses
Departments should consult the Treasury as soon as possible, outlining:
•
the nature of the case, the amount involved and the circumstances in which it arose;
•
the reasons for the proposed write-off, including any legal advice;
•
the reason for consulting the Treasury;
•
whether fraud (suspected or proven) is involved;
•
whether the case resulted from dereliction of duty;
•
whether failure of supervision is involved;
•
whether appropriate legal and/or disciplinary action has been taken against those involved
including supervisors, and, if not, why not;
•
whether those primarily involved will be required to bear any part of the loss; and
•
whether the investigation has shown any defects in the existing systems of control and,
•
if so, what action will be taken.
Notification to parliament
A4.10.6
Losses should be brought to parliament’s attention at the earliest opportunity, normally
by noting the department's annual accounts, whether or not they may be reduced by
subsequent recoveries. For serious losses, departments should also consider the case for a
written statement to parliament. Departments should not hesitate to notify parliament of any
losses which it would be proper to bring to their attention.
Losses and claims records
A4.10.7
Public sector organisations should maintain an up to date record of losses. The record
should show:
•
the nature, gross amount (or estimate where an accurate value is unavailable), and
cause of each loss;
110
•
the action taken, total recoveries and date of write-off where appropriate; and
•
the annual accounts in which each loss is to be noted.
A4.10.8
A losses statement is required in annual accounts where total losses exceed £300,000.
Individual losses of more than £300,000 should be noted separately. Losses should be reported
on an accruals basis.
A4.10.9
Where efforts are still being made to secure recovery of cash losses formally written off,
charged to the accounts and noted, public sector organisations should consider including them
in a record of claims to ensure that recovery is not overlooked.
Accounting for cash losses
A4.10.10
Cash losses may initially be accounted for as debtors in annual accounts pending
recovery or write-off.
A4.10.11
When a department incurs a cash loss it should charge it to the appropriate budget
subhead in the Estimate, and for accounts recognise the cost in accordance with the FReM.
A4.10.12
Where a cash loss is wholly or partly recovered by reducing the amounts of pay or
pension1 which would otherwise be due, or under statutory or other specific powers2, only the
resulting outstanding balance is treated as a loss to be written off. The sum(s) are charged to
the relevant budget boundary as if they had been paid to the individual concerned who then
used the money to pay the claim.
A4.10.13
Similarly, where the loss is wholly or partly met by voluntary payments by the person
responsible or by a payment from an insurance company or other non-public source, only the
net loss is written off. If, however, there are no powers to apply the sums withheld by non-issue
of pay etc, the gross amount of the loss is written off.
A4.10.14
Generally, no note is necessary if the net loss is nil by the time the annual accounts are
finalised. There may, however, be exceptions (eg losses arising from culpable causes) where the
circumstances of the loss are such as to make it proper to bring them to the notice of
parliament by inclusion in the Losses Statement.
Stores losses
A4.10.15
Stores losses are, in effect, money spent without the authority of parliament. In
establishing the amount of the loss, and hence whether the annual account should be noted,
the net value of the loss after crediting any sums recovered will be the determining factor.
A4.10.16
Losses of stores arising from culpable causes should be noted in departmental records,
in accordance with normal practice. Such losses should also be noted in the annual account, to
ensure that such losses are brought to the attention of parliament in the appropriate manner,
and to aid departmental management in managing and accounting for stores.
A4.10.17
Where there is an identifiable claim against some person, the loss need not be noted
immediately. However, if the department subsequently decides to waive the claim, or finds that
it cannot be presented or enforced, the loss should be treated as an abandoned claim (see
paragraph A.4.10.23) and noted accordingly.
1 Tax must be deducted from pay or pension subject to PAYE withheld in settlement of a loss, to arrive at the amount attributed to debt repayment.
2 For example, Queen’s Regulations
111
A4.10.18
Any loss recoverable from a third party, where a decision is taken to waive recovery
because of a knock for knock agreement, should be noted as a stores loss.
A4.10.19
Where stores are to be written off, gifted, or transferred to other departments, they
should be valued in accordance with the FReM, unless circumstances justify exceptional
treatment, or other arrangements have been agreed3.
Fruitless payments
A4.10.20
A fruitless payment is a payment which cannot be avoided because the recipient is
entitled to it even though nothing of use to the department will be received in return. Some
examples are in box A4.10C.
A4.10.21
As fruitless payments will be legally due to the recipient, they are not regarded as
special payments. However, as due benefit has not been received in return, they should be
treated as losses, and brought to the attention of parliament in the same way as stores losses.
Box A4.10C:
examples of fruitless payments
A fruitless payment is a payment for which liability ought not to have been incurred, or where the
demand for the goods and services in question could have been cancelled in time to avoid liability, for
example:
•
forfeitures under contracts as a result of some error or negligence by the department;
•
payment for travel tickets or hotel accommodation wrongly booked or no longer needed, or for
goods wrongly ordered or accepted;
•
the cost of rectifying design faults caused by a lack of diligence or defective professional
practices; and
•
extra costs arising from failure to allow for foreseeable changes in circumstances.
Constructive losses
A4.10.22
A constructive loss is a similar form of payment to stores losses and fruitless payments,
but one where procurement action itself caused the loss. For example, stores or services might
be correctly ordered, delivered or provided, then paid for as correct; but later, perhaps because
of a change of policy, they might prove not to be needed or to be less useful than when the
order was placed.
A4.10.23
Constructive losses need not be noted in the Losses Statement in the annual accounts
unless they are significant.
Claims waived or abandoned
A4.10.24
Losses may arise if claims are waived or abandoned because, though properly made, it
is decided not to present or pursue them. Some examples are in box A4.10D.
A4.10.25
The following should not be treated as claims waived or abandoned.
•
any claims wrongly identified or presented, whether in error or otherwise. A claim
should not, however, be regarded as withdrawn where there is doubt as to
3 Stores held by the Ministry of Defence may be valued according to their estimated supply price.
112
whether it would succeed if pursued in a court of law, or if the liability of the
debtor has not or cannot be accurately assessed;
•
waivers or remission of tax. HMRC have special rules about remissions of tax.
Departments should consult the Treasury about treatment when a case arises; or
•
a claim for a refund of an overpayment which fails or is waived. This should be
regarded as a cash loss.
Box A4.10D:
examples of waived and abandoned claims
•
where it is decided to reduce the rate of interest on a loan, and therefore to waive the right to
receive the amount of the reduction
•
claims actually made and then reduced in negotiations or for policy reasons
•
claims which a department intended to make, but which could not be enforced, or were never
presented
•
failure to make claims or to pursue them to finality, e.g. owing to procedural delays allowing the
Limitations Acts (annex 4.11.11) to become applicable
•
claims arising from actual or believed contractual or other legal obligations which are not met
(whether or not pursued), e.g. under default or liquidated damages clauses of contracts
•
amounts by which claims are reduced by compositions in insolvency cases, or in out-of-court
settlements, other than reductions arising from corrections of facts
•
claims dropped on legal advice, or because the amounts of liabilities could not be determined
•
remission of interest on voted loans.
A4.10.26
Waivers should be noted in annual accounts in accordance with the FReM. In
addition:
•
a claim not presented should normally be noted at its original figure;
•
where more than one department is involved, each should note its records to the
extent of its interest, without attempting spurious accuracy.
There is no need to note annual accounts if claims between departments are waived or
abandoned. These are domestic matters.
113
114
Annex 4.11
A4.11 Overpayments
This annex discusses how , and how far, public sector organisations should seek to
recover overpaym ents – one case of special paym ents outside norm al parliam entary
process (section 4.7). In difficult cases it is im portant to act on legal advice.
A 4.11.1 Even good payment systems sometimes go wrong. Most organisations responsible for
making payments will sometimes discover that they have made overpayments in error.
A 4.11.2 In principle public sector organisations should always pursue recovery of
overpayments, irrespective of how they came to be made. In practice, however, there will be
both practical and legal limits to how cases should be handled. So each case should be dealt
with on its merits. Some overpayment scenarios are outlined in box A4.11A. Where recovery of
overpayments is not pursued the guidance in annex A4.10 should be followed.
Box A 4.11A : possible reasons for overpaym ent
Contractors and suppliers
Overpayments in business transactions should always be pursued, irrespective of cause. It is
acceptable to recover by abating future payments if this approach offers value for money and helps
preserve goodwill. If the contractor resists, the overpaying organisation should consider taking legal
action, taking account of the strength of the case, and of legal advice.
G rants and subsidies
Overpayments to persons or corporate bodies should be treated as business transactions and a full
refund sought. The overpaying organisation should ask recipients to acknowledge the amount of the
debt in writing.
Pay, allow ances, pensions
Overpayments to:
•
civil servants
•
members of the armed forces
•
employees of NDPBs
•
retired teachers and NHS employees
•
and the dependants of any of these
should be pursued, taking proper account of how far recipients have acted in good faith. Similar
cases should be treated consistently. After warning recipients, recovery through deduction from
future salary or pension is often convenient. Legal advice is often wise to make sure that proper
account has been taken of any valid defence against recovery recipients may have.
A 4.11.3 When deciding on appropriate action, taking legal advice, organisations should
consider:
•
the type of overpayment;
•
whether the recipient accepted the money in good or bad faith;
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A4.11 Overpayments
•
the cost-effectiveness of recovery action (either in house or using external
companies). Advice that a particular course of action appears to offer good value
may not be conclusive since it may not take account of the wider public interest;
•
any relevant personal circumstances of the payee, including defences against
recovery;
•
the length of time since the payment in question was made; and
•
the need to deal equitably with overpayments to a group of people in similar
circumstances.
A 4.11.4 It is good practice to consider routinely whether particular cases reveal concerns about
the soundness of the control systems and their operation. It is important to put failings right.
Payments made with parliamentary authority
A 4.11.5 Sometimes overpayments are made using specific legal powers but making mistakes
of fact or law. These are legally recoverable, subject to the provisions of the Limitation Acts and
other defences against recovery (see below). The presumption should always be that recovery
should be pursued, irrespective of the circumstances in which it arose.
Good faith
A 4.11.6 The decision on how far recovery of an overpayment should be pursued in a particular
case will be influenced by whether the recipient has acted in good or bad faith:
•
where recipients of overpayments have acted in good faith, eg genuinely believing
that the payment was right, they may be able to use this as a defence (though
good faith alone is not a sufficient defence);
•
where recipients of overpayments have acted in bad faith, recovery of the full
amount overpaid should always be sought.
A 4.11.7 Recipients may be inferred to have acted in bad faith if they have wilfully suppressed
material facts or otherwise failed to give timely, accurate and complete information affecting the
amount payable. Other cases, eg those involving recipients’ carelessness, may require
judgement. And some cases may involve such obvious error, eg where an amount stated is very
different from that paid, that no recipient could reasonably claim to have acted in good faith.
A 4.11.8 In forming a judgement about whether payments have been received in good faith,
due allowance should be made for:
•
the complexity of some entitlements, eg to pay or benefits;
•
how far the payment depended on changes in the recipient’s circumstances of
which he or she was obliged to tell the payer;
•
the extent to which generic information was readily available to help recipients
understand what was likely to be due.
Fraud
A 4.11.9 If a public sector organisation is satisfied that the circumstances of an overpayment
involved bad faith on the part of the recipient, it should automatically consider the possibility of
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A4.11 Overpayments
fraud in addition to recovery action. For example, the recipient may have dishonestly given false
information or knowingly failed to disclose information. If there is evidence of fraudulent intent,
prosecution or disciplinary action should be undertaken where appropriate and practicable. A
criminal conviction in such a case will not eliminate the public debt which had resulted from the
overpayment, and so recovery of the debt should also be pursued by any available means.
Cost-effectiveness
A 4.11.10 Public sector organisations should take decisions about their tactics in seeking
recovery in particular cases on the strength of cost benefit analysis of the options. Decisions not
to pursue recovery should be exceptional and taken only after careful appraisal of the relevant
facts, taking into account the legal position. The option of abating future payments to the
recipient should always be considered.
Defences against recovery
A 4.11.11 Defences which may be claimed against recovery include:
•
the length of time since the overpayment was made
•
change of position
•
estoppel
•
good consideration
•
hardship.
Lapse of time
A 4.11.12 There can be time limitations on recovery. In England and Wales, a recipient might
plead that a claim is time-barred under the provisions of the Limitation Acts. Proceedings to
recover overpayments must generally be instituted within six years (twelve years if the claim is
against the personal estate of a deceased person) of discovery of the mistake or the time when
the claimant could, with reasonable diligence, have discovered it.
A 4.11.13 When public sector organisations claim against a private sector organisation or
people who ignore or dispute the claim, the organisation should take legal advice about
proceeding with the claim in good time so that it does not become time barred.
A 4.11.14 If someone claims that they have overpaid a public sector organisation, they should
be told promptly if the claim is time barred. But if, on its merits, the recipient organisation
decides that there is a case for an ex gratia payment, it should obtain Treasury consent if the
amount involved is outside the organisation’s delegated powers. Similarly, there may be a case
for ex gratia payments to make good underpayments to government employees unless they
were dilatory in making their claims.
Change of position
A 4.11.15 The recipient of an overpayment may seek to rely on change of position if he or she
has in good faith reacted to the overpayment by relying on it to change their lifestyle. It might
then be inequitable to seek to recover the full amount of the overpayment. The paying
organisation’s reaction should depend on the facts of the case. The onus is on the recipient to
show that it would be unfair to repay the money. This defence is difficult to demonstrate.
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A4.11 Overpayments
Estoppel
A 4.11.16 A recipient who has changed his or her position may also be able to rely on the rule
of evidence estoppel if the paying organisation misled the recipient about his or her entitlement,
even if the overpayment was caused by a fault on the part of the recipient. However, a mistaken
payment will not normally of itself constitute a representation that the payee can keep it. There
must normally be some further indication of the recipient's supposed title other than the mere
fact of payment.
A 4.11.17 The paying organisation can be prevented from recovery even where it has made no
positive statement to the payee that the latter is entitled to the money received. If, following a
demand for repayment, the recipient can give reasons why repayment should not be made, then
silence from paying organisation would almost certainly entitle the recipient to conclude that
the reply was satisfactory and that he or she could keep the money.
A 4.11.18 It is essential for public sector organisations to seek legal advice where change of
position or estoppel is offered as defence against recovery.
Good consideration
A 4.11.19 Another possible defence against recovery is where someone makes a payment for
good consideration, i.e. where the recipient gives something in return for the payment. For
example, payment might be made to discharge a debt; or where the payment is part of a
compromise to deal with an honest claim. If such payments are later found to be more than
was strictly due, the extent to which the paying organisation was acting in good faith should be
taken into account.
Hardship
A 4.11.20 Public sector organisations may waive recovery of overpayments where it is
demonstrated that recovery would cause hardship. But hardship should not be confused with
inconvenience. Where the recipient has no entitlement, repayment does not in itself amount to
hardship, especially if the overpayment was discovered quickly. Acceptable pleas of hardship
should be supported by reasonable evidence that the recovery action proposed by the paying
organisation would be detrimental to the welfare of the debtor or the debtor's family. Hardship
is not necessarily limited to financial hardship; public sector organisations may waive recovery of
overpayments where recovery would be detrimental to the mental welfare of the debtor or the
debtor's family. Again, such hardship must be demonstrated by evidence.
Collective overpayments
A 4.11.21 If a group of people have all been overpaid as a result of the same mistake, the
recipients should be treated in the same way. However, that does not mean that recovery of all
such overpayments should be automatically written off. For example, it may be legitimate to
continue to effect recovery from those who have offered to repay, or some may not be subject
to the same level of hardship.
A 4.11.22 Public sector organisations should decide how best to handle collective
overpayments so that they do not inhibit the maximum recovery possible. If it is deemed
impractical to pursue recovery from some members of an equivalent group, there should be no
inhibition on pursuing others who may be able to pay. There is no obligation to inform the
group generally about what action is being taken against particular members since all have the
same legal obligation. Any differential treatment should be based on advice.
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A4.11 Overpayments
A 4.11.23 If a public sector organisation is minded to forgo recovery of the whole or any part
of a collective overpayment, it should consult the Treasury (or its sponsor department, as the
case may be) before telling the recipients of the overpayments. The Treasury will need to be
satisfied that a collective waiver is defensible in the public interest or as value for money. And
any such waivers should be exceptional.
119
120
A4.12 Annex 4.12
Gifts
This annex explains how departments should notify parliament of gifts, both given and received. It is
important to assure parliament that propriety has been respected through transparent reporting
A4.12.1
A gift is something voluntarily donated, with no preconditions and without the
expectation of any return. In this document, the term gift includes all transactions which are
economically indistinguishable from gifts: see box A4.12A.
A4.12.2
It is also important to be clear about transactions which do not score as gifts. For
example:
•
transfers of assets between government departments should generally be at full
current market value; assets transferred under a transfer of functions order to
implement a machinery of government change are generally made at no charge. In
neither case are such transfers regarded as gifts;
•
grants and grants-in-aid are not gifts as they are made under legislation, subject to
conditions, with some expectation that the government will receive value through
the furtherance of its policy objectives;
•
grants in kind that are part of a planned programme of HMG support for an
organisation or third country (for example, the provision of equipment in official
development assistance projects). Again, there is an expectation that the
government will receive value through the furtherance of its policy objectives in
precisely the same way as with financial support to a partner organisation or the
direct delivery of projects by government. Such grants in kind will normally be made
under the same legislation that supports other parts of the programme concerned
and the purchase of the equipment concerned will typically have been financed
through provision in the department’s Estimate.
Box A4.12A:
definition of gifts
Gifts include all transactions economically equivalent to free and unremunerated transfers from
departments to others, such as:
•
loan of an asset for its expected useful life
•
sale or lease of assets at below market value (the difference between the amount received and
the market value is the value of the gift)
•
donations by departments
•
transfers of land and buildings, or assignment of leases, to private sector bodies at less than
market price (the gift is valued at the difference between the price agreed and the market price).
Approval
A4.12.3
Treasury approval is needed for all gifts valued at more than £300,000, and any other
gifts not covered by a department's delegated authorities. Similarly, ALBs should consult their
121
sponsor departments about gifts, and the department concerned may need in turn to consult
the Treasury.
A4.12.4
As parliament does not provide for gifts when voting Estimates or passing specific
legislation, parliament should be notified of gifts worth more than £300,000. Ideally this should
be through Estimates. Alternatively, where time does not permit, a written ministerial statement
(WMS) and a departmental minute should be laid in parliament.
Reporting
A4.12.5
If the Estimates timetable permits, departments planning to make a gift worth more
than £300,000 should notify parliament in their Estimates (Main or Supplementary depending
on timing), providing details of the gift and its cost.
A4.12.6
Departments wishing to make a gift over £300,000, who have been unable to include it
in their Estimates, should notify parliament by laying a WMS and a departmental minute. This
should happen even if parliamentary authority will be sought in a subsequent Estimate for funds
to replace an existing asset to be given. Treasury approval must be obtained before the WMS
and departmental minute are laid.
A4.12.7
The WMS and minute must then be laid before the House of Commons, on the same
day, at least fourteen parliamentary sitting days before the department proposes to make the
gift. In cases of special urgency, it is permissible, exceptionally, for all or part of the fourteen day
notice period to fall during an adjournment or recess, or for a shorter notice period to be given.
In such cases, with Treasury approval, the reasons for urgency should be explained.
A4.12.8
The WMS and minute must contain the standard opening and closing paragraphs in
box A4.12B. These terms have the PAC’s endorsement and can be changed only with Treasury
approval.
Box A4.12B:
standard paragraphs for written ministerial statement and departmental minute
Opening paragraph:
It is the normal practice when a government department proposes to make a gift of a value exceeding
£300,000, for the department concerned to present to the House of Commons a minute giving
particulars of the gift and explaining the circumstances; and to refrain from making the gift until
fourteen parliamentary sitting days after the issue of the minute, except in cases of special urgency.
Closing paragraph:
The Treasury has approved the proposal in principle. If, during the period of fourteen parliamentary
sitting days beginning on the date on which this minute was laid before the House of Commons, a
Member signifies an objection by giving notice of a Parliamentary Question or a Motion relating to the
minute, or by otherwise raising the matter in the House, final approval of the gift wil be withheld
pending an examination of the objection.
A4.12.9
The WMS and minute should also set out briefly the nature of the gift, its value, the
circumstances in which it is being given, and the recipient. Where the gift is to be replaced,
information about the cost and nature of the replacement, when it is expected to be acquired,
and the Estimate to which the expenditure will be charged should be included. In the case of
non-voted expenditure, the account to which the replacement cost will be charged should be
quoted.
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Parliamentary objections
A4.12.10
Members of Parliament may object to gifts by letter, Parliamentary Question or
through an Early Day Motion. In such cases, departments may wish to advise their ministers to
take the initiative by making contact with the MP concerned. This may be particularly
appropriate if it is proposed to make the gift urgently or promptly on expiry of the waiting
period.
A4.12.11
Where an objection is raised, the gift should not normally be made until the objection
has been answered. In the case of an Early Day Motion, the MP should be given an opportunity
to make a direct personal representation to the Minister. The Treasury should be notified of the
outcome of any representations made by MPs.
Noting annual accounts
A4.12.12
Annual accounts should include a note on gifts made by departments if their total
value exceeds £300,000. Gifts with a value of more than £300,000 should be noted individually,
with a reference to the appropriate WMS and departmental minute. Exceptionally, where gifts
are made between government departments, the receiving department should notate its
accounts, not the donor.
Gifts received
A4.12.13
Departments should maintain a register detailing gifts they have received, their
estimated value and what happened to them (whether they were retained, disposed of, etc).
Gifts received need not be noted in accounts unless the Treasury or department concerned
considers there is a special need for them to be brought to parliament's attention.
A4.12.14
Donations, sponsorship or contributions, eg from developers should also be treated as
gifts.
A4.12.15
Guidance on gifts made to individual civil servants is in the Civil Service Management
Code1.
1 https://www.gov.uk/government/publications/civil-servants-terms-and-conditions
123
124
Annex 4.13
A4.13 Special payments
This annex explains how public sector organisations should approach current
transactions outside the usual planned range. It is often right, or essential, to
consult the Treasury beforehand. In som e cases, it is also im portant to notify
parliam ent.
A 4.13.1 In voting money or passing specific legislation, parliament does not and cannot
approve special payments outside the normal range of departmental activity. Such transactions
are therefore subject to greater control than other payments.
A 4.13.2 Departments should authorise special payments only after careful appraisal of the
facts and when satisfied that the best course has been identified. It is good practice to consider
routinely whether particular cases reveal concerns about the soundness of the control systems;
and whether they have been respected as expected. It is also important to take any necessary
steps to put failings right.
A 4.13.3 Arm’s length bodies should operate to similar standards as departments unless there
are good reasons to the contrary, eg overriding requirements of the statutory framework for
Companies Act companies. Departments should ensure that their oversight arrangements (see
chapter 7) enable them to be satisfied that their arm’s length bodies observe the standards.
Dealing with special payments
A 4.13.4 Departments should always consult the Treasury about special payments unless there
are specific agreed delegation arrangements in place. So a department should seek Treasury
approval, in advance, for any special payment for which it has no delegated authority, or which
exceeds its authority. Similarly, ALBs should consult their sponsor departments in comparable
circumstances. In turn, the department may need to consult the Treasury.
A 4.13.5 The special payments on which the Treasury may need to be consulted are
summarised in box A4.13A. The list is not exclusive. If a department is in doubt, it is usually
better to consult the Treasury.
A 4.13.6 In particular, it is important to consult the Treasury about any cases, irrespective of
delegations, which:
•
involve important questions of principle;
•
raise doubts about the effectiveness of existing systems;
•
contain lessons which might be of wider interest;
•
might create a precedent for other departments; or
•
arise because of obscure or ambiguous instructions issued centrally.
125
A4.13 Special payments
Box A 4.13A : special paym ents
•
extra-contractual paym ents: payments which, though not legally due under contract,
appear to place an obligation on a public sector organisation which the courts might uphold.
Typically these arise from the organisation’s action or inaction in relation to a contract.
Payments may be extra-contractual even where there is some doubt about the organisation’s
liability to pay, eg where the contract provides for arbitration but a settlement is reached
without it. (A payment made as a result of an arbitration award is contractual.)
•
extra-statutory and extra-regulatory paym ents are within the broad intention of the
statute or regulation, respectively, but go beyond a strict interpretation of its terms.
•
com pensation paym ents are made to provide redress for personal injuries (except for
payments under the Civil Service Injury Benefits Scheme), traffic accidents, damage to property
etc, suffered by civil servants or others. They include other payments to those in the public
service outside statutory schemes or outside contracts.
•
special severance paym ents are paid to employees, contractors and others outside of
normal statutory or contractual requirements when leaving employment in public service
whether they resign, are dismissed or reach an agreed termination of contract.
•
ex gratia paym ents go beyond statutory cover, legal liability, or administrative rules,
including:
-
payments made to meet hardship caused by official failure or delay
-
out of court settlements to avoid legal action on grounds of official inadequacy
-
payments to contractors outside a binding contract, eg on grounds of hardship.
A 4.13.7 The Treasury does not condemn all special payments out of hand. Each needs to be
justified properly in the public interest against the key public sector principles set out in
Chapter 1, box 1.1, with particular emphasis on value for money since there is no legal liability.
Any proposal to keep a special payment confidential must be justified especially carefully since
confidentiality could appear to mask underhand dealing. Also financial reporting requirements
and Freedom of Information legislation should be complied with. The Treasury’s bottom line is
usually to ask the department to establish that the responsible accounting officer(s) would feel
able to justify the proposed payment in parliament if challenged.
A 4.13.8 Departments should also consult the Treasury about proposals for special payments
above the relevant delegated limits. They should explain:
•
the nature and circumstances of the case;
•
the amount involved;
•
the legal advice, where appropriate;
•
the management procedures followed;
•
an assessment of the value for money of the case
•
any non-financial aspects;
•
whether the case in question could have wider impact.
Severance Payments
A 4.13.9 Special severance payments when staff leave public service employment should be
exceptional. They always require Treasury approval because they are usually novel, contentious
126
A4.13 Special payments
and potentially repercussive. So departments should always consult the Treasury in advance
when considering a special severance payment.
A 4.13.10 The Treasury adopts a sceptical approach to proposals for special severance
settlements, in particular:
•
precedents from other parts of the public sector may not be a reliable guide in any
given case;
•
legal advice that a particular severance payment appears to offer good value for the
employer may not be conclusive since such advice may not take account of the
wider public interest;
•
even if the cost of defeating an apparently frivolous or vexatious appeal will exceed
the likely cost of that particular settlement to the employer, it may still be desirable
to take the case to formal proceeding;
•
winning such cases demonstrates that the government does not reward failure and
should enhance the employer’s reputation for prudent use of public funds.
Severance payments will only be approved where they provide value for money for the
Exchequer as a whole, rather than simply for the body concerned.
A 4.13.11 Departments should not treat special severance as a soft option, eg to avoid
management action, disciplinary processes, unwelcome publicity or reputational damage. Box
A4.13B sets out the factors the Treasury needs to evaluate in dealing with special severance
cases.
A 4.13.12 It is important to ensure that Treasury approval is sought before any offers, whether
oral or in writing, are made. A proforma for seeking Treasury approval is available1
.
A 4.13.13 Departments and their ALBs are also required to seek ministerial approval (including
the approval of the Minister for the Cabinet Office) of confidentiality clauses in certain
circumstances. Cabinet Office guidance on the use and approval of such agreements is also
available2.
Box A 4.13B: factors to consider in special severance cases
Any case for special severance put to the treasury should explain:
•
the circumstances of the case
•
any scope for reference to a tribunal with its potential consequences, including the legal
assessment of the organisation’s chances of winning or losing the case and likely scale of any
award
•
the management procedures followed
•
the value for money offered by the possible settlement
•
any non-financial considerations, eg where it is desirable to end someone’s employment without
dismissal, perhaps because of restructuring
•
whether the case could have wider impact, eg for a group of potential tribunal cases
1
https://www.gov.uk/government/publications/managing-public-money
2
https://www.gov.uk/government/publications/civil-service-settlement-agreements-special-severance-payments-and-confidentiality-clauses
127
A4.13 Special payments
A 4.13.14 Particular care should be taken to:
•
avoid unnecessary delays which might lead to greater severance payments than
might otherwise be merited;
•
avoid offering the employee concerned consultancy work after severance unless
best value for money can be demonstrated and the proposal is in line with Cabinet
Office approvals and controls3;
•
ensure any undertakings about confidentiality leave severance transactions open to
adequate public scrutiny, including by the NAO and the PAC;
•
ensure special severance payments to senior staff are transparent and negotiated
avoiding conflicts of interest.
A 4.13.15 Organisations seeking retrospective Treasury approval for special severance payments
should not take it for granted that approval will be provided, since such payments usually
appear to reward failure and set a poor example for the public sector generally. Requests for
retrospective approval will be considered as if the request had been made at the proper time
and should contain the same level of detail as if the case had been brought to the Treasury in
advance.
Retention Payments
A 4.13.16 Retention payments, designed to encourage staff to delay their departures,
particularly where transformations of ALBs are being negotiated, are also classified as novel and
contentious. Such payments always require explicit Treasury approval, whether proposed in
individual cases or in groups. Treasury approval must be obtained before any commitment,
whether oral or in writing, is made.
A 4.13.17 Organisations considering proposals for retention payments should subject them to
strict value for money analysis. Sponsor departments should submit a business case to the
Treasury, supported by market evidence, together with an evaluation of the risks and costs of
alternative options. The Treasury will always be sceptical of whether they are necessary.
Reporting
A 4.13.18 As parliament does not provide for special payments when voting Estimates or
passing specific legislation, special payments should be brought to parliament’s attention,
usually through a note in the organisation’s account. Any special severance payments for senior
staff will in any case be itemised in annual accounts.
A 4.13.19 Notification is separate from accounting treatment, which will depend on the nature
of the special payment. Special payments should be noted in the accounts even if they may be
reduced by subsequent recoveries.
A 4.13.20 Special payments should be noted in annual accounts where the total value exceeds
£300,000. Individual payments of more than £300,000 should be noted separately.
3
https://www.gov.uk/government/publications/cabinet-office-controls
128
A4.13 Special payments
Reporting to Cabinet Office
A 4.13.21 Departments and their ALBs are required to report to the Minister for the Cabinet
Office on a quarterly basis any special severance payment made in connection with the
termination of employment. These returns will enable Cabinet Office to provide assurance on
whether the use of special severance payments across the Civil Service is both proportionate and
appropriate, including the use of any confidentiality clauses alongside such payments. A pro
forma is available4
A 4.13.22 Civil Service-wide data on special severance payments will be published annually by
the Cabinet Office.
4
https://www.gov.uk/government/publications/civil-service-settlement-agreements-special-severance-payments-and-confidentiality-clauses
129
130
Annex 4.14
A4.14 Remedy
Prom pt and efficient com plaint handling is an im portant w ay of ensuring custom ers
receive the service to w hich they are entitled and m ay save public sector
organisations tim e and m oney by preventing a com plaint escalating unnecessarily.
If their services have been found deficient, public sector organisations should
consider w hether to provide rem edies to people or firm s w ho com plain. This is
separate from adm inistering statutory rights or other legal obligations, eg to m ake
paym ents to com pensate. Rem edies m ay take several different form s and should be
proportionate and appropriate.
Dealing with complaints
A 4.14.1 Public sector organisations should operate clear accessible complaints procedures.
They are a valuable source of feedback which can help shed light on the quality of service
provided, and in particular how well it matches up to policy intentions. So all complaints should
be investigated. The Parliamentary and Health Service Ombudsman (PHSO) has published
Principles of good complaint handling1 to help public bodies when dealing with complaints.
A 4.14.2 Systems for dealing with complaints should operate promptly and consistently. Those
making complaints should be told how quickly their complaints can be processed. Where
groups of complaints raise common issues, the remedies offered should be fair, consistent and
proportionate.
A 4.14.3 Public sector organisations should seek to learn from their complaints. If an internal
or external review, or a PHSO investigation, shows there are systemic faults, defective systems or
procedures should be overhauled and corrected.
Remedies
A 4.14.4 As section 4.11 explains, when public sector organisations have caused injustice or
hardship because of maladministration or service failure, they should consider:
•
providing remedies so that, as far as reasonably possible, they restore the wronged
party to the position that they would be in had things been done correctly, and
•
whether policies and procedures need change, to prevent the failure reoccurring.
The remedies available
A 4.14.5 Remedies can take a variety of forms, including (alone or in combination):
•
an apology;
•
an explanation;
1
http://www.ombudsman.org.uk/improving-public-service/ombudsmansprinciples/principles-of-good-complaint-handling-full
131
A4.14 Remedy
•
correction of the error or other remedial action;
•
an undertaking to improve procedures or systems; or
•
financial payments, eg one off or as part of a structured settlement.
A 4.14.6 Financial remedies for individual cases are normally ex gratia payments. Where a
pattern develops, and a number of cases raising similar points need to be dealt with, it may
make sense to develop an extra statutory scheme (see annex 4.10). If any such scheme seems
likely to persist, the organisation concerned should consider whether to bring forward legislation
to set it on a statutory footing (see sections 2.5 and 2.6).
Designing remedies
A 4.14.7 The normal approach to complaints where no financial payment is called for is to offer
an apology and an explanation. This may be a sufficient and appropriate response in itself.
People complaining may also want reassurance that mistakes will not be repeated.
A 4.14.8 It may be more difficult to judge whether financial compensation is called for, and if
so how much, especially if there is no measurable financial detriment. Great care should be
taken in designing financial compensation schemes since they may set expensive precedents.
A 4.14.9 Where financial remedies are identified as the right approach to service failure, they
should be fair, reasonable and proportionate to the damage suffered by those complaining.
Financial remedies should not, however, allow recipients to gain a financial advantage compared
to what would have happened with no service failure.
A 4.14.10 Public sector organisations deciding on financial remedies should take into account
all the relevant factors. Some which are often worth considering are outlined in box A4.14A.
The list may not be exhaustive.
Box A 4.14A : factors to consider in deciding w hether financial com pensation is
appropriate
•
Whether a loss has been caused by failure to pay an entitlement, eg to a grant or benefit.
•
Whether someone has faced any additional costs as a result of the action or inaction of a public
sector organisation, eg because of delay.
•
Whether the process of making the complaint has imposed costs on the person complaining, eg
lost earnings or costs of pursuing the complaint.
•
The circumstances of the person complaining, eg whether the action or inaction of the public
sector organisation has caused knock on effects or hardship.
•
Whether the damage is likely to persist for some time.
•
Whether any financial remedy would be taxable when paid to the person complaining.
•
Any advice from the PHSO.
A 4.14.11 If a compensation payment includes an element because the person complaining has
had to wait for their award, it should be calculated as simple interest. The interest rate to be
applied should be appropriate to the circumstances and defensible against the facts. Some rates
worth considering are the rate HMRC pays on tax repayments and the rate used in court
settlements.
132
A4.14 Remedy
A 4.14.12 When a public sector organisation recognises that it needs a scheme for a set of
similar or connected claims after maladministration or service failure, it should ensure that the
arrangements chosen deal with all potential claimants equitably. It is important that such
schemes take into account the PHSO’s Principles of good administration2. They must be well
designed since costs can escalate if a problem turns out to be more extensive than initially
expected.
A 4.14.13 If those seeking compensation have suffered injustice or hardship in a way which is
likely to persist, it may not be appropriate to pay compensation as a lump sum. Instead it may
make sense to award a structured settlement with periodic (eg monthly or annual) payments.
Public sector organisations considering such settlements should seek both legal and actuarial
advice in drawing them up.
A 4.14.14 Essentially, designing a compensation scheme is no different from designing other
services. Good management, efficiency, effectiveness and value for money are key goals (see
Chapter 4). Some specific issues which may require special care for compensation schemes are
outlined in box A4.14B.
Box A 4.14B: Issues to consider in d esigning com p ensation schem es
•
Clarify the coverage of the scheme.
•
Set clear scheme rules, with supporting guidance, to implement the policy intention.
•
Make the remedies fair and proportionate, avoiding bias, discrimination or prejudice.
•
Ensure the scheme’s systems work, eg through pilot testing.
•
Design in sufficient flexibility to cope with the characteristics of the claimant population.
•
Check that the administration cost is not excessive – or simplify the scheme.
•
If the scheme sets a precedent, make sure that it is acceptable generally.
•
Inform parliament appropriately, eg through a written statement and/or in the estimates /
annual accounts.
•
Plan to evaluate the scheme at suitable point(s).
•
Provide for closure of the scheme, unless there is good reason not to.
Consulting the Treasury
A 4.14.15 When considering making individual remedy payments, departments need to consult
the Treasury (and sponsored bodies need to consult their sponsor departments) about cases
which:
•
fall outside their delegated authorities; or
•
raise novel or contentious issues; or
•
could set a potentially expensive precedent or cause repercussions for other public
sector organisations.
A 4.14.16 Public sector organisations developing schemes to pay remedies should consult the
Treasury before finalising them. Proposed schemes drawn up in response to a PHSO
recommendation also require Cabinet Office approval. Once a scheme is agreed, it is only
2
http://www.ombudsman.org.uk/improving-public-service/ombudsmansprinciples/principles-of-good-administration
133
A4.14 Remedy
necessary to consult the Treasury further about cases outside the agreed boundaries for the
scheme, or the delegated authority applying to it.
Reporting ex gratia payments
A 4.14.17 Departments should ensure that ex gratia payments have Estimate cover, and that
the ambit of the vote concerned is wide enough for the purpose. Ex gratia payments score as
special payments in departments' accounts. Departments and agencies should include summary
information on compensation payments arising from maladministration in their annual reports.
134
A4.15 Annex 4.15
Asset management
Each public sector organisation is expected to develop and operate an asset management strategy
underpinned by a reliable and up to date asset register. The board should review the strategy annually
as part of the corporate or business plan.
A4.15.1
Accounting officers of public sector organisations are responsible for managing their
assets. This aspect of financial management covers the acquisition, use, maintenance, and
disposal of assets for the benefit of the organisations and indeed for the Exchequer as whole.
A4.15.2
Each organisation needs to have a clear grasp of:
•
the content of its current assets base;
•
the assets it needs to deliver efficient, cost effective public services;
•
what this means for asset acquisition, use, maintenance, renewal, upgrade and
disposal;
•
whether any gains could be achieved by working with other public sector
organisations;
•
how use of assets fits within the corporate plan.
A4.15.3
Normally, these responsibilities will be dispersed in an organisation through a system of
delegations with appropriate reporting arrangements. Similarly, departments should ensure that
each of their sponsored organisations has equivalent arrangements.
Asset registers
A4.15.4
It is good practice for each organisation to draw up, and keep up to date, a register of
all the assets it owns and uses. This will usually be needed for preparation of its financial
accounts. It is also essential to undertake regular stock taking of the organisation’s current
assets base and thus for planning change.
A4.15.5
The assets on an organisation’s register should include both tangible and intangible
assets, covering both owned assets and assets under its legal control such as leased or private
finance assets. Box A.4.15A lists the main groups of assets but is not exhaustive. Each
organisation should decide on a meaningful valuation threshold in line with best practice.
A4.15.6
In drawing up the asset register, particular care should be taken with two sorts of asset:
•
attractive items, such as works of art and items similarly susceptible to theft. These
may be included even if they are below the valuation threshold, in line with
guidance provided by the Government Art Collection; and
•
investments in the form of debentures and shares in commercial companies. These
should be checked at least annually.
135
Box A4.15A:
main categories of public sector assets
tangible assets
intangible assets
•
wholly owned land and buildings
•
copyrights, including Crown copyright
•
leased fixed assets (including those
•
trademarks
acquired through private finance)
•
franchises
•
raw materials
•
patents and other intellectual property
•
stocks and stores
rights, including in house software
•
plant, machinery, equipment, tools
•
goodwill
•
furniture and fittings
•
data and information
•
assets under construction
•
knowledge and know-how
•
donated physical assets
•
software licences
•
heritage assets
•
public dividend capital
•
antiques and works of art
•
loans and deposits
•
economic infrastructure assets (including
•
investments including shares and
highways, railways, airports, utilities
debentures in companies
communication networks and power
generation and transmission)
Asset management strategies
A4.15.7
The asset management strategy of a public sector organisation should be integrated
into its corporate and annual business plans. It should thus be possible to help plan change in
asset use or deployment when necessary. Box A.4.15B suggests some key steps. The
organisation’s board should take stock of progress in delivering its asset management strategy
from time to time, and at least annually.
Box A4.15B:
steps for developing asset management plans
•
Review the asset register to assess its adequacy for the organisation’s objectives and functions.
•
Plan how retained assets will be used efficiently for the organisation’s core functions.
•
Plan asset acquisitions, e.g. to extend, modify or replace the existing asset base.
•
Identify disposals, and plan to use the proceeds. Once decided upon, disposals should be as
swift as the market will allow with reasonable value for money). Treasury approval is required for
spending or retaining receipts.
•
Plan any loans of assets, with charges and conditions for their return, liability, damage.
•
Consider whether any retained assets have potential to generate revenue through commercial
services.
136
A4.15.8
Assets should be managed like other parts of organisation’s business, with up to date
and reliable information systems to provide feedback on performance, efficiency and value for
money. The organisation is expected to:
•
view value for money from the asset from the perspective of the whole Exchequer,
taking account of opportunities to work with other public sector organisations to
minimise the government’s overall required asset base;
•
manage the assets in a way which aims to optimise cost sustainability through their
effective lives;
•
use commercial terms for the delivery and support of assets;
•
incorporate adequate flexibility to cope with the organisation’s future change
programme.
Efficiency improvements
A4.15.9
Efficiency in the use of workspace may make it possible for a public sector organisation
to occupy less space. It is good practice to dispose of surplus property, or to share
accommodation on the civil estate with other public sector organisations where this is
practicable. It may be necessary to consider a budget transfer between organisations, with
Treasury consent, to help meet the initial relocation costs.
A4.15.10
Prior to marketing any land or building asset, public sector organisations should also
make use of the following:
•
“Disposal of Surplus Public Sector Land and Buildings – Protocols for Land holding
Departments”1 which describes the procedures to be followed to dispose of land
with development potential;
•
The Cabinet Office’s National Property Controls which detail the rules on lease
extensions, lease renewals, acquisitions, disposals as well as required space
standards associated with major refurbishments of buildings;
•
The Register of Surplus Land, part of
ePIMS (electronic Property Management
Information Mapping Service), a mandatory central database recording information
on the civil estate. The data base does not cover leasehold property with less than
99 years outstanding;
•
the Civil Estate Occupancy Agreement governing relationships among Crown bodies
sharing accommodation and the
Civil Estate Coordination Protocol which is
designed to improve the planning, acquisition, management, rationalisation and
disposal of property and other workspace on the civil estate;
•
latest guidance and advice available from the Government Property Unit.
1 https://www.gov.uk/government/publications/disposal-of-surplus-public-sector-land-and-buildings-protocol-for-land-holding-departments
137
Asset Sales
A4.15.11
When undertaking an asset sale, departments should follow the Asset Sales Disclosure
Guidance.2 The guidance requires government departments to disclose the impacts of an asset
sale on Public Sector Net Borrowing (PSNB), Public Sector Net Debt (PSND), Public Sector Net
Financial Liabilities (PSNFL) and Public Sector Net Liabilities (PSNL), as well as disclosing the
proceeds and whether the sale was above, within or below the retention value range.
Departments should also include a rationale for the sale, as well as justification for its format
and timing, and include these alongside the impacts in a Written Ministerial Statement laid in
Parliament after the sale.
Transfer of property
A4.15.12
Public sector organisations may transfer property among themselves without placing
the asset on the open market, provided they do so at market prices and in appropriate
circumstances. They should follow the guidelines in box A4.15C.
Box A4.15C:
protocol for transfers of assets
•
Consult ePIMS to see if properties on the civil estate can be used.
•
Value assets at market prices using Royal Institute Chartered Surveyors’ Red Book
(www.rics.org).
•
The original and prospective owners should work collaboratively to agree a price. It is good
practice to commission a single independent valuation to settle the price to be paid.
•
The organisations should take legal advice, especially where sponsored organisations are involved
as these may have specific legal requirements.
•
There is no need for full investigation of legal title since full transfer is rarely necessary because of
the indivisibility of the Crown.
•
Consult the Government Property Unit of the Cabinet Office, who may be able to help with
coordination.
•
The terms of transfer should not normally involve neither clawback (rights to share disposal
proceeds) or overage (rights to share future profits on disposal) though see A4.15.13 below.
A4.15.13
Sometimes transfers of assets result from machinery of government changes. The
relevant legislation (eg a transfer of functions order) should prescribe the terms of any such
transfers.
A4.15.14
In certain limited circumstances overage provisions can be considered. The
circumstances where overage is acceptable are:
•
where the property is sold to a private developer for housing development;
•
there is a realistic prospect that selling will improve the outcome for housing policy,
e.g. by creating an aggregated composite site;
•
the accounting officers of the relevant public sector organisations are convinced
that, in this transaction, overage offers value for money for the Exchequer as a
whole;
•
the Treasury agrees (these transaction are always novel and contentious).
2 https://www.gov.uk/government/publications/asset-sale-disclosures-guidance-for-government
138
A4.15.15
In addition, the overage provisions may be agreed by a central government purchaser
of property where it is a condition of the sale of that property by a local government or devolved
administration body. In all cases the purchase must represent value for money for the Exchequer
as a whole and Treasury consent should be sought.
Disposals of property and land assets
A4.15.16
Public sector organisations should take professional advice when disposing of land
and property assets. Some key guidelines are in box A4.15D.
Box A4.15D:
protocol for disposal of land, property and other assets
•
Value assets at market prices using Royal Institute of Chartered Surveyors’ Red Book
(www.rics.org).
•
Dispose of surplus land property within three years.
•
Dispose of surplus residential property within six months.
•
Sell plant, machinery, office equipment, furniture and consumable stores by public auction as
seen; or by open tender. Obtain payment before releasing the goods.
•
If an asset is sold or leased at a loss, the proceeds forgone (compared to market value) should be
treated as a gift, and the routine in annex 4.12 should be followed.
A4.15.17
Sometimes private finance projects involve disposals. Each such case should be
evaluated as part of the private finance project, with due attention to the need to secure good
value for money. Further guidance is an annex 7.4.
A4.15.18
Public sector organisations which make grants to third parties for the acquisition of
assets should normally include a clawback condition under which they can recoup the proceeds
if the recipient of the grant later sells the asset. There is some scope for flexibility in this
discipline: see annex 5.2.
A4.15.19
Disposals to charities require particular care. Their trust deeds sometimes place
restrictions on how they may use their assets. It is good practice to consider the possible
disposal of assets by such recipients before making gifts to them.
Economic infrastructure assets
A4.15.20
Managing economic infrastructure affects the quality of delivery of services. It is also
central to achievement of the national infrastructure goals detailed in the National Infrastructure
Plan. These factors need to be incorporated into the business plans and objectives of public
sector organisations which hold, use and manage such assets.
A4.15.21
Good asset management of economic infrastructure thus calls for the responsible
organisations to coordinate their own and their stakeholders’ objectives. Sometimes securing
value for money for the taxpayer means compromise between cost, risks, opportunities and
performance. Finding the right solution can affect organisations’ long-term plans, their
prioritisation of resources and work to achieve realism in stakeholder expectations, as set out in
the National Infrastructure Plan.
139
Central asset registers
A4.15.22
From time to time government gathers information in order to publish a national
assets register. Central government organisations and NHS bodies should supply the information
on their assets when requested.
A4.15.23
Under Crown copyright policy, certain public sector organisations are required to
supply details for the official bibliographic database. See annex 6.2 for further details.
Digest of guidance
•
Office of Government Property (Cabinet Office) -
https://www.gov.uk/government/policy-teams/government-property-unit-ogp
•
Government’s Estate Strategy: delivering a modern estate –
https://www.gov.uk/government/publications/government-estate-strategy-2018
•
Common Minimum Standards for
Construct
ionhttps://www.gov.uk/government/publications/common-minimum-
standards-for-construction
•
recording property details on the government’s ePIMS (electronic Property
Information System)
https://www.epims.ogc.gov.uk/ProgrammeHub/public/DAO%20Letter%20Mandatin
g%20e-PIMS.pdf?id=258687de-b5ce-4d28-9430-1e259c56897b
•
Property disposal -
https://www.gov.uk/government/publications/guide-for-the-
disposal-of-surplus-government-land
•
Crichel Down rules – offering land and property acquired by the public sector back
for former owners -
https://www.gov.uk/government/publications/compulsory-
purchase-process-and-the-crichel-down-rules-guidance#historyC
•
Disposal of Heritage Asset
s https://historicengland.org.uk/images-
books/publications/disposal-heritage-assets/guidance-disposals-final-jun-10/
140
A5.1
Annex 5.1
Grants
This annex sets out how government departments should arrange and control grants, including to
arm’s length bodies such as NDPBs.
A5.1.1
Central government departments normally offer two kinds of financial support to third
parties, using statutory powers:
•
grants: made for specific purposes, under statute, and satisfying specific conditions,
eg about project terms, or with other detailed control;
•
grants in aid: providing more general support, usually for an NDPB, with fewer
specific, but more general controls on the body, and less oversight by the funder.
A5.1.2
Grants should not be confused with contracts. A public sector organisation funds by
grant as a matter of policy, not in return for services provided under contract.
Payment
A5.1.3
Grants should be paid on evidence of need or qualification, depending on the terms of
the grant scheme. For example:
•
the recipient may need to submit a claim with evidence of eligibility;
•
the recipient may need to show that it meets the conditions of the scheme, eg a
farmer may need to disclose details of his or her business;
•
there may be a timing condition;
•
small third sector organisations may need to demonstrate a clear operational
requirement for project funding to be made before grant is paid.
A5.1.4
Grants in aid should also match the recipient’s need. Significant sums should be phased
through the year in instalments designed to echo the recipient’s expenditure pattern. In this way
the recipient organisation need not carry significant cash balances, which would be an
inefficient use of public money.
Control
A5.1.5
Payment of both grants and grants in aid normally requires specific empowering
legislation as well as cover in Estimates. There is scope for temporary ex gratia grant schemes to
be financed on the authority of the Appropriation Act alone provided that the scheme meets the
standard conditions (see section 2.5).
A5.1.6
The accounting officer of the funding organisation is responsible for ensuring that grant
recipients are eligible and use the grant in the way envisaged in the founding legislation. For
grants in aid, it is usual to arrange this by setting out terms and conditions in a framework
document sent to recipients to explain their responsibilities. Such framework documents should
strike an appropriate balance among:
141
•
ensuring prudent management of grant in aid funds;
•
achieving value for money;
•
assuring funders that grants are used as envisaged; while
•
allowing recipients reasonable freedom to take their own decisions.
However, care needs to be taken as general and wide ranging conditions attached to grant in
aid can transfer control of a body to a funder for public sector classification purposes.
A5.1.7
Accounting Officers should ensure that all grants issued comply with the Cabinet Office’s
Grant Standards. 1
A5.1.8
Departments should understand enough about the other sources of a grant recipient’s
income to be satisfied that the same need is not funded twice. It is usually essential to segregate
inflows from different recipients since they are usually intended for different purposes.
A5.1.9
Departments which provide grants of either kind to an arm’s length body should
document how the recipient is expected to handle the funds. See annex 7.2 for more.
A5.1.10
Departments should ensure that they have adequate assurance arrangements in place
and that the Comptroller and Auditor General has adequate access rights to grant recipients.
A5.1.11
A department asked by another part of government to pay a grant to an external
organisation, such as a charity, from its own resources should ensure that its own accounting
officer gives due consideration to the proposal before funding is committed.
Protecting the Exchequer
A5.1.12
If public sector organisations provide grants to private sector organisations to acquire
or develop assets, suitable and proportionate steps should be taken to safeguard both their
financial interests and those of the Exchequer. Donors should consider setting grant conditions
designed to ensure that the Exchequer’s interest is not overlooked if the asset is not used as
expected (see annex 5.2).
Endowments
A5.1.13
Grants and grants in aid are normally paid to meet the needs of the recipients.
Exceptionally, there may be a case for funding by way of endowment or dowry, ie a modest
one-off grant to enable the recipient to set up a fund from which to draw down over several
years. The recipient should then be able to make a clean break with the need for support.
A5.1.14
Departments contemplating such funding arrangements should consult the relevant
Treasury spending team (and in turn arm’s length bodies should consult their sponsor
departments) as this form of funding is always novel and contentious. The Treasury will need to
consider the value for money case for this form of funding, including:
•
the opportunity cost of locking public funds into a particular endowment, using
investment appraisal techniques;
1 https://www.gov.uk/government/publications/grants-standards
142
•
the value of the particular programme or project against others. The Treasury will
need to be satisfied that such funding would not protect any low-value projects or
programmes from proper expenditure scrutiny;
•
the sustainability of the funded body and whether such funding will remove future
reliance on public funding;
•
whether there are clear objectives, outputs and outcomes of the funding; and
•
the risk of further call on public funds.
A5.1.15
Any such endowment should:
•
reflect genuine need for capital funding that could not be raised through other
methods;
•
be made only to recipients with the competence to manage the endowment over
time; and
•
avoid skewing public funding away from other projects that have genuine cash
needs.
A5.1.16
The terms of an endowment should:
•
be clear that the funded body should not subsequently approach the donor for
annual funding;
•
maintain clear boundaries between the funder and recipient.
A5.1.17
Endowments should never be used as a way of bringing expenditure forward to avoid
an underspend. Nor is it acceptable to make a string of endowment payments to a single
recipient instead of taking specific provision in legislation to pay grants.
A5.1.18
Endowments are intended for situations where a clear financial break will be
advantageous to both recipient and donor. Normally the recipient will be a civil society body or
equivalent status.
143
144
Annex 5.2
Protecting the Exchequer
A5.2
interest (clawback)
This annex discusses how public sector organisations w hich provide grants to the
private sector and others should protect their investm ents w here grants are used to
buy or im prove assets.
Clawback
A 5.2.1 Public sector organisations providing funds to others to acquire or develop assets
should take steps to make sure that public sector funds are used for the intended purposes for
which the grant is made. It is usual to consider setting conditions on such grants, taking into
account the value of the grant, the use of the asset to be funded and its future value.
A 5.2.2 A standard grant condition is clawback. This is achieved by setting a condition on the
grant that gives the funding body a charge over the asset so that, if the recipient proposes to
sell or change the use of the asset acquired with the grant, it must:
•
consult the funder;
•
return the grant to the funder; or
•
yield the proceeds of sale (or a specified proportion) to the funder.
A 5.2.3 However, a charge over the asset is not always essential. Some ground rules are
suggested in box A5.2A.
Box A 5.2A : w hen to consider claw back
claw back desirable
•
tangible or tangible or intangible assets, including intellectual property rights, crown copyright,
patents, designs and database rights, financed directly, whether wholly or partly by grants or
grants in aid;
•
tangible or intangible assets developed by the funded body itself, financed indirectly by a grant
for a related purpose or by grant in aid
claw back not alw ays necessary
•
procurement of goods and services, where any liability is adequately discharged once the goods
and services have been provided
•
where a grant has been provided for research and not specifically for the creation of physical
asset, the successful conclusion of the research might be adequate return
A 5.2.4 Because funders, recipients and circumstances can vary so much, there is no single
model for clawback. Bespoke terms are often desirable. They should allow as much flexibility as
seems sensible. The aim should be to help recipients develop and provide services over the
longer term while securing value for public funds. Drawing on the ideas in box 7.2, funders
should always settle the terms of each grant with its recipient at the start of the relationship,
consistent with its objectives.
145
A5.2 Protecting the Exchequer interest (clawback)
Designing clawback conditions
A 5.2.5 The design of clawback conditions for a grant should take account of its circumstances,
the underlying policy objective(s) and the funder’s approach to risk. A checklist of some
common factors to consider is in box A5.2B. Using this tailored approach can mean different
organisations take very different approaches to the same risks.
Box A 5.2B: factors to consider in designing claw back term s
•
the nature and purpose of the grant
•
how the asset will help secure the policy objectives behind the grant
•
the expected life of the asset
•
the extent to which the recipient is financed out of public funds
•
how the asset will be used by the recipient, eg scope for appreciation or generating profit
•
how long the funder should retain an interest in the asset
•
whether the asset may be sold, with any restrictions on disposal, eg as to price or purchaser
•
whether there is sense in reassessing after a certain period or on a given trigger
•
whether the terms of clawback should vary according to a factor such as the asset value (in
which case the terms may need to provide for periodic valuations)
•
when the policy objectives should be delivered
•
the funder’s legal powers and the recipient’s legal position (eg as a company or charity)
•
any other relevant legal factors, eg EU rules on state aids
A 5.2.6 In setting terms and conditions for grants, funders should consider what could happen
if things do not proceed as intended, notably what should happen if:
•
the recipient does not behave as expected; or
•
external conditions are very different to plans; or
•
the recipient goes into liquidation (eg should the funder take priority over
unsecured creditors).
Duration of charge
A 5.2.7 It can make sense to relate the funder’s right to clawback to the policy objectives of
making the grant rather than allowing it to persist indefinitely unchanged. Some policy options
are outlined in box A5.2C. If the clawback is linked to the value of an asset which is likely to
appreciate, there is a risk that the recipient may face a disincentive to participate, so care and
sensitivity may be needed.
A 5.2.8 However, it can also make sense to moderate grants conditions by using terms such as:
•
a break clause allowing the funder and recipient to consider whether the objectives
of the funding have been achieved, triggering the end or reduction of the funder’s
interest in the asset;
•
a review clause allowing scope to retain the charge and review the clawback period
if the project has not met the agreed objectives;
146
A5.2 Protecting the Exchequer interest (clawback)
•
releasing the funder’s interest in the asset (and so permitting its disposal or use as
collateral) at the end of the agreed charge or clawback period.
Box A 5.2C : options for claw back duration or assets as collateral
•
keying it to the objectives of the grant
•
relating it to the period over which the intended benefits are to be delivered
•
settling clawback rights on a declining scale, eg falling to zero by the end of an agreed period,
or the
asset’s useful life, or by when the policy objectives are deemed delivered
•
allowing the recipient to use as collateral the difference between the market value of the asset
and the original grant
A 5.2.9 It is common to prohibit recipients from using the assets they acquire or improve using
grants as collateral in borrowing transactions. This is because the public sector funder might be
forced to take up the recipient’s legal liability to service debt should it fail. However, if a funder
agrees that a recipient may use assets acquired or developed with grants as collateral, it should
consider carefully what conditions it should apply. Some freedom of this kind may help the
recipient make the transition to viability or independence. For example, a funder might allow a
recipient to retain income generated by using spare capacity in the funded asset.
A 5.2.10 But normally it is important for the funder to retain some control over any use of the
funded asset outside the grant conditions. Typically the funder will require the recipient to
obtain the funder’s consent before raising funds on any part of a funded asset so long as the
clawback period continues. Any further conditions should be proportionate, striking a proper
balance between encouraging the recipient to be self-supporting and allowing the recipient to
use public funds for its own purpose.
Enforcing a claim on a funded asset
A 5.2.11 Where appropriate, funders should secure a formal legal charge on funded assets.
This may be particularly important for high risk projects or to prevent the funder becoming
exposed to assuming the recipient’s debts. It is usual to take a registered charge on land under
the Land Registration Act 2002 and its Rules. If the recipient is a Companies Act company, it
may make sense to secure a registered charge on the company’s book debts.
A 5.2.12 The form and intended duration of any charge should be recorded in the founding
documents charting the relationship between the funder and recipient. Both parties will need
legal advice, eg covering the statutory background, any relevant EU rules (eg on state aids) and
on how the charge would be enforceable. Both parties should also keep track of their
outstanding charges. It is good practice to register a land charge, so that it will automatically be
taken into account during any sale process.
A 5.2.13 Sometimes a funder may decide not to enforce clawback when a funded asset is sold,
even though the agreed clawback period is still in force. Funders should take any such decision
consciously on its merits, not letting it go by default. Reasons why a funder might take this
approach include:
•
the objectives of the grant may have been achieved;
•
the recipient may propose to use the funded asset in an acceptable way different
from the original purpose;
147
A5.2 Protecting the Exchequer interest (clawback)
•
the recipient may intend to finance an alternative asset or project within the
objectives of the grant scheme out of the proceeds of the sale;
•
the funder might agree to abate future grants to the recipient instead of taking the
proceeds of sale.
A 5.2.14 If a department decides to waive a clawback condition, it should consider whether it
needs to report that waiver as a gift. If so, it should follow the gift reporting requirements in
annex 4.12.
A 5.2.15 If it is proposed to sell a grant recipient with a live charge, the funder should take
legal advice on whether it can enforce the charge on the proceeds of the sale. The funder
should consider the legal position of the proposed purchaser of the grant recipient, and in
particular whether its objectives (eg charitable or as a social enterprise) are in line with the
original grant conditions. If the funder becomes aware that such a sale is possible at the time
the grant is awarded, it would usually be appropriate to require the recipient to obtain its
consent before proceeding. And any request for endorsement of a sale should be evaluated
objectively.
148
Annex 5.3
A5.3
Treatment of income and
receipts
The rules on use of income and receipts are designed to control the circumstances in which they can
finance use of public resources.
A5.3.1
Parliament controls departments’ use of income and receipts, just as it controls the
raising of tax, since both may finance use of public resources. Departments should ensure that
all income and associated cash is recorded in full and collected promptly.
A5.3.2
Unless otherwise authorised, cash receipts must be paid into the Consolidated Fund.
Sometimes specific legislation requires this for certain income streams; for many others the Civil
List Act 1952 classifies them as hereditary revenues to be paid into the Consolidated Fund.
A5.3.3
Hereditary revenue is:
•
virtually all non-statutory receipts;
•
cash receipts received by virtue of specific statutory authority; and
•
receipts where statute does not say otherwise.
Unless it can be established that a particular type of receipt or surplus cash is not hereditary
revenue, the default position is that it is, and that the Civil List Act 1952 requires it to be paid
into the Consolidated Fund.
A5.3.4
The main categories of income and associated receipts are shown in Box A.5.3A.
Box A5.3A:
the different kinds of central government income
•
the proceeds of taxation: paid into the Consolidated Fund
•
repayment of principal and interest on NLF loans: paid direct to the NLF
•
sums due under bespoke legislation: paid as specified, eg the proceeds of national insurance
contributions paid into the National Insurance Fund
•
receipts of trading funds: treated as specified in the founding legislation
•
sums due to departments financed through Estimates:
- either paid into the Consolidated Fund as CFERs
- or applied to support spending in the Estimate if the Treasury agrees.
A5.3.5
Specific legislation, with Treasury approval, is normally required to authorise use of
income directly to meet resource consumption ie to offset current or capital expenditure. In
effect this process means that the department seeks less finance through Estimates because part
of the cost of the service is met from income. Parliament has an interest because otherwise
resource consumption would require specific approval through the Estimates process.
A5.3.6
Following the Clear Line of Sight reforms, there is no longer a specific control over the
amount of income that can be retained by departments and used to offset spending. However
controls over income remain.
149
A5.3.7
In order for a department to retain income to offset against spending within the
Estimate it must be within the budget boundary (i.e. classed by the Treasury as negative DEL or
departmental AME) and be properly described in the Estimate. There must also be a direct
relationship between the income and the spending and departments may not use additional
income on one part of the Estimate to offset shortfalls of income (or overspends) in another part
of the Estimates without Treasury approval. Such approval will only be given where the
additional income has an appropriate relationship to the expenditure it is being used to cover.
Authority to retain and use income
A5.3.8
The Treasury has powers to direct that income included in a departmental Estimate and
approved by Parliament may be retained and used by the department. This Treasury direction is
included within the introductory text to the Main Supply Estimates publication1. The direction
provides that the income in the relevant Estimate may be applied against resources (current or
capital) within that Estimate. Without such authority the cash must be surrendered to the
Consolidated Fund as extra receipts (CFERs).
A5.3.9
Sometimes departments have excess income, ie income is anticipated to be higher than
the expenditure stream it matches, or more income than was anticipated in the Estimate. When
income is anticipated to be higher than the expenditure stream it matches departments may
present an Estimate with a negative budgetary limit at the start of the financial year, although
this is relatively rare. When more income is received than was anticipated in the Estimate,
departments are allowed to treat the income as negative DEL as long as it is no more than 10%
above the level envisaged for that year as part of the Spending Review settlement2. Any income
in excess of this will normally be treated as non-budget and will need to be surrendered as a
CFER.
1 (see
Estimates Manual https://www.gov.uk/government/publications/supply-estimates-guidance-manual
2 https://www.gov.uk/government/collections/consolidated-budgeting-guidance
150
A5.4
Annex 5.4
Contingent Liabilities
Parliament expects advance notice of any commitments to future use of public funds for which there
is no active request for resources through Estimates. This annex discusses how a number of different
kinds of liability should be dealt with.
A5.4.1
As with expenditure, ministers may enter into liabilities – in effect, commitments to
future expenditure – without explicit parliamentary authority. But parliament expects to be
notified of the existence of these commitments when they are undertaken. Should they
eventually give rise to the need for public expenditure, they will require the authority of an
Appropriation Act and frequently also specific enabling legislation.
A5.4.2
Because the Crown is indivisible, ministers (and their departments) cannot give
guarantees to each other. They can, however, enter into commitments to conditional support
with the same effect – though this is rare.
A5.4.3
Some liabilities are uncertain. These contingent liabilities recognise that future
expenditure may arise if certain conditions are met or certain events happen. That is, the risk of a
call on Exchequer funds in the future will depend on whether or not certain circumstances arise.
For example, payment under a government guaranteed loan would only be required if the body
covered by the guarantee was unable to repay the loan.
A5.4.4
Arm’s length bodies (ALBs) sponsored by departments do not generally have powers to
take on liabilities, because these would in effect bind their sponsoring departments. So the
documentation governing the relationship between a department and an ALB (see chapter 7
and annex 7.4) should require the ALB to gain the sponsor department’s agreement to any
commitment, including borrowing, into which it proposes to enter. Departments should ensure
that ALBs have systems to appraise and manage liabilities to the standards in this annex, so that
they can report to parliament any liabilities assumed by ALBs in the same way as they would
their own.
Need for statutory powers
A5.4.5
It is good practice to enter into liabilities on the strength of specific statutory powers – as
with items of expenditure. This is essential if a regular scheme of loan guarantees or other
support is intended. Departments should consult the Treasury about proposals for such
legislation, which should include arrangements for reporting new liabilities to parliament. It is
usual to put a statement to both Houses when statutory liabilities are undertaken. Provision in
budgets and Estimates should be scored as the department’s best assessment of the need to pay
out in support of the liabilities.
A5.4.6
In the nature of giving liabilities, many will arise with little notice. Departments should
report these to parliament at the earliest opportunity. There is a standard procedure for doing
this: see paragraphs A.5.4.22 to A.5.4.36 of this annex.
A5.4.7
If a liability taken on in this way seems likely to persist, the department concerned should
consider backing it with statutory cover. This is because any expenditure which arises because of
it is subject to the same parliamentary expectations about statutory powers as any other
151
expenditure (see section 2.1). If a contingent liability could give rise to a loan, the organisation
should ensure that there is reasonable likelihood of the loan being serviced and repaid (see
section 5.6).
A5.4.8
There is an exception to the need for statutory powers for accepting liabilities.
Commitments taken on in the normal course of business do not need specific cover, just as
routine administrative expenditure does not (see para 2.3.2). The standard conditions for
treating liabilities as undertaken in the normal course of business are set out in box A.5.4A, with
some common examples. What may be the normal course of business for one department may
not be the normal course of business for another.
Box A5.4A:
Liabilities arising in the normal course of business
In order to treat a liability as arising in the normal course of business, the organisation concerned
should be able to show that:
•
the activity is an unavoidable part of its business and/or
•
parliament could reasonably be assumed to have accepted that such liabilities can rest on
the sole authority of the Supply and Appropriation Act, based on the activities it has
previously authorised.
Examples of common liabilities arising in the normal course of business include:
•
liabilities arising in the course of the purchase or supply of goods and services in the
discharge of the department's business
•
contractual commitments to make payments in future years arising under long-term
contracts, eg major building works
•
commitments to pay grants in future years under a statutory grant scheme
•
contingent liabilities resulting from non-insurance (see annex 4.4).
A5.4.9
If procurement in the normal course of business gives rise to proposals for liabilities
outside the normal range (eg a cap on the contractor’s liabilities), the public sector organisation
should consider renegotiating. The acid test is whether two private sector bodies would use the
same terms. In cases of doubt, the Treasury should be consulted.
A5.4.10
PFI contracts are a special case of procurement and so can cause departments to take
on liabilities. There is no need to notify use of standard PFI terms to parliament, but any use of
non-standard terms should be reported like any other.
A5.4.11
There are additional conditions for taking on non-standard conditions, namely:
•
the need must be urgent and unlikely to be repeated; and
•
it would be in the national interest to act even though there is no statutory
authority.
Taking on liabilities
A5.4.12
Before accepting any liability, the organisation should appraise the proposal using the
Green Book1, to secure value for money, just like a proposal to undertake any other project. The
1 https://www.gov.uk/government/publications/the-green-book-appraisal-and-evaluation-in-central-governent
152
liability should be designed to restrict exposure to the minimum, eg by imposing conditions
about duration. Other possible features to limit liabilities might include:
•
a commitment fee from the beneficiary (though this does not remove the need for
appraisal of the proposition) and/or
•
arrangements to lift the liability if the beneficiary no longer needs it.
A5.4.13
Similarly, it is not good practice to take on liabilities to contractors which would
indemnify them in the event of their own negligence or that of a sub-contractor. But it may be
reasonable to give an indemnity to a private sector body against damage to property it owns
arising out of government use, eg if a public sector organisation uses a private sector body’s
premises or equipment. Any such indemnity should of course exclude damage caused by the
body’s own staff or contractors.
A5.4.14
Subject to the statutory powers of the public sector organisation and its delegated
authorities, it is important for an organisation contemplating assuming a new liability to consult
the Treasury (or the sponsor department, as the case may be) before assuming it. Departments’
delegated authorities for incurring liabilities should include the liabilities of any sponsored
bodies.
A5.4.15
HM Treasury approval must be sought for all contingent liabilities that are novel,
contentious or repercussive. In addition, a completed
Contingent Liability approval framework
checklist2 must be submitted to HM Treasury before entering into a contingent liability with a
maximum exposure of £3m or more. This process is also required for remote contingent
liabilities.
Types of liability
A5.4.16
Public sector organisations may take on liabilities by:
•
issuing specific guarantees, usually of loans;
•
writing a letter or statement of comfort; or
•
providing indemnities.
A5.4.17
It is important to remember that any of these instruments issued by a minister may be
legally enforceable.
A5.4.18
Guarantees should normally arise using statutory powers. They typically involve
guarantees against non-payment of debts to third parties.
A5.4.19
Letters of comfort, however vague, give rise to moral and sometimes legal obligations.
They should therefore be treated in the same way as any other proposal for a liability. Great care
should be taken with proposals to offer general statements of awareness of a third party’s
position, or oral statements with equivalent effect. Creditors could easily take these to mean
more than intended and threats of legal action could result. Treasury approval is essential.
A5.4.20
It is common to give certain kinds of indemnity to members of boards of central
government departments or of NDPBs; or to civil servants involved in legal proceedings or formal
enquiries as a consequence of their employment, perhaps by acting as a board member of a
2 https://www.gov.uk/government/publications/contingent-liability-approval-framework
153
company. The standard form is set out in box A.5.4B, in line with the Civil Service Management
Code3. This cover is comparable to what is obtainable on the commercial insurance market. So it
excludes personal criminal liability, reckless acts or business done in bad faith.
A5.4.21
Liabilities of this kind to individuals do not normally need to be reported to parliament
unless they go beyond the standard form or are particularly large or risky.
Box A5.4B:
standard indemnity for board members
The government has indicated that an individual board member who has acted honestly and in good
faith will not have to meet out of his or her personal resources any personal civil liability, including
costs, which is incurred in the execution or the purported execution of his or her board functions, save
where the board member has acted recklessly.
Notifying liabilities to parliament
A5.4.22
The rules for notifying parliament of liabilities are very similar to those for public
expenditure. Generally speaking, there is no requirement to inform parliament about any liability
which:
•
arises in the normal course of business;
•
arises under statutory powers (subject to third bullet point of paragraph A5.4.23);
or,
•
would normally require notification (i.e. neither arising in the normal course of
business nor under statutory powers) but is under £300,000 in value.
A5.4.23
There are some exceptions to this general rule. Parliament should be notified of any
liability, even if it meets one or more of the criteria given in paragraph A5.4.22, which:
•
arises as a result of a specific guarantee, indemnity or letter of comfort where the
guarantee is not of a type routinely used in commercial business dealings;
•
is of such a size, relative to the department’s total budget, that parliament should
be given notice;
•
arises under specific statutory powers which require parliament to be notified; or,
•
is novel, contentious or potentially repercussive.
A5.4.24
It is important to note that undertakings in the normal course of business should be
judged against the department’s normal business pattern authorised by parliament. So what
may be normal for some departments may not be normal for others. In cases of doubt it is best
to report.
A5.4.25
Non-statutory liabilities which need to be reported to parliament should be notified by
Written Ministerial Statement and accompanying departmental Minute (see box A5.4C).
3 https://www.gov.uk/government/publications/civil-servants-terms-and-conditionshttps://www.gov.uk/government/publications/civil-servants-terms-
and-conditions
154
Treasury approval is required before going ahead. It is sometimes necessary, with Treasury
agreement, to adapt the form of wording, eg if the liability arises immediately.
A5.4.26
Written Ministerial Statements and departmental Minutes should be laid in the House
of Commons, on the same day, and should briefly outline the nature of the contingent liability
and confirm that a departmental Minute providing full details has been laid in the House of
Commons.
A5.4.27
Departmental Minutes should:
•
use the standard wording for the opening and closing passages, which has been
agreed with the PAC (box A.5.4C);
•
describe the amount and expected duration of the proposed liability, giving an
estimate if precision is impossible;
•
explain which bodies are expected to benefit, and why;
•
if applicable, explain why the matter is urgent and cannot observe the normal
deadlines (paragraph A5.4.26_);
•
explain that authority for any expenditure required under the liability will be sought
through the normal Supply procedure;
•
be copied to the chairs of both the PAC and departmental committee.
A5.4.28
The indemnity should not go live until 14 parliamentary sitting days, after the Minute
has been laid. Every effort should be made to ensure that the full waiting period falls while
parliament is in session.
A5.4.29
If an MP objects by letter, Parliamentary Question or Early Day Motion, the indemnity
should not normally go live until the objection has been answered. In the case of an Early Day
Motion, the Member(s) should be given an opportunity to make direct personal representations
to the minister, eg proactively arranging a meeting with them. The Treasury should be kept in
touch with representations made by MPs and of the outcome.
A5.4.30
If, exceptionally, the guarantee or indemnity would give rise to an actual liability, the
department should consult the Treasury about the wording of the Minute. The department
should discuss the implications for the actual liability on its budget, Estimate and accounts.
A5.4.31
There is not usually a requirement to notify parliament in instances where a contingent
liability arises due to events outside a department or ALB’s control rather than through an active
policy decision. An example of something that would be outside a department or ALB’s control
would be legal proceedings being brought against them. Events of this nature should still be
disclosed in the entity’s Annual Report and Accounts in line with the requirements of the
Government Financial Reporting Manual (FReM).
155
Box A5.4C:
standard text for departmental Minutes on liabilities
Opening passage
It is normal practice, when a government department proposes to undertake a contingent liability in
excess of £300,000 for which there is no specific statutory authority, for the Minister concerned to
present a departmental Minute to parliament a giving particulars of the liability created and explaining
the circumstances; and to refrain from incurring the liability until fourteen parliamentary sitting days
after the issue of the Minute, except in cases of special urgency.
The body of the Minute should include:
If the liability is called, provision for any payment will be sought through the normal Supply
procedure.
Closing passage
The Treasury has approved the proposal in principle. If, during the period of fourteen parliamentary
sitting days beginning on the date on which this Minute was laid before parliament, a member
signifies an objection by giving notice of a Parliamentary Question or by otherwise raising the matter
in parliament, final approval to proceed with incurring the liability will be withheld pending an
examination of the objection.
Non-standard notification
A5.4.32
Sometimes it is not possible to give details of a contingent liability with full
transparency. In such cases the department should write to the chairs of both the PAC and
departmental committee to provide the same details as those outlined in paragraph A5.4.24,
with the same notice period. The letters should explain the need for confidentiality. Any
objection by either chair should be approached in the same way as MPs’ objections (paragraph
A.5.4.27). If departments continue to have concerns about writing to parliament, in particularly
sensitive or confidential cases, they should seek advice from the Treasury.
A5.4.33
Sometimes departments want to report an urgent contingent liability providing less
than the required 14 days notice. In such cases, the department should follow the procedure in
paragraph A.5.4.24 and explain the need for urgency, agreeing revised wording to the final
standard paragraph with the Treasury.
A5.4.34
Departments may also want to report a contingent liability at short notice, ie less than
14 days before the end of the session. In such cases the contingent liability should only go live
after lying before parliament during 14 sitting days, ie some days after the start of the next
session. If the proposal is more urgent than this rule would allow, the department should write
to the chairs of the PAC and the departmental committee, giving the information in paragraph
A.5.4.24 and explaining the need for urgency. As a matter of record, when parliament
reconvenes, a Written Ministerial Statement and departmental Minute should be laid explaining
what has happened, including any liabilities undertaken.
A5.4.35
The same procedure as in paragraph A.5.4.29 should be used to report liabilities during
a parliamentary recess. In such cases the notice period should be 14 working days notice, ie
excluding weekends and bank holidays.
A5.4.36
Similarly, it is possible that a department might want to undertake a non-statutory
contingent liability when parliament is dissolved. Every effort should be made to avoid this, since
members cease to be MPs on dissolution, and committees will be reconstituted in the new
parliament. If the department nonetheless considers the proposed liability to be essential, it
156
should consult the Treasury. When parliament reconvenes a Written Ministerial Statement
should be laid explaining what has happened, including any liabilities undertaken.
Reporting liabilities publicly
A5.4.37
Any changes to existing liabilities should be reported in the same way as they were
originally notified to parliament, explaining the reasons for the changes. If an originally
confidential liability (see paragraph A5.4.29) can be reported transparently, the standard Minute
(paragraph A.5.4.24) should be laid.
A5.4.38
Departments should report all outstanding single liabilities, or schemes of liabilities, in
their accounts unless they are confidential. Any which would fall as a direct charge on the
Consolidated Fund should be reported in the Consolidated Fund accounts. The conventions in
the FreM should be used.
A5.4.39
Estimates should similarly be noted with amounts of any contingent or actual liabilities.
The figures quoted should be the best assessments possible at the time of publication. Actual
liabilities should appear as provisions. The rubric should refer back to notification of parliament.
A5.4.40
When the conditional features of contingent liabilities are met, it is good practice to
wait until parliament has approved the relevant Estimate before providing the necessary
resources. But if providing support is more urgent, departments should apply for an advance
from the Contingencies Fund (see Annex 2.4 and the Estimates Manual4 under the usual
conditions). If an advance is approved, a statement to parliament should explain what is
happening, and in particular how the crystallised liability is to be met.
International agreements
A5.4.41
International treaties, agreements or commercial commitments which mean the UK
incurring specific contingent liabilities should follow the parliamentary reporting procedures as
far as possible whether or not the agreement is covered by legislation. Even if an international
agreement does not require legislation for ratification, it should nevertheless be laid before
parliament, accompanied by an explanatory memorandum, for 21 sitting days before it is
ratified (the Ponsonby rule).
4 lhttps://www.gov.uk/government/publications/supply-estimates-guidance-manual
157
158
Annex 5.5
A5.5
Lending
G overnm ent departm ents m ay borrow from the Estim ate or N LF and then on -lend to
third parties. There are som e key disciplines required to protect the Exchequer from
loss. It is also im portant to keep parliam ent inform ed, especially about risk
exposures.
A 5.5.1 The government provides loan finance to public sector organisations through
departmental Estimates and the National Loans Fund (NLF). The broad principles of this annex
also apply to Public Dividend Capital (PDC) and government loan guarantees.
Statutory authority
A 5.5.2 The NLF needs specific statutory authority to lend to each of its borrowers, normally
found in the enabling legislation of the borrower. Similarly, departments must normally have
specific statutory authority to make voted loans. Box A5.5A identifies the provisions which
should be specified in the enabling legislation. Departments setting up new powers should
consult their Treasury spending team early in the drafting process. If NLF lending is intended,
they should also consult the Exchequer Funds and Accounts team (EFA) in the Treasury.
Loans from the NLF
A 5.5.3 The Treasury is accountable for the management of the NLF. In turn departments
responsible for on-lending are accountable for the specific advances they make. So they should
ensure that the conditions for their loans are satisfied and that repayments of interest and
principal are received on time.
A 5.5.4
The NLF cannot lend at a loss1. Interest on NLF loans must therefore be sufficient
to cover the cost of government borrowing, on the same terms and for the same period. This
makes sure that lending is unsubsidised and that no final charge rests on the NLF.
A 5.5.5 Because the government’s credit rating is better than commercial borrowers’ the NLF
can both borrow and lend at fine rates. NLF lending is not available to commercial entities in
the private sector.
A 5.5.6 Similarly, NLF loans can only be made where there is a reasonable expectation that they
will be serviced and repaid on the due dates. Lending departments should consider whether to
take security in order to fully protect the NLF’s position. And if a lending department becomes
concerned about the security of any of its loans to third parties, it should discuss them with the
Treasury at an early stage. Departments automatically stand behind all NLF loans to arm’s length
bodies (ALBs) and should agree this with them, formally in
writing.is intended, they should also
consult the Treasury’s Exchequer Funds and Accounts team (EFA).
1 S5, NLF Act 1968
159
A5.5 Lending
Box A 5.5A : pow ers in legislation enabling lending
NLF loans
voted loans
•
the Secretary of State or Minister may lend •
the circumstances in which loans may be
to relevant bodies;
made;
•
the Treasury may issue funds from the NLF
•
repayment of principal and interest should
to the Secretary of State;
be made to the Consolidated Fund.
•
the purpose for which loans may be
•
conditionality associated with the loans;
made;
•
a borrowing limit, sometimes including a
•
a limit on total lending outstanding;
power to raise this limit by order within a
further absolute ceiling specified in the
•
(sometimes) a power to raise this limit by
primary legislation;
order within a further absolute ceiling;
•
the terms and conditions to be attached
•
a requirement for interest and principal
to loans and how interest rates are to be
repayments collected by departments to
determined;
be surrendered to the NLF;
•
a requirement to present an annual
account to parliament, prepared by the
sponsor department, of loans made and
repaid.
Interest on NLF loans
A 5.5.7 Interest on temporary NLF loans of up to 6 months is fixed and repayable with the
principal on maturity.
A 5.5.8 Long-term NLF loans may be issued at fixed or variable rates. Fixed rate loans may be
repaid by:
•
equal instalments of principal (EIP) throughout the life of the loan, normally twice a
year; or
•
equal repayments (ER) comprising varying proportions of interest and principal over
the life of the loan, normally twice a year; or
•
exceptionally, interest over the life of the loan with repayment of principal in full at
maturity.
A 5.5.9 The length and type of loan should be matched to the type of asset being acquired and
the expected payback period. Variable rate loans can be rolled over at one, three, or six monthly
intervals. Penalty interest may be charged if a payment of interest or principal is not received on
time. EFA can advise on the details of the terms and conditions.
A 5.5.10 The Treasury sets all NLF interest rates (including on appropriate rollover dates for
variable rate loans) for the different maturities available in the light of prevailing interest rates.
Interest rates for long-term loans are set out on the website of the Public Works Loan Board2
(PWLB).
2 The PWLB is an NDPB which lends NLF funds to local authorities and others
www.pwlb.gov.uk
160
A5.5 Lending
Early repayment of NLF loans
A 5.5.11 As the government lends at very competitive rates, it is not usually possible for
borrowers to repay loans early in order to refinance on more advantageous terms. If this were
possible, any savings the borrower might make would be at the expense of the NLF, leaving the
Exchequer as a whole worse off. However, there may be a case for early repayment (other than
for temporary loans) where there are genuinely surplus funds (eg from the sale of assets or
trading activities). Similarly, it may also be possible to refinance existing loans where material,
demonstrable and sustained changes (eg in asset life or technology) make a different maturity
period more appropriate.
A 5.5.12 Any proposals for early repayment must be agreed with the Treasury beforehand. If
agreed, the borrower pays:
•
interest up to the day before the loan is prematurely repaid; plus
•
a sum, calculated by the Treasury, equal to the present value of all future
repayments of principal and interest on the original schedule. This sum is designed
to leave the Exchequer no worse off. It may be higher or lower than the total of
the sums due on the loan for the outstanding period under the original schedule.
The difference (ie the discount or premium) then scores as an adjustment to interest
in the accounts.
Write off or repayment of NLF loans by grant
A 5.5.13 Departments should consult the Treasury about any proposals for a capital
reconstruction involving repayment or write off of NLF loans. It requires primary legislation to
write off NLF loans. Interest remains payable on debts up to the day before repayment or write
off.
A 5.5.14 Capital reconstruction of the debts of an organisation which will remain in the public
sector also requires specific statutory powers. Typically the legislation achieves capital
reconstruction of its assets and liabilities by issuing it with voted grants to repay its NLF debt.
A 5.5.15 Change of status and capital reconstruction ahead of privatisation is different. When
the borrower’s status changes from public to private sector, it is no longer appropriate for it to
enjoy the fine rates the NLF achieves. So all NLF loans must be repaid. Departments should
agree the approach with the Treasury.
Accounting for NLF loans
A 5.5.16 Legislation authorising an ALB to borrow from the NLF normally specifies that its
sponsor department should prepare its annual accounts. Sponsor departments should also
account for NLF transactions in their accounts in accordance with the FReM.
Voted loans
A 5.5.17 Like NLF loans, voted loans should only be made where there is a reasonable
expectation of their being properly serviced and repaid. Departments making voted loans
should ensure that the conditions in the enabling legislation are met and that the Estimate
provides for advances of principal. If the legislation leaves the lending department with
discretion over terms and conditions, interest rates should be set to reflect the cost to the
161
A5.5 Lending
government of borrowing. Otherwise the same disciplines apply to voted loans as to NLF loans
(paragraphs A.5.5.3-10).
A 5.5.18 Voted loans are technically assets of the Consolidated Fund. So payments of interest
and principal should normally be surrendered to the Consolidated Fund. However if there is
related expenditure within the same budget boundary as the receipt, such payments may be
retained if the Treasury agrees.
Repaying early and writing off voted loans
A 5.5.19 The Treasury should be consulted about any proposals for the early repayment of
voted loans. The rules applying to early repayment of NLF loans
(A.5.5.11) normally apply.
A 5.5.20 Treasury approval is required to write off loans of more than £20m. The department
concerned should notify parliament in a Treasury Minute using the standard opening and
closing paragraphs in box A.5.5B. If it is not possible for the Minute to be laid allowing
fourteen days of parliamentary time, the Minute should explain why.
A 5.5.21 Should a Member of Parliament object to the write-off, the minister responsible
should give the MP the opportunity to make a personal representation about his or her
objections. Only when this dialogue has been concluded will the Treasury be able to give
consent to the write-off.
A 5.5.22 Treasury agreement is also required for smaller write offs unless specific delegations
have been agreed. Departments writing off loans should follow the procedure in annex 4.10 to
notify parliament.
Box A 5.5B: Treasury M inute on loan w rite -offs: standard paragraphs
O pening paragraph:
When a government department proposes to write off the repayment of an Exchequer loan whose
principal outstanding exceeds £20 million, it is the normal practice for the Treasury to present to the
House of Commons a Minute explaining the circumstances and giving particulars of the write-off.
Except in cases of special urgency, Treasury consent is withheld until fourteen parliamentary sitting
days after the issue of the Minute.
Closing paragraph:
The Treasury has approved the proposal in principle. If, during the period of fourteen parliamentary
sitting days beginning on the date on which this Minute was laid before the House of Commons, a
Member signifies an objection (for example by giving notice of a Parliamentary Question or of a
Motion relating to the Minute), final Treasury approval of the remission will be withheld pending an
examination of the objection.
Lending to competitive organisations
A 5.5.23 The requirements described above always apply to NLF and voted loans. Some
additional disciplines apply to loans to public sector organisations which operate in commercial
markets. These disciplines are justified by the need to:
•
avoid distorting competition in the markets in which these organisations operate;
•
achieve compliance with the EU state aids directive [Annex 4.7];
162
A5.5 Lending
•
deliver vfm for the Exchequer as a whole by maximising the efficiency of the pooled
borrowing approach and minimising subsequent cost of funds.
A 5.5.24 The competitive organisations and transactions in the public sector to which these
disciplines apply are:
•
those organisations that compete with the private sector for more than 75% of
their business;
•
many organisations that compete for between 20% and 75% of their business,
considered case by case;
•
usually organisations using loan finance for a particular discrete activity that would
compete with the private sector.
A 5.5.25 The disciplines required are all intended to ensure that the public sector organisations
concerned do not exploit any competitive advantage they might otherwise enjoy through access
to cheaper finance. They are set out in box A5.5C.
Box A 5.5C : D isciplines for com m ercial lending
•
All borrowing must be agreed with the Treasury spending team.
•
The borrower, or its sponsor department, should obtain a credit rating, using independent
financial advice and excluding any implicit or explicit government guarantees.
•
Any guarantee of an organisation’s borrowing should rest on explicit statutory powers. There
may be terms and conditions, eg a cap on the amount.
•
The borrower organisation should satisfy the Treasury that the proposed transactions are justified
within its corporate plan; or for large singleton transaction that it delivers value for money.
•
Short term finance ie less than seven days, should be obtained from commercial providers, eg
through overdrafts.
•
Longer term borrowing, whether from the NLF or through voted loans, should be at interest
rates comparable to what similar competitor firms in the private sector would pay, and must as a
minimum cover the government’s cost of borrowing and equal or exceed the EU reference rate.
The Treasury will determine the interest rate to be applied.
External borrowing and government guarantees
A 5.5.26 Public sector organisations sometimes undertake limited, short-term borrowing from
the private sector, for example through a bank overdraft, in order to meet very short term
requirements not available through public sector lenders. Such borrowing should be explicitly
guaranteed by the government to secure the finest terms unless there are good policy reasons
otherwise.
A 5.5.27 Guarantees should normally only be given with an explicit statutory power, which
should specify:
•
the circumstances in which guarantees may be given and the terms and conditions
to be attached;
•
a limit on the total sum which may be covered by guarantees at any one time,
which may include power to raise the limit by order within a further absolute ceiling
specified in the primary legislation;
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A5.5 Lending
•
a requirement for parliament to be notified once the guarantee has been given; and
•
authority for any costs resulting from the guarantee to be met from Estimates.
A 5.5.28 Even if the enabling legislation does not require the sponsor department to notify
parliament of new guarantees, the department should follow the standard procedure for
notifying parliament of contingent liabilities (annex 5.4).
A 5.5.29 In principle government guarantees may also be given for longer term borrowing,
including in foreign currencies. Such guarantees will only be considered where the guaranteed
borrowing is on terms at least as fine as the government could obtain in its own name. This is a
stringent test. Private sector borrowers cannot often meet it. Departments should therefore
ensure that all their sponsored bodies consult them in advance about the terms of any proposed
private sector or overseas borrowing. In no circumstances should any central government
organisation borrow on terms more costly than those available to the government without
Treasury approval.
A 5.5.30 As foreign borrowing may also have implications for the credit standing on the
international money markets of the UK public sector, proposals for such borrowing must be
cleared with the Treasury in advance. This applies to all ALBs.
A 5.5.31 It is good practice to keep parliament informed when guarantees are first used, or
varied significantly.
164
A5.6
Annex 5.6
Banking and managing cash
Public sector organisations should run their cash management processes to provide good value for
the Exchequer as a whole. This means using the Government Banking Service, limiting use of
commercial banking (with Treasury consent in each instance), and providing the Treasury with
accurate forecasts of cashflows. Any use of non-standard techniques should be kept within defined
bounds and controlled carefully.
A5.6.1
Together public sector organisations process large volumes of cash each day in order to
carry out their functions. It is important that the cashflows involved achieve good value for the
Exchequer as a whole by minimising the government’s borrowing at the end of each working
day. So as much as possible of the government’s cashflow should be contained within the
Exchequer pyramid.
A5.6.2
Public sector organisations must maximise the use of publicly procured banking services
(accounts with commercial banks managed centrally by Government Banking), unless there is a
clear business case to do otherwise. This ensures effective aggregate control and provides the
opportunity for central consolidation of cash resources to minimise government’s financing
arrangements. Other arrangements lead to increased government borrowing increasing costs
and credit risk to the Exchequer.
A5.6.3
When assessing the government’s cash position, the Debt Management Office (DMO)
relies in part on the Treasury’s cash flow forecasts, which in turn rely on department’s own
forecasts. For this reason, it is important for departments and their ALBs to provide accurate
cash flow forecasts to the Treasury.
A5.6.4
Accounting officers are responsible for managing the risks inherent in this process
actively, including any credit exposures of funds held in commercial banks outside the Exchequer
pyramid. Each public sector organisation should establish a banking policy in order to carry out
this task.
Cash management
A5.6.5
Good cash management means having the right amount of cash available when needed,
without inefficient unused surpluses. Each public sector organisation should plan its own cash
management efficiently, following the guidelines in box A5.6A. It is usually convenient for
sponsor departments to include their ALBs’ flows with their own for this purpose. With this
information Exchequer Funds and Accounts (EFA) in the Treasury can enable departments to
draw cash as they need it within their voted provisions in Estimates.
A5.6.6
EFA need to understand the dynamics of public sector organisations’ demands for cash
and similarly the income they may generate. With this information they can identify peaks and
troughs in the public sector’s overall need for cash so that the DMO can plan its debt
management activity. For this purpose EFA need to know the annual, monthly and daily
sequences of cash flow, including any major one-off items.
A5.6.7
As a matter of good financial management, public sector organisations should never go
overdrawn. Exchequer costs rise if unplanned large payments are not forecast in advance. The
165
A5.6 Banking and managing cash
Treasury will normally charge penalty interest at current base rate plus 2% on overdrawn
positions on Government Banking accounts. Particular care should be given to ensure the
nominated supply estimate account and the account group as a whole remain in credit.
A5.6.8
The Treasury may waive or vary such a penalty interest charge, normally if the
circumstances which led to the overdraft are outside the department’s control, or if the
overdraft does not incur additional costs to the Exchequer.
Box A5.6A:
planning cash management
•
Forecast cash flows and provide EFA with detail within agreed timescales.1
•
Tell EFA of the major cash flows even if a definite transaction date has not been agreed.
•
Keep EFA advised if payment or receipt dates are moved even if this is outside normal deadlines.
•
Negotiate payment dates, put them in contracts with counterparties and stick to them.
•
Transact substantive payments (above £5m) by 12pm (noon) each weekday.
•
Negotiate the main inflows to take place on specific dates, and specify receipt in the morning as
late receipts (after 3pm) may not be swept into the Exchequer pyramid that day.
•
Departments should keep commercial accounts at minimum levels and ensure they are not
funded in advance of need. Departments should notify EFA each quarter of any balances held in
a commercial account.
Banking
A5.6.9
Each public sector organisation should establish a banking policy for control of its
working balances and its transmission of funds. Its centrepiece should be use of Government
Banking accounts, which sit within the Exchequer Pyramid. Departments should only hold funds
outside of the Exchequer where a good business case can be made for doing so, e.g. if
Government Banking cannot provide a necessary service or legislation requires it.
A5.6.10
Specific Treasury agreement to each commercial account is required before it is
established. Once this approval has been received, departments (and their ALBs) should gain the
Crown Commercial Representative for Banking’s (CR) approval before setting up, or altering, any
commercial accounts. The CR has responsibility for the strategic management of banking
services and their suppliers across the whole of the Exchequer.
A5.6.11
A banking policy should cover at least the features outlined in box A5.6B. Once settled,
the policy should be reviewed regularly to make sure that it remains appropriate and up to date.
1 Treasury can financially penalise poor forecasting and reward good forecasting. Further details on the cashflow management scheme is available from
the Treasury EFA team, at xxxxxxx@xxxxxxxxxx.xxx.xx
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A5.6 Banking and managing cash
Box A5.6B:
an organisation’s banking policy
•
The Government Banking bank accounts to be operated, with reference to their purposes (e.g. to
contain income from different sources).
•
Any commercial accounts, how they should operate, and why they are justified.
•
How and where working overnight balances required for day to day operation are to be held.
•
How the risks of fraud and overpayments are to be prevented, countered systemically and
managed when discovered.
•
How any non-Exchequer funds should be managed and kept separate from public money.
•
The organisation’s cut off times for processing payments (in line with the Exchequer’s core
banking hours; authorising payments on their banking platforms by 12pm for high value
payments and no later than 3pm for others)
•
When and how payment by cheque, credit card or direct debit is acceptable (see guidelines in
Box A5.6D).
•
Any use of non- standard financial instruments, e.g. agreeing foreign exchange hedging
contracts with commercial banks (see paragraph A5.6.22).
•
Record keeping, including frequent bank statement reconciliations.
A5.6.12
Where a public sector organisation plans to use commercial bank account(s), it should
follow the guidelines in box A5.6C. Only commercial banks which are members of the relevant
UK clearing bodies should be considered for this purpose2.
Box A5.6C:
guidelines for using commercial bank accounts
•
Only hold funds outside of the Exchequer where there is a clear basis to do so (legal, value for
money for the Exchequer as a whole) and with the agreement of the Treasury.
•
Consult the CR to agree the approach to negotiations with potential suppliers and to ensure
leverage of government’s relationship with key banking suppliers.
•
Ensure that cleared funds will reach accounts as early as possible in the relevant clearing cycle.
•
Obtain specific charges for money transmission and other services so that costs are transparent
and comparable.
•
Obtain gross interest on cleared credit balances, at rates as close as possible to the Bank of
England’s interbank rate or better (subject to credit risk and other liquidity considerations).
•
Refuse arrangements that involve maintaining minimum balances as this increases Exchequer
debt and raises Exchequer costs, even if the offer appears superficially attractive because of
reduced charges.
•
Negotiate with care any indemnities that commercial banks may seek to replace their normal
arrangements (eg to protect the bank from incorrect BACS debits), after taking legal advice and
obtaining clearance from the Treasury.
•
Surrender interest receipts as Consolidated Fund Extra Receipts.
•
Minimise balances in commercial accounts without going overdrawn, holding only enough for
immediate needs.
Money transmission
A5.6.13
Public sector organisations should generally use the cheapest, safest and most certain
means of moving public funds, depending on the context. Generally this means adopting the
2 http://www.accesstopaymentsystems.co.uk/introduction-payment-systems/what-payment-scheme
167
A5.6 Banking and managing cash
hierarchy in box A.5.6D. Sometimes it is necessary to strike a balance among these desirable
features to achieve the best outcome.
A5.6.14
For payments to counterparties outside the Exchequer, it is good practice for public
sector organisations to use BACS3 Grade 3 (Government Grade) where possible. This is a safe
and cost effective payment method, allowing for settlement directly at the Bank of England
which reduces exposure to commercial banks. Use of a government grade Bacs SUN means
public sector organisations are not limited to the standard BACS payment limit. For inward
payments, it may be appropriate to apply credit controls or other safeguards.
A5.6.15
Public sector organisations should ensure their finance operations provide timely
payment of all intra-day outflows. Payments made late during the working day increase intraday
volatility, causing disruption to payee’s and the wider Exchequer’s cash management activities
which may lead to increased cost.
Box A5.6D:
Money transmission services ranked in order of preference
1
Internal transfers. Use to move funds between accounts held within the same bank as they are
free. You can move funds between your organisation’s accounts as well as to accounts held by
other public sector organisations who use Government Banking’s contract with the same bank.
2
Government BACS grade 3. This can be used for payments external to the Exchequer boundary,
for example to suppliers and for salaries, and when moving funds to public sector organisations
who use different commercial banking service providers.
3
Faster payments and CHAPS. These should only be used for transactions with entities external to
the Exchequer. Where used for:
•
making payments, this should be in a controlled manner with appropriate safeguards to
prevent damage to the Exchequer; or,
•
receipts, arrangements should be made for the payer to make payments as early as
possible in the day.
4
Credit and other payment cards. When accepting credit and other payment cards to receive
payments the fees and additional risks involved need to be understood. Paying and receiving
funds in this way needs to represent value for money for the Exchequer.
5
Payable orders and cheques, should be used by exception and only when other methods are not
available.
6
Cash, uncrossed cheques, order books or any methods carrying similar security risks should not
usually be used.
Borrowing
A5.6.16
Public sector organisations should not normally rely on obtaining finance by borrowing
from commercial banks as it is almost always more expensive than relying on the government’s
credit rating. Any expenditure financed by such borrowing without explicit Treasury consent
would be considered irregular.
A5.6.17
Certain arm’s length bodies, such as public corporations, trading funds and NHS
Foundation Trusts may, however, borrow from commercial banks for short term needs. This is
only possible if it has been agreed in the founding documentation for the body (see chapter 7).
3 BACS (formerly the Bankers’ Automated Clearing Service) is the commonly used three-day electronic payments and receipts system
168
A5.6 Banking and managing cash
Exotic transactions
A5.6.18
Sometimes public sector organisations face financial risks which they find
uncomfortable. In these circumstances they may consider hedging using commercial financial
instruments. Speculation is never acceptable.
A5.6.19
In principle risks of this kind are no different to the other risks with which public sector
organisations grapple. They should be managed in a similar way, balancing the scale and
likelihood of the risk against the cost of purchasing protection or taking other mitigating action.
A5.6.20
When considering use of financial instruments, it is important to remember that:
•
their use may entail taking on new risks, which themselves must be managed. It is
therefore necessary for any organisation using them to ensure that it has sufficient
expertise in depth for this task;
•
those selling financial instruments do so for profit so their customers should be
confident that the risk avoided is worth the additional cost they incur. As with
insurance (see annex 4.4), the cost of this sort of protection is not always
worthwhile;
•
provisions for their use should be contained in the organisation’s banking policy
(box A5.6B).
A5.6.21
Any decision to use financial instruments is automatically novel and contentious and
should be cleared with the Treasury accordingly. The Treasury will normally be sceptical because,
like insurance, financial hedging incurs costs in circumstances where the government may in
principle be able to bear the risks and could usually do so more cheaply. It is also important to
bear in mind that there are some risks that only the government can bear, and that these may
be impossible to hedge at tolerable cost.
A5.6.22
If an organisation considers using financial instruments to hedge, its accounting officer
will need to be satisfied that the cost and management effort of operating the hedging policy
offers value for money. The organisation should clear its strategy with the Treasury and draw up
a bespoke section of its banking policy for the purpose. An outline is shown at box A5.6E.
Box A5.6E:
0utline management policy for using financial instruments
•
Define the risks to be controlled, their volume, frequency and the rationale for control.
•
Governance of and accountability for the various elements of the organisation’s hedging policy,
both at working level and on the board.
•
List of acceptable counterparties (after assessing their credit risks and competence), with
exposure limits (which may differ for different financial instruments).
•
Arrangements for defining acceptable risk, differentiated as necessary among the different
methods of dealing with them.
•
Arrangements for monitoring and reporting exposures and forecasts.
Foreign exchange
A5.6.23
The most powerful case for hedging arises when a public sector organisation must
make regular and predictable transactions in foreign currencies whose scale is material to the
169
A5.6 Banking and managing cash
organisation’s business. The standard advice about operating a forex hedging strategy is set out
in box A5.6F. When drawing up the strategy It is important to remember that:
• the costs of hedging are certain though the benefits are not;
• commercial advisers on hedging often have an interest in selling relatively complicated
instruments when simpler approaches might suffice.
Box A5.6F:
standard practice for managing risk relating to foreign exchange
•
Foreign Currency balances: should be minimised.
•
Spot trades: use the Bank of England for transactions above £2m (approaching Government
Banking in the first instance)
•
Forward transactions: use the Bank of England (again approaching Government Banking in the
first instance), unless specific Treasury agreement is given to do otherwise
•
Options: better avoided since they usually involve a measure of speculation.
•
Currencies: plan to use sterling, US dollars or Euros where possible as markets in other
currencies are less liquid.
•
Exposures: avoid taking long term positions which are usually expensive.
•
Value for money: the essential test for all strategies.
•
Foreign exchange hedging: as with financial instruments, must be cleared with the Treasury
170
A6.1
Annex 6.1
How to calculate charges
This annex discusses how to calculate the cost of public services for which a fee is charged.
Introducing a new or updated charge bearing service
A6.1.1
Public sector organisations planning to set up or update a service for which a fee may be
charged should ensure early engagement with Treasury. Advice should be sought at the earliest
opportunity if there are any variations on the standard model. Proposed variations may be
agreed in certain instances, considering each on its merits. Each will need to be justified in the
public interest and on value for money grounds.
A6.1.2
Practical issues which organisations will need to consider when setting up or refreshing a
charge bearing service include: the definition of the service and its rationale; the proposed
financial objective (for instance, ful cost recovery; 70% of full cost plus a 30% public subsidy);
how the service is to be delivered and which organisation is to deliver it; whether the provider
should retain any income from charges; the proposed charging structure (for instance, a single
service or several sub-services). Organisations will also need to refer to the checklist in box 4.9 of
factors to consider when planning policies and projects.
Measuring the full cost of a service
A6.1.3
With agreed exceptions, fees for services should generally be charged at cost, sometimes
with an explicit additional element to match the returns of commercial competitors. So to set
fees for public services it is essential to calculate the cost of providing them accurately.
A6.1.4
The main features to be taken into account in measuring the annual cost of a service are
set out in box A6.1A. Not everything in the list will apply to every service and the list may not be
exhaustive. It is important that the calculation is comprehensive, including all relevant overheads
and non-cash items.
A6.1.5
So far as possible the calculation should use actual costs, where they are known. For
services just starting, there may be no alternative to using best estimates, geared to estimated
consumption patterns.
A6.1.6
Start up costs which are capitalised in the accounts and the cost of fixed capital items are
scored in the accounts in full. These costs should be attributed to the cost of the service as the
depreciated value each year.
A6.1.7
Start up costs which cannot be capitalised in the accounts are scored as they are
incurred. Such costs may be recovered through fees and charges by spreading them over the
first few years of service provision. It is also good practice to set fees to recover costs which
cannot be capitalised in the accounts and which have been incurred to improve efficiency and
effectiveness so that charges are lower or offer better value. This needs explicit Treasury
agreement and may require statutory backing.
A6.1.8
For services which are charged at different rates, the same procedure should be used to
set the different rates. That is, the cost of any premium service should be objectively justifiable
171
by its additional cost (eg where faster shipping is offered); or conversely any discount should be
justifiable by saving to the supplier (eg using the internet rather than over the counter). Note,
however, that sometimes the legislation permits differential pricing unrelated to the relative
underlying costs – though even then there should be good policy reason for the difference.
Box A6.1A:
elements to cost in measuring fees
•
Accommodation, including capital charges for freehold properties
•
Fixtures and fittings
•
Maintenance, including cleaning
•
Utilities
•
Office equipment, including it systems
•
Postage, printing, telecommunications
•
Total employment costs of those providing the service, including training
•
Overheads, eg (shares of) payroll, audit, top management costs, legal services, etc
•
Raw materials and stocks
•
Research and development
•
Depreciation of start up and one-off capital items
•
Taxes: vat, council tax, stamp duty, etc
•
Capital charges
•
Notional or actual insurance premiums
•
Fees to sub-contractors
•
Distribution costs, including transport
•
Advertising
•
Bad debts
•
Compliance and monitoring1 costs
•
Provisions
but not
•
Externalities imposed on society (eg costs from pollution and crime)
•
Costs of policy work (other than policy on the executive delivery of the service)
•
Enforcement costs1
•
Replacement costs of items notionally insured
•
Start up costs (those which are capitalised in the accounts) and one-off capital items
Financial objectives
A6.1.9
The standard approach to setting charges for public services (including services supplied
by one public sector organisation to another) is full cost recovery. It normally means recovering
the standard cost of capital, currently 3.5% in real terms. Some exceptions are noted in section
6.4.
1 See the HM Treasury publication on receipts
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/226421/PU1548_final.pdf
172
A6.1.10
One other exception is commercial services, ie those services which compete or may
compete with private sector suppliers of similar services. These should aim to recover full costs
including a real rate of return in line with the rates achieved by comparable businesses facing a
similar level of risk. The normal range of rates is 5-10% but rates as high as 15% may be
appropriate for the very highest risk businesses.
A6.1.11
Great care should be taken in pricing commercial services where public sector suppliers
have a natural dominant position. The market prices of competitors will often be a good guide
to the appropriate rate of return if there is genuine competition in the market. Where there are
limited numbers of buyers and sellers in a market, it may be better to take other factors into
account as well. These might include past performance, the degree of risk in the underlying
activity and issues bearing on future performance.
Accidental surpluses and deficits
A6.1.12
Despite every effort to measure and forecast costs, surpluses and deficits are bound to
arise from time to time. Causes may include variations in demand, in year cost changes, and so
on. It is good practice to consider mid-year adjustment to fee levels if this is feasible.
A6.1.13
It is also good practice to set fees to recover accumulated past deficits. This may require
statutory backing through a s102 order (see paragraph 6.3.3).
173
174
Annex 6.2
A6.2
Charging for Information
This annex discusses how public sector organisations should charge for the use and re-use of
information, including data, text, images or sound recordings. Much information about public
services is available for free. However, when charging for information, it is generally at full cost
although there are exceptions.
A6.2.1 The policy is that much information about public services should be made available
either free or at low cost, in the public interest. Most public organisations freely post
information about their activities and services on the internet. There should be no additional
charge for material made available to meet the needs of particular groups of people e.g. Braille
or other language versions. More extensive paper or digital versions of information may carry a
charge to cover the costs of production.
A6.2.2 Information products have an unusual combination of properties: typically, high cost of
production combined with low cost or reproduction. They are frequently licensed for the use of
many customers simultaneously rather than being sold or otherwise transferred. This can make
for complex charging arrangements to recover costs accurately.
A6.2.3 It is good practice to make available sufficient recent legislation, public policy
announcements, consultation documents and supporting material to understand the business
of each public sector organisation.
A6.2.4 Anything originating in Crown bodies, including many public sector organisations, has
the protection of Crown copyright. Most Crown copyright information is made available at no
charge under Open Government Licence terms.
A6.2.5 Public sector organisations should maintain information asset registers as part of their
asset management strategy1.
Rights to access
A6.2.6 The terms on which information is made available should be made clear at the point of
sale or licensing. There is a clear public interest in maximising access to much public sector
material, and this should be borne in mind when deciding what charges should be levied. For
this reason many publications can be re-used by others free of charge. However, public sector
organisations should take account of copyright issues, using legal advice as necessary.
A6.2.7 Most public sector organisations choose, as a matter of policy, to make available on the
internet information disclosed in response to requests under the Freedom of Information Act
2000 and Environment Information Regulations 2004. Public sector bodies should also note the
provisions of the amendments (introduced by the Protection of Freedoms Act 2012) to sections
1 For further information s
ee http://www.nationalarchives.gov.uk/information-management/manage-information/policy-process/digital-continuity/step-
by-step-guidance/step-2/
175
11-11B and 19 of the Freedom of Information Act 20002 in respect of relevant datasets, where
there are statutory duties relating to the format and supply of requested datasets and to their
listing in publication schemes, and to charges under a specified licence.
Information carrying charges
A6.2.8 Whilst the majority of information is free to access, a number of public sector
organisations supply information for which charges are made to cover the associated costs.
These include:
•
services commissioned in response to particular requests;
•
services where there are statutory powers to charge;
•
information sold or licensed by trading funds (although they must comply with the
rules set out by the re-use regulations – see below);
•
publications processing publicly gathered data for the convenience of the public,
through editing, reclassification or other analysis;
•
retrieval software, e.g. published as a key to using compiled data.
A6.2.9 Public sector organisations can also charge for supplying some information which
recipients intend to process, e.g. for publication in another format. Licences supplied in this way
may take a number of forms, including royalties on each additional copy sold in the case of the
most commercial applications. The norm is:
•
Raw data: license and charge at marginal cost;
•
Value added data and information supplied by trading funds: charge at full cost
including an appropriate rate of return where this is permitted under the re-use
regulations (see paragraph A6.2.11).
A6.2.10 Where it is intended to charge for environmental information within the scope of
Directive 2003/4/EC or for spatial data services within the scope of Directive 2007/2/EC on
establishing an infrastructure for Spatial Information in the European Community (INSPIRE) it is
important to comply with regulations3.
The Re-use of Public Sector Information Regulations 2015
A6.2.11 The Re-use of Public Sector Information Regulations 20154 set out the circumstances
where public sector bodies may charge above marginal cost for licensing the re-use of
information. Where it is intended to charge for the re-use of information within the scope of
the regulations, it is important to comply with those regulations, paying attention to the clauses
that cover requirements to generate revenue.
A6.2.12 Trading funds, for example, may charge for information where the customer intends to
duplicate or process (re-use) such material for profit. In such cases, Crown bodies need to apply
for a delegation of authority from the Keeper of Public Records5 to license the information.
2 Freedom of Information Act 2000 revised -
https://www.legislation.gov.uk/ukpga/2000/36/contents
3 INSPIRE Regulations 2009 (SI 2009/3157)
4 SI 2015/1415 -
http://www.legislation.gov.uk/uksi/2015/1415/contents/made
5
http://www.nationalarchives.gov.uk/information-management/re-using-public-sector-information/uk-government-licensing-framework/crown-
copyright/delegations-of-authority/
176
A6.2.13 The regulations set out that “charges for re-use must, so far as is reasonably
practicable, be calculated in accordance with the accounting principles applicable to the public
sector body”. See Annex 6.3 for further detail on marginal cost pricing.
177
Annex 6.3
A6.3
Competition law
Public sector organisations need to take care if they provide services w hich com pete
w ith private sector suppliers of sim ilar services, or m ay do so. It is im portant that
they respect the requirem ents of com petition law .
A 6.3.1 UK competition law is founded on Articles 81 and 82 of the EU Treaty, applied through
the Competition Act 1998. Together these prohibit business agreements that prevent, restrict or
distort competition in trade in the UK and EU. They also disallow market abuse on the part of
any business in a dominant1 in a market.
A 6.3.2 In particular, the following kinds of unfair competition are not allowed:
•
very high prices that may exploit market power;
•
very low prices that may exclude competitors;
•
differential prices (or other terms and conditions of service) for the same product to
different customers (except for objective reasons such as differences in quality or
quantity) that distort competition; or
•
refusing to supply competitors without objective justification such as poor customer
credit worthiness.
Pricing in competitive markets
A 6.3.3 Services should be costed in line with the normal rules for full cost recovery. Charges
should be set to achieve the appropriate financial objective, normally at least recovering full
costs.
A 6.3.4 Some public sector organisations both supply data for use in providing public services
and sell services using their data in competition with commercial firms. Such organisations need
to take particular care not to abuse their competitive position in the market, especially if it is
dominant. This could happen if a dominant supplier organisation allocated its costs in such a
way that an efficient competitor could not operate profitably.
A 6.3.5 There can be circumstances which merit departing from the normal principle of full cost
recovery. The justification is normally to achieve greater efficiency and sensitivity in responding
to patterns of demand or cost, eg:
•
if the service cannot be expanded, but customers are willing to pay more, there
may be a case for increasing the price;
•
if there is excess capacity and customers are not willing to pay the current charge,
there may be a case for reducing the charge or reducing output;
1 A business is deemed to be in a dominant position if it can generally behave independently of competitive pressures in its field.
178
A6.3 Competition law
•
incentive charging, ie charging below cost to encourage demand, or above cost to
discourage it.
A 6.3.6 If a public sector organisation decides not to recover full costs for a while, it should take
care that:
•
its prices are not reduced in such a way as to stifle competition (a rapid cut in prices
could be unfair to private sector competitors);
•
its products and services are not charged at less than their average variable costs or
short run marginal costs (though this does not preclude charging at less than break
even for a short period, eg to match competition);
•
the charging strategy is compatible with full cost recovery over the medium term.
This may mean ceasing to offer a service which has become unviable against the
competition;
•
any cross subsidies between services should not drive prices below average variable
cost or short run marginal cost;
•
if, exceptionally, a supplier charges below full cost because it has surplus capacity,
there must be broader benefits and prices should not fall below average variable or
short run marginal cost.
Delivering financial objectives
A 6.3.7 Public sector organisations should normally plan to achieve their financial objectives. If
necessary this may mean adjusting prices or managing the cost structure of the supply to deliver
adequate efficiency. In particular, if a public sector supplier forecasts a deficit, it should take
remedial action promptly.
A 6.3.8 If a public sector supplier moves away from full cost charging, there may be a case for
reviewing its financial objective. Normally any such change needs the agreement of both the
responsible minister and the Treasury.
Taking things further
A 6.3.9 The following may be particularly useful:
•
the Competition Act and public bodies at
http://webarchive.nationalarchives.gov.uk/20140402142426/http://www.oft.gov.uk
/OFTwork/publications/publication-categories/guidance/competition-act/
•
agreements and concerted practices at
http://webarchive.nationalarchives.gov.uk/20140402142426/http://www.oft.gov.uk
/shared_oft/business_leaflets/ca98_mini_guides/oft443.pdf
•
abuse of a dominant position
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/284
422/oft402.pdf .
A 6.3.10 More generally, it is good practice for bodies supplying goods or services into
competitive markets to seek legal advice on the application of competition law at an early stage.
179
Annex 7.1
A7.1
Forming and reforming ALBs
This annex covers the processes of setting up new arm ’s length bodies and reshaping
existing ones, either by m erger, dissolution or other transform ation. W hile the
processes are flexible, there are som e com m on them es centring on accountability and
stream lining governm ent processes.
Rationale for ALBs
A 7.1.1 The government works through ALBs when there is a good reason to do so, usually
when it is helpful for a specialist body to carry out a function where independence is important.
Each ALB has its own bespoke reason for existing and many are established under specific
legislation determining their form, functions and powers.
A 7.1.2 The three main kinds of ALBs are agencies, non departmental public bodies (NDPBs)
and non-ministerial departments (NMDs). Each has its strengths and is appropriate for a range
of functions. The three are compared in box A7.1A.
Setting up a new ALB
A 7.1.3 It is good practice to decide early which kind of body is most appropriate when setting
up a new ALB (sources of guidance on setting up ALBs are in box A7.1B). Parliament is
concerned that hiving off functions into an ALB should not diminish accountability. For that
reason NMDs are rarely the right solution.
A 7.1.4 It is important to remember that effective functional independence does not necessarily
require a specific structure. Ministers can choose to stand back from the decisions made or
opinions published by any ALB while maintaining financial control and oversight, eg ministers
never interfere with HMRC’s decisions on individual taxpayers’ affairs.
A 7.1.5 The next step is to develop a memorandum of understanding (or equivalent) setting out
the relationship between the new ALB and its parent department. Advice on this is in annex
7.2. These should be periodically reviewed to keep abreast of experience and the changing
context1.
A 7.1.6 Decisions on the form of any particular ALB must ultimately be for ministers. They will
depend in part on perceptions of the function in question, and on the extent to which ministers
think it right to take a day to day interest in its affairs. Generally, the closer the ALB’s functions
are to the centre of government, the more likely it is to be an agency; while NMD status is
appropriate for organisations of some size carrying out professional functions. The form and
structure of the NDPB is very flexible, suiting specific and technical functions.
1 See the Cabinet Office
Guidance on Reviews of Non Departmental Public Bodies which is available on the Cabinet Office website
http://www.civilservice.gov.uk/wp-content/uploads/2011/09/triennial-reviews-guidance-2011_tcm6-38900.pdf
180
A7.1 Forming and reforming ALBs
A 7.1.7 When an ALB is planned, it is essential to consult both the Treasury and the Cabinet
Office about its powers, status and funding2.
Box A 7.1A : com parison of the three m ain kinds of A LB in central governm ent
Feature
agency
non-departm ental
non-m inisterial
public body (N D PB) departm ent (N M D )
Status
Part of a department
Independent
Department in its own
organisation. May be
right
a company and/ or
a charity
Crown body
Yes
Not usually
Yes
Established by
Administrative action
Usually bespoke
Administrative action,
(usually quick and
primary legislation
often supplemented
easy)
(may take time).
by primary legislation
(if needed, may take
time)
Governance
CEO supported by a
Independent board led Permanent Secretary
board
by non-executive Chair
supported by a board
Ministerial
A minister in the
A minister in the
Rarely needed, but
accountability
parent department
sponsor department
when necessary, a
makes key decisions
decides key matters,
minister in the parent
on the agency’s
eg whether to adjust
department decides
affairs
functions, whether to
wind up or replace
Parent department
Has direct control
Subject to formally
Remote
agreed memorandum,
may be light touch
Funding
Estimates and/or fee
Grant(s) from
Estimates and/or fee
income
department(s), and /
income
or income from fees or
levies
Employees
Civil servants
Not usually civil
Civil servants
servants
Accounts etc
Publishes plans and
Publishes own plans
Publishes own plans
accounts as part of
and accounts; also
and accounts
parent department’s
consolidated into
central accounts
sponsor department’s
accounts
Parliamentary
CEO is Agency
CEO is normally the
Permanent Secretary is
Accounting Officer,
Accounting Officer,
Accounting Officer,
oversight by
oversight by
sponsor department’s
departmental PAO
departmental PAO
PAO could step in if
required
A 7.1.8 It is worth remembering that the three kinds of ALB in box A7.1A are only the most
common. Others are possible. Cabinet Office guidance on the categories of Public Bodies3
2 See for example: Executive Agencies: A guide for Departments and Public Bodies: A Guide for Departments -
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/80076/exec_agencies_guidance_oct06_0.pdf
181
A7.1 Forming and reforming ALBs
explains in more detail. They include public corporations and various kinds of cooperative
arrangements with the private or voluntary sector, some fairly loose. And there is scope to
establish one-off arrangements for special bodies where circumstances demand something
different. Special structures must of course be evaluated carefully, on the strength of a
comparative business case, to make sure that they will deliver value for money to the public
purse.
A 7.1.9
Whatever the legal status of an ALB, its sponsor department should have a
mechanism for asserting an appropriate degree of control over it, especially in financial matters
and in relation to issues of ethics in the use of public funds. In general, the greater the extent of
public funding, the greater the degree of control called for.
A 7.1.10 If legislation is required to set up an ALB, it is important to observe the new services
rules (Section 2.6). Strictly this means that royal assent is required before resources can be
committed to getting the organisation on its feet. In some urgent cases it may be possible to
make a claim on the Reserve to make an earlier start, but even so only after second reading in
the Commons to an uncontroversial bill and with safeguards to allow commitments to be
unwound if the bill does not pass.
A 7.1.11 Whatever the approach taken to setting up the new organisation, it is often desirable
to operate a period of shadow running before it starts in earnest. And do be aware that the
process of preparation can take time – eg often a couple of years or more for an NDPB.
Box A 7.1B: sources of guidance
G uide to the Establishm ent and O peration of Trading Funds
http://webarchive.nationalarchives.gov.uk/20130129110402/http:/www.hm-
treasury.gov.uk/psr_reporting_centralgovernment.htm
M aking and M anaging Public Appointm ents
http://publicappointmentscommissioner.independent.gov.uk/publications/guidance/
Corporate G overnance in Central G overnm ent Departm ents: Code of Good Practice includes
references to NDPBs and Agencies
https://www.gov.uk/government/publications/corporate-governance-code-for-central-government-
departments
Financial Reporting M anual – includes guidance for NDPBs and Agencies, including form of
Annual Reports
https://www.gov.uk/government/publications/government-financial-reporting-manual
Consolidated Budgeting G uidance – includes guidance in relation to NDPBs and public
corporations
https://www.gov.uk/government/publications/consolidated-budgeting-guidance
Reforming ALBs
A 7.1.12 Valuable as they can be, proliferation of ALBs is not good practice. It adds to
administrative costs generally and can fragment accountability. So it can be necessary or
desirable to wind up or merge ALBs in the light of experience.
3 Categories of Public Bodies: A Guide for Departments and is available on the Cabinet Office website
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/80075/Categories_of_public_bodies_Dec12.pdf
182
A7.1 Forming and reforming ALBs
A 7.1.13 The process of decision making is similar to that for setting up a new ALB if there is to
be a successor organisation. It is good practice to decide on a suitable shape for the new
organisation and then plan legislation, if necessary, to achieve it.
A 7.1.14 The predecessor organisation(s) must be wound up in an orderly fashion, with final
accounts to close its affairs (including a comprehensive list of assets and liabilities). If a closing
organisation has no staff by the time the final accounts are draw up, it is usual for the
accounting officer of the successor organisation, if there is one, to take responsibility for signing
them off. If this is not possible, for example if there is no successor, the PAO of the parent
department should sign them off.
A 7.1.15 When staff are to be migrated into a new organisation, it is important to respect their
statutory employment rights. Planning for this should form a key part of the transition
preparations. Mistakes can be costly.
183
Annex 7.2
Drawing up framework
A7.2
documents
Departm ents need arrangem ents to m onitor and understand their arm s-length bodies’
strategy, perform ance and delivery, usually built around a fram ew ork docum ent. This
annex offers an outline of how this can be draw n up, w ith a possible specim en,
though this is not the only w ay in w hich a fram ew ork docum ent can be drafted.
A 7.2.1 This annex contains an outline menu of terms suitable for inclusion in the framework
document for agencies, non-departmental public bodies (NDPBs) and other arms-length bodies
(ALBs) controlled by departments. Each body will need a bespoke specification suited to its
specific structure and responsibilities. The document should focus clearly on its relationship with
the sponsor department, and with any other departments with interest(s) in the ALB’s business.
A 7.2.2 The outline below could be adapted or used as a basis for framework documents for
any ALB. Some aspects must be tailored accordingly, in particular corporate governance ant the
roles of the chair, board and CEO are likely to be different for, e.g. executive agencies and
NDPBs. Those drawing up framework documents are not bound to follow the specimen, which
is offered by way of illustration. The paragraph numbering in the specimen framework
document follows that of the outline menu.
FRAMEWORK DOCUMENT FOR AN ALB: outline menu
Purpose of the ALB
1.
Statement of:
•
any statutory (and/or other) duties
•
strategic aims
•
any mission statement or equivalent.
Governance and accountability
2.
Statement of any legal origin(s) of its powers and duties.
3.
Statement of aims set by the sponsor department’s minister and any other ministers.
4.
Statement of which minister will account for the ALB’s business in parliament.
5.
Statement of the responsibilities of the accounting officer in the sponsor department,
especially:
•
regular monitoring and general oversight over the ALB’s business
•
accounting for any disbursements of grant to the ALB
•
sponsorship of its aims in central government
•
relationship with any other department(s) with an interest in the
ALB’s business.
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A7.2 Drawing up framework documents
6.
Statement of the responsibilities of the organisation’s accounting officer (usually the
chief executive) to account to:
•
parliament
•
the sponsor department
•
the ALB’s board
•
other stakeholders.
7.
Statement of the responsibilities of the ALB’s:
•
board
•
chairman
•
individual board members.
8.
Specification of the essential publications of the ALB, including
•
annual report and accounts, including its governance statement
•
any statutory reports
•
any bespoke requirements, eg related to its business sector.
9.
Statement of internal audit arrangements, including access by sponsor department’s
internal audit service.
10.
Statement of external audit arrangements, including:
•
the auditor (usually the C&AG)
•
the accounts direction (issued by the Secretary of State with the concurrence of the
Treasury)
•
value for money audits by the C&AG.
Management and financial responsibilities
11.
Statement that the ALB should follow the standards, rules, guidance and advice in
Managing Public Money, referring any difficulties or potential bids for exceptions to its sponsor
department in the first instance. Specification of any standard exceptions to or elaborations of
this general requirement.
12.
Details of corporate governance arrangements.
13.
Details of risk management procedures and arrangements.
14.
Requirements for developing and revising the corporate plan, with the expected
frequency, and arrangements for clearance with the sponsor department.
15.
Details of budgeting procedures.
16.
Details of the terms and conditions of payment of the grant-in-aid and any ring-fenced
grants made by the sponsor or other departments.
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A7.2 Drawing up framework documents
17.
Details of reporting to the sponsor department, with the expected frequency, including:
•
the ALB’s main activities;
•
its financial performance;
•
its expenditure against its budget boundary;
•
other monitoring information;
•
working level liaison arrangements.
18.
Specification of the activities of, and changes within, the body which require clearance
from the sponsor department, including delegated limits for new activities and capital projects.
19.
Staff.
20.
Arrangements for reviews of the ALB’S status.
21.
Procedures for winding up.
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A7.2 Drawing up framework documents
Appendix to Annex 7.2
FRAMEWORK DOCUMENT: specimen
This framework document has been drawn up by [the department] in consultation with [the
named ALB]. This document sets out the broad framework within which the [named body] will
operate. The document does not convey any legal powers or responsibilities. It is signed and
dated by [the department] and [the ALB]. Copies of the document and any subsequent
amendments have been placed in the Libraries of both Houses of Parliament and made available
to members of the public on the ALB website.
Purpose of the [named ALB]
1.1
Under the [Name] Act, the [name of ALB] has been set up in order to support the
strategic aims and business plan of the [sponsor] department(s). Its main aim is to […].
1.2
Its statutory duties are to:
•
[short summary of overarching statutory duties]
1.3
The [ALB’s] strategic aims are to:
•
[explain big picture aims] Aim 1
•
Aim 2
1.4
Its mission statement (if any) is:
Governance and accountability
2
[A LB’s] legal origins of pow ers and duties
2.1
The [ALB’s] powers and duties stem from sections [?] and [Schedule?] of the
[establishing legislation, include both primary and secondary legislation, as necessary].
3
O verall aim s
3.1
The Secretary of State/responsible Minister(s) has agreed that, subject to 1.3, the aims of
[the ALB] should be as follows:
i)
ii)
iii)
4
M inisterial responsibility
4.1
The [name or office of the responsible and successor minister] will account for business
in Parliament.
5
Sponsor departm ent’s accounting officer’s specific accountabilities and
responsibilities as Principal A ccounting O fficer (PA O )
5.1
The Principal Accounting Officer (PAO) of [sponsor department] has designated the chief
executive as [the ALB’s] accounting officer. (The respective responsibilities of the PAO and
accounting officers for ALBs are set out in Chapter 3 of
Managing Public Money which is sent
separately to the accounting officer on appointment.)
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A7.2 Drawing up framework documents
5.2
The PAO is accountable to parliament for the issue of any grant-in-aid to [the ALB]. The
PAO is also responsible for advising the responsible minister:
•
on an appropriate framework of objectives and targets for [the ALB] in the light of
the department’s wider strategic aims and priorities;
•
on an appropriate budget for the ALB in the light of the sponsor department’s
overall public expenditure priorities; and
•
how well the ALB is achieving its strategic objectives and whether it is delivering
value for money.
5.3
The PAO is also responsible for ensuring arrangements are in place in order to:
•
monitor the ALB’s activities;
•
address significant problems in the ALB, making such interventions as are judged
necessary;
•
periodically carry out an assessment of the risks both to the department and the
ALB’s objectives and activities;
•
inform the ALB of relevant government policy in a timely manner; and
•
bring concerns about the activities of the ALB to the full (ALB) board ,and, as
appropriate to the departmental board requiring explanations and assurances that
appropriate action has been taken.
5.4
[Named team] in the department is the primary contact for the ALB. They are the main
source of advice to the responsible minister on the discharge of his or her responsibilities in
respect of the ALB. They also support the PAO on his or her responsibilities toward the ALB.
6
Resp onsib ilities of the A LB’s chief executive as accounting officer
General
6.1
The chief executive as accounting officer is personally responsible for safeguarding the
public funds for which he or she has charge; for ensuring propriety, regularity, value for money
and feasibility in the handling of those public funds; and for the day-to-day operations and
management of the [named ALB]. In addition, he or she should ensure that the [named ALB] as
a whole is run on the basis of the standards, in terms of governance, decision-making and
financial management that are set out in Box 3.1 of Managing Public Money.
Responsibilities for accounting to parliament
6.2
The accountabilities include:
•
signing the accounts and ensuring that proper records are kept relating to the
accounts and that the accounts are properly prepared and presented in accordance
with any directions issued by the Secretary of State;
•
preparing and signing a Governance Statement covering corporate governance, risk
management and oversight of any local responsibilities, for inclusion in the annual
report and accounts;
•
ensuring that effective procedures for handling complaints about the ALB are
established and made widely known within the ALB;
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A7.2 Drawing up framework documents
•
acting in accordance with the terms of this document,
Managing Public Money and
other instructions and guidance issued from time to time by the Department, the
Treasury and the Cabinet Office;
•
giving evidence, normally with the PAO, when summoned before the PAC on the
ALB’s stewardship of public funds.
Responsibilities to the [named sponsor department]
6.3
Particular responsibilities to [named sponsor department] include:
•
establishing, in agreement with the department, the [named ALB’s] corporate and
business plans in the light of the department’s wider strategic aims and agreed
priorities;
•
informing the department of progress in helping to achieve the department’s policy
objectives and in demonstrating how resources are being used to achieve those
objectives; and
•
ensuring that timely forecasts and monitoring information on performance and
finance are provided to the department; that the department is notified promptly if
over or under spends are likely and that corrective action is taken; and that any
significant problems whether financial or otherwise, and whether detected by
internal audit or by other means, are notified to the department in a timely fashion.
Responsibilities to the board
6.4
The chief executive is responsible for:
•
advising the board on the discharge of the [ALB Board’s] responsibilities as set out
in this document, in the founding legislation and in any other relevant instructions
and guidance that may be issued from time to time;
•
advising the board on the [named ALB’s] performance compared with its aim[s] and
objectives;
•
ensuring that financial considerations are taken fully into account by the Board at
all stages in reaching and executing its decisions, and that financial appraisal
techniques are followed;
•
taking action as set out in paragraph 3.8.6 of
Managing Public Money if the board,
or its chairman, is contemplating a course of action involving a transaction which
the chief executive considers would infringe the requirements of propriety or
regularity or does not represent prudent or economical administration, efficiency or
effectiveness, is of questionable feasibility, or is unethical.
The [nam ed A LB’s] Board
7.1
The board should ensure that effective arrangements are in place to provide assurance
on risk management, governance and internal control. The board must [set up an Audit
Committee chaired by an independent non-executive member to provide independent
advice/ensure that the department’s Audit Committee provides assurance on risk]. The board is
expected to assure itself of the effectiveness of the internal control and risk management
systems.
7.2
The board is specifically responsible for:
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A7.2 Drawing up framework documents
•
establishing and taking forward the strategic aims and objectives of the ALB
consistent with its overall strategic direction and within the policy and resources
framework determined by the Secretary of State;
•
ensuring that the responsible minister is kept informed of any changes which are
likely to impact on the strategic direction of the [named ALB Board] or on the
attainability of its targets, and determining the steps needed to deal with such
changes;
•
ensuring that any statutory or administrative requirements for the use of public
funds are complied with; that the board operates within the limits of its statutory
authority and any delegated authority agreed with the sponsor department, and in
accordance with any other conditions relating to the use of public funds; and that,
in reaching decisions, the Board takes into account guidance issued by the sponsor
department;
•
ensuring that the board receives and reviews regular financial information
concerning the management of the [named ALB]; is informed in a timely manner
about any concerns about the activities of the [named ALB]; and provides positive
assurance to the department that appropriate action has been taken on such
concerns;
•
demonstrating high standards of corporate governance at all times, including by
using the independent audit committee to help the Board to address key financial
and other risks;
•
[unless the establishing legislation provides for other arrangements] appoint [with
the responsible minister’s approval] a chief executive and, in consultation with the
department, set performance objectives and remuneration terms linked to these
objectives for the chief executive which give due weight to the proper management
and use and utilization of public resources. [Set out the arrangements in legislation
if different from this.]
The chairman’s personal responsibilities
7.3
The chairman is responsible to the named minister. Communications between the
[named ALB’s] board and the responsible minister should normally be through the chairman.
He or she is responsible for ensuring that policies and actions support the responsible minister’s
[and where relevant other ministers’] wider strategic policies and that its affairs are conducted
with probity. Where appropriate, these policies and actions should be clearly communicated
and disseminated throughout the ALB.
7.4
In addition, the Chairman has the following leadership responsibilities:
•
formulating the board’s strategy;
•
ensuring that the board, in reaching decisions, takes proper account of guidance
provided by the responsible minister or the department;
•
promoting the efficient and effective use of staff and other resources;
•
delivering high standards of regularity and propriety; and
•
representing the views of the board to the general public.
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A7.2 Drawing up framework documents
7.5
The chairman also has an obligation to ensure that:
•
the work of the board and its members are reviewed and are working effectively;
•
the board has a balance of skills appropriate to directing the [named ALB’s]
business, as set out in the Government Code of Good Practice for Corporate
Governance;
•
board members are fully briefed on terms of appointment, duties, rights and
responsibilities;
•
he or she, together with the other board members, receives appropriate training on
financial management and reporting requirements and on any differences that may
exist between private and public sector practice;
•
the responsible minister is advised of [named ALB’s] needs when board vacancies
arise;
•
he or she assesses the performance of individual board members when being
considered for re-appointment;
•
there is a Board Operating Framework in place setting out the role and
responsibilities of the Board consistent with the Government Code of Good Practice
for Corporate Governance
•
there is a code of practice for board members in place, consistent with the Cabinet
Office
Code of Conduct for Board Members of Public Bodies.
Individual board members’ responsibilities
7.6
Individual board members should:
•
comply at all times with the
Code of Conduct for Board Members of Public Bodies
and with the rules relating to the use of public funds and to conflicts of interest;
•
not misuse information gained in the course of their public service for personal gain
or for political profit, nor seek to use the opportunity of public service to promote
their private interests or those of connected persons or organisations;
•
comply with the board’s rules on the acceptance of gifts and hospitality, and of
business appointments;
•
act in good faith and in the best interests of the [named ALB].
8
A nnual report and accounts
8.1
The [ALB Board] must publish an annual report of its activities together with its audited
accounts after the end of each financial year. The [named ALB] shall provide the department its
finalised (audited) accounts by [date] each year in order for the accounts to be consolidated
within the [named department’s].
8.2
The annual report must:
•
cover any corporate, subsidiary or joint ventures under its control;
•
comply with the Treasury’s
Financial Reporting Manual (FreM);
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A7.2 Drawing up framework documents
•
outline main activities and performance during the previous financial year and set
out in summary form forward plans.
8.3
Information on performance against key financial targets is within the scope of the audit
and should be included in the notes to the accounts. The report and accounts shall be laid in
parliament and made available on the [named ALB’s] website, in accordance with the guidance
in the FReM. A draft of the report should be submitted to the department [two weeks] before
the proposed publication date. The accounts should be prepared in accordance with the
relevant statutes and specific accounts direction issued by the department as well as the FReM.
9
Internal audit
9.1
[Named ALB] shall:
•
[establish and maintain arrangements for internal audit in accordance with the
Treasury’s Public Sector Internal Audit Standards (PSIAS)
(
https://www.gov.uk/government/publications/public-sector-internal-audit-
standards )/ ensure that the sponsor department’s internal audit team have
complete access to all relevant records] [delete as appropriate]
•
[in the event that the body has its own internal audit service] ensure the sponsor
department is satisfied with the competence and qualifications of the Head of
Internal Audit and the requirements for approving appointments in accordance
with PSIAS;
•
[set up an audit committee of its board in accordance with the Code of Good
Practice for Corporate Governance and the
Audit and Risk Assurance Committee
Handbook, or be represented on the [named] sponsor department’s Audit
Committee];
•
forward the audit strategy, periodic audit plans and annual audit report, including
the [named ALB] Head of Internal Audit opinion on risk management, control and
governance as soon as possible to the sponsor department; and
•
keep records of, and prepare and forward to the department an annual report on
fraud and theft suffered by the [named ALB] and notify the sponsor department of
any unusual or major incidents as soon as possible.
9.2
The internal audit service has a right of access to all documents, including where the
service is contracted out.
10
External audit
10.1
[The Comptroller & Auditor General (C&AG) audits the [named ALB’s] annual accounts
and lays them before parliament, together with his report/ The C&AG passes the audited
accounts to the Secretary of State who will lay the accounts together with the C&AG’s report
before parliament.] [Delete as applicable.]
In the event that the [named ALB] has set up and controls subsidiary companies, the [named
ALB] will [in the light of the provisions in the Companies Act 2006] ensure that the C&AG is
appointed auditor of those company subsidiaries that it controls and/or whose accounts are
consolidated within its own accounts. The [ALB] shall discuss with the sponsor department the
procedures for appointing the C&AG as auditor of the companies.]
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A7.2 Drawing up framework documents
10.2
The C&AG:
•
will consult the department and the ALB on whom – the NAO or a commercial
auditor – shall undertake the audit(s) on his behalf, though the final decision rests
with the C&AG;
•
has a statutory right of access to relevant documents, including by virtue of section
25(8) of the Government Resources and Accounts Act 2000, held by another party
in receipt of payments or grants from the [ALB];
•
will share with the sponsor department information identified during the audit
process and the audit report (together with any other outputs) at the end of the
audit, in particular on issues impacting on the Department's responsibilities in
relation to financial systems within the [named ALB];
•
will, where asked, provide departments and other relevant bodies with Regulatory
Compliance Reports and other similar reports which departments may request at
the commencement of the audit and which are compatible with the independent
auditor's role.
10.3
The C&AG may carry out examinations into the economy, efficiency and effectiveness
with which the ALB has used its resources in discharging its functions. For the purpose of these
examinations the C&AG has statutory access to documents as provided for under section 8 of
the National Audit Act 1983. In addition, the ALB shall provide, in conditions to grants and
contracts, for the C&AG to exercise such access to documents held by grant recipients and
contractors and sub-contractors as may be required for these examinations; and shall use its
best endeavours to secure access for the C&AG to any other documents required by the C&AG
which are held by other bodies.
Right of access
10.4
The department has the right of access to all ALB records and personnel for any purpose
including, for example, sponsorship audits and operational investigations.
Management and financial responsibilities
11
M anaging Public M oney and other governm ent-w ide corporate guidance
and instructions
11.1
Unless agreed by the department and, as necessary, HM Treasury, [Named ALB] shall
follow the principles, rules, guidance and advice in
Managing Public Money, referring any
difficulties or potential bids for exceptions to [named team] in [department] in the first instance.
A list of guidance and instructions with which the ALB should comply is in Appendix [?].
11.2
Once the budget has been approved by the sponsor department [and subject to any
restrictions imposed by statute][the responsible minister’s instructions][this document], the ALB
shall have authority to incur expenditure approved in the budget without further reference to
the sponsor department, on the following conditions:
•
the ALB shall comply with the delegations set out in Appendix 2. These delegations
shall not be altered without the prior agreement of the sponsor department;
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A7.2 Drawing up framework documents
•
the ALB shall comply with
Managing Public Money regarding novel, contentious or
repercussive proposals;
•
inclusion of any planned and approved expenditure in the budget shall not remove
the need to seek formal departmental approval where any proposed expenditure is
outside the delegated limits or is for new schemes not previously agreed;
•
the ALB shall provide the sponsor department with such information about its
operations, performance individual projects or other expenditure as the sponsor
department may reasonably require.
12
Corporate governance
Board appointments - the chairman and board members
12.1
The ALB chairman and board members are appointed for a period of [three] years by the
responsible minister. Such appointments will comply with the Commissioner for Public
Appointments
Code of Practice for Ministerial Appointments to Public Bodies.
Board appointments – the chief executive
12.2
[The chief executive is appointed by the responsible minister in consultation with [with
the agreement of] the chairman./The chief executive is appointed by the ALB’s Board, consulting
the responsible minister and PAO, as required.] [Delete as necessary]
Composition of the board
12.3
In line with the government’s
Code of good Practice
(https://www.gov.uk/government/publications/corporate-governance-code-for-central-
government-departments), the Board will consist of a chairman, together with [number] of
executive members that have a balance of skills and experience appropriate to directing the
ALB’s business. For [named ALB] there should be members who have experience of [add/delete
as necessary or appropriate] its business, operational delivery, corporate services such as HR, IS,
technology, property asset management, estate management, communications and
performance management. The board should include [number] of independent non-executive
members to ensure that executive members are supported and constructively challenged in their
role.
13
Risk m anagem ent
13.1
The [named ALB] shall ensure that the risks that it faces are dealt with in an appropriate
manner, in accordance with relevant aspects of best practice in corporate governance, and
develop a risk management strategy, in accordance with the Treasury guidance
Management of
Risk: Principles and Concepts (http://www.hm-treasury.gov.uk/orange_book.htm ). It should
adopt and implement policies and practices to safeguard itself against fraud and theft, in line
with the Treasury’s guidance on tackling fraud
(http://webarchive.nationalarchives.gov.uk/20130129110402/http://www.hm-
treasury.gov.uk/d/managing_the_risk_fraud_guide_for_managers.pdf.pdf). It should also take all
reasonable steps to appraise the financial standing of any firm or other body with which it
intends to enter into a contract or to give grant or grant-in-aid.
14
Corporate and business plans
14.1
[By date] the [named ALB] shall submit annually to the sponsor department a draft of
the corporate plan covering [three] years ahead. The draft should be submitted by [date]. The
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A7.2 Drawing up framework documents
ALB shall agree with the department the issues to be addressed in the plan and the timetable for
its preparation. The plan shall reflect the ALB’s statutory and/or other duties and, within those
duties, the priorities set from time to time by the responsible minister (including decisions taken
on policy and resources in the light of wider public expenditure decisions). The plan shall
demonstrate how the ALB contributes to the achievement of the department’s priorities.
14.2
The first year of the corporate plan, amplified as necessary, shall form the business plan.
The business plan shall be updated to include key targets and milestones for the year
immediately ahead and shall be linked to budgeting information so that resources allocated to
achieve specific objectives can readily be identified by the department. Subject to any
commercial considerations, [a digest of] the corporate and business plans should be published
by the ALB on its website and separately be made available to staff.
14.3
The following key matters should be included in the plans:
•
key objectives and associated key performance targets for the forward years, and
the strategy for achieving those objectives;
•
key non-financial performance targets;
•
a review of performance in the preceding financial year, together with comparable
outturns for the previous [2-5] years, and an estimate of performance in the current
year;
•
alternative scenarios and an assessment of the risk factors that may significantly
affect the execution of the plan but that cannot be accurately forecast; and
•
other matters as agreed between the department and the ALB.
15
Budgeting procedures
15.1
Each year, in the light of decisions by the department on the updated draft corporate
plan, the department will send to the ALB [by date]:
•
a formal statement of the annual budgetary provision allocated by the department
in the light of competing priorities across the department and of any forecast
income approved by the department; and
•
a statement of any planned change in policies affecting the ALB.
15.2
The approved annual business plan will take account both of approved funding provision
[where this applies] and any forecast receipts, and will include a budget of estimated payments
and receipts together with a profile of expected expenditure and of draw-down of any
departmental funding and/or other income over the year. These elements form part of the
approved business plan for the year in question.
16
G rant-in-aid and any ring-fenced grants
16.1
Any grant-in-aid provided by the department for the year in question will be voted in the
department's Supply Estimate and be subject to Parliamentary control.
16.2
The grant-in-aid will normally be paid in monthly instalments on the basis of written
applications showing evidence of need. The [named ALB] will comply with the general principle,
that there is no payment in advance of need. Cash balances accumulated during the course of
the year from grant-in-aid or other Exchequer funds shall be kept to a minimum level consistent
with the efficient operation of the ALB. Grant-in-aid not drawn down by the end of the
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A7.2 Drawing up framework documents
financial year shall lapse. Subject to approval by parliament of the relevant Estimates provision,
where grant-in-aid is delayed to avoid excess cash balances at the year-end, the department will
make available in the next financial year any such grant-in-aid that is required to meet any
liabilities at the year end, such as creditors.
16.3
[In the event that the department provides the ALB separate grants for specific (ring-
fenced) purposes, it would issue the grant as and when the ALB needed it on the basis of a
written request. The ALB would provide evidence that the grant was used for the purposes
authorised by the department. The ALB shall not have uncommitted grant funds in hand, nor
carry grant funds over to another financial year.]
17
Rep orting p erform ance to the d ep artm ent
17.1
The ALB shall operate management, information and accounting systems that enable it
to review in a timely and effective manner its financial and non-financial performance against
the budgets and targets set out in the corporate and business plans. The ALB shall inform the
sponsor department of any changes that make achievement of objectives more or less difficult.
It shall report financial and non-financial performance, including performance in helping to
deliver ministers’ policies, and the achievement of key objectives regularly [specify]. The ALB’s
performance shall be formally reviewed by the department twice a year. The responsible
minister will meet the [board][chairman][chief executive] once a year.
Providing monitoring information to the department
17.2
As a minimum, the ALB shall provide the department with information monthly that will
enable the department satisfactorily to monitor:
•
the ALB’s cash management;
•
its draw-down of grant-in-aid;
•
forecast outturn by resource headings;
•
other data required for the Online System for Central Accounting and Reporting
(OSCAR).
ALB/Department working level liaison arrangements
17.3
Officials of [named] team in the sponsor department will liaise regularly with ALB
officials to review financial performance against plans, achievement against targets and
expenditure against its DEL and AME allocations. The [team] will also take the opportunity to
explain wider policy developments that might have an impact on the ALB.
18
D elegated authorities
18.1
The ALB’s delegated authorities are set out in [appendix 2]. The ALB shall obtain the
department’s prior written approval before:
•
entering into any undertaking to incur any expenditure that falls outside the
delegations or which is not provided for in the ALB’s annual budget as approved by
the department;
•
incurring expenditure for any purpose that is or might be considered novel or
contentious, or which has or could have significant future cost implications;
196
A7.2 Drawing up framework documents
•
making any significant change in the scale of operation or funding of any initiative
or particular scheme previously approved by the department;
•
making any change of policy or practice which has wider financial implications that
might prove repercussive or which might significantly affect the future level of
resources required; or
•
carrying out policies that go against the principles, rules, guidance and advice in
Managing Public Money.
19
[ALBs that employ their own staff] Staff
Broad responsibilities for staff
19.1
Within the arrangements approved by the responsible minister [and the Treasury] the
ALB will have responsibility for the recruitment, retention and motivation of its staff. The broad
responsibilities toward its staff are to ensure that:
•
the rules for recruitment and management of staff create an inclusive culture in
which diversity is fully valued; appointment and advancement is based on merit:
there is no discrimination on grounds of gender, marital status, sexual orientation,
race, colour, ethnic or national origin, religion, disability, community background or
age;
•
the level and structure of its staffing, including grading and staff numbers, are
appropriate to its functions and the requirements of economy, efficiency and
effectiveness;
•
the performance of its staff at all levels is satisfactorily appraised and the ALB
performance measurement systems are reviewed from time to time;
•
its staff are encouraged to acquire the appropriate professional, management and
other expertise necessary to achieve the ALB’s objectives;
•
proper consultation with staff takes place on key issues affecting them;
•
adequate grievance and disciplinary procedures are in place;
•
whistle-blowing procedures consistent with the Public Interest Disclosure Act are in
place;
•
[a code of conduct for staff is in place based on the Cabinet Office’s
Model Code
for Staff of Executive Non-departmental Public Bodies
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/800
82/PublicBodiesGuide2006_5_public_body_staffv2_0.pdf .]
Staff costs
19.2
Subject to its delegated authorities, the ALB shall ensure that the creation of any
additional posts does not incur forward commitments that will exceed its ability to pay for them.
Pay and conditions of service
19.3
[NB the department should have regard to chapter 5 of the Cabinet Office’s
Public
Bodies: A Guide for Departments that provides guidance on staff issues in public bodies
(https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/80082/PublicBo
diesGuide2006_5_public_body_staffv2_0.pdf).] The ALB’s staff are subject to levels of
197
A7.2 Drawing up framework documents
remuneration and terms and conditions of service (including pensions) within the general pay
structure approved by the sponsor department [and the Treasury]. The ALB has no delegated
power to amend these terms and conditions.
19.4
If civil service terms and conditions of service apply to the rates of pay and non-pay
allowances paid to the staff and to any other party entitled to payment in respect of travel
expenses or other allowances, payment shall be made in accordance with the
Civil Service
Management Code (https://www.gov.uk/government/publications/civil-servants-terms-and-
conditions ) except where prior approval has been given by the department to vary such rates.
19.5
Staff terms and conditions should be set out in an Employee Handbook, which should
be provided to the department together with subsequent amendments.
19.6
The ALB shall operate [a performance-related pay scheme that shall form part of the
annual aggregate pay budget approved by the department or the general pay structure
approved by the department and the Treasury whichever is applicable].
19.7
The travel expenses of board members shall be tied to the rates allowed to senior staff of
the ALB or departmental rates [whichever is applicable]. Reasonable actual costs shall be
reimbursed.
19.8
The ALB shall comply with the EU Directive on contract workers – the Fixed-Term
Employees (Prevention of Less Favourable Treatment) Regulations.
Pensions, redundancy and compensation
19.9
ALB staff shall normally be eligible for a pension provided by [its own scheme][state
second pension][PCSPS][LGPS][other]. Staff may opt out of the occupational pension scheme
provided by the ALB, but that employers’ contribution to any personal pension arrangement,
including stakeholder pension shall normally be limited to the national insurance rebate level.
[Note that there is an exception for ALBs covered by the PCSPS partnership arrangement, and for
PCSPS by-analogy versions.]
19.10 Any proposal by the ALB to move from the existing pension arrangements, or to pay any
redundancy or compensation for loss of office, requires the prior approval of the department.
Proposals on severance must comply with the rules in chapter 4 of Managing Public Money.
20
Review of A LB’s status (and w ind ing -up arrangem ents)
20.1
The ALB will be reviewed every [3] years. The date of the next review will be in 20[?].
21
A rrangem ents in the event that the A LB is w ound up
21.1
The sponsor department shall put in place arrangements to ensure the orderly winding
up of the ALB. In particular it should ensure that the assets and liabilities of the ALB are passed
to any successor organisation and accounted for properly. (In the event that there is no
successor organisation, the assets and liabilities should revert to the sponsor department.) To
this end, the department shall:
•
ensure that procedures are in place in the ALB to gain independent assurance on
key transactions, financial commitments, cash flows and other information needed
to handle the wind-up effectively and to maintain the momentum of work inherited
by any residuary body;
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A7.2 Drawing up framework documents
•
specify the basis for the valuation and accounting treatment of the ALB’s assets and
liabilities;
•
ensure that arrangements are in place to prepare closing accounts and pass to the
C&AG for external audit, and that, for non-Crown bodies funds are in place to pay
for such audits. It shall be for the C&AG to lay the final accounts in Parliament,
together with his report on the accounts;
•
arrange for the most appropriate person to sign the closing accounts. In the event
that another ALB takes on the role, responsibilities, assets and liabilities, the
succeeding ALB AO should sign the closing accounts. In the event that the
department inherits the role, responsibilities, assets and liabilities, the sponsor
department’s AO should sign.
21.2
The ALB shall provide the department with full details of all agreements where the ALB
or its successors have a right to share in the financial gains of developers. It should also pass to
the department details of any other forms of claw-back due to the ALB.
LIST OF APPENDICES TO THE SPECIMEN DOCUMENT
Appendix 1
-
List of delegated authorities (not attached)
Appendix 2
-
List of government-wide corporate guidance instructions (attached)
Signed.……..
Signed……….
Date……...
Date………..
(On behalf of the department)
(On behalf of the ALB)
199
A7.2 Drawing up framework documents
APPENDIX 2 TO SPECIMEN DOCUMENT
Compliance with government-wide corporate guidance and instructions [NB to
check/update references.]
The Body shall comply with the following general guidance documents and instructions:
•
this document;
•
Appropriate adaptations of sections of
Corporate Governance in Central
Government Departments: Code of Good Practice
https://www.gov.uk/government/publications/corporate-governance-code-for-
central-government-departments ;
•
Code of Conduct for Board Members of Public Bodies
http://www.civilservice.gov.uk/wp-content/uploads/2011/09/code-of-
conduct_tcm6-38901.pdf
•
Code of Practice for Ministerial Appointments to Public Bodies
http://publicappointmentscommissioner.independent.gov.uk/wp-
content/uploads/2012/02/Code-of-Practice-2012.pdf
•
Managing Public Money (MPM);
•
Public Sector Internal Audit Standards,
https://www.gov.uk/government/publications/public-sector-internal-audit-
standards;
•
Management of Risk: Principles and Concepts: ;
https://www.gov.uk/government/publications/orange-book
•
HM Treasury Guidance on Tackling Fraud,
http://webarchive.nationalarchives.gov.uk/20130129110402/http://www.hm-
treasury.gov.uk/d/managing_the_risk_fraud_guide_for_managers.pdf.pdf ;
•
Government Financial Reporting Manual (FReM),
https://www.gov.uk/government/publications/government-financial-reporting-
manual;
•
Fees and Charges Guide, Chapter 6 of
Managing Public Money;
•
Departmental Banking: A Manual for Government Departments, annex 5.6 of
Managing Public Money;
•
relevant Dear Accounting Officer letters
https://www.gov.uk/government/collections/dao-letters ;
•
Regularity, Propriety and Value for Money,
http://webarchive.nationalarchives.gov.uk/20130129110402/http://www.hm-
treasury.gov.uk/psr_governance_valueformoney.htm;
•
The Parliamentary and Health Service Ombudsman’s Principles of Good
Administration
http://www.ombudsman.org.uk/improving-public-
service/ombudsmansprinciples ;
•
Consolidation Officer Memorandum, and relevant DCO letters;
200
A7.2 Drawing up framework documents
•
relevant Freedom of Information Act guidance and instructions (Ministry of Justice);
•
[Model Code for Staff of Executive Non-departmental Public Bodies (Cabinet Office)
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/800
82/PublicBodiesGuide2006_5_public_body_staffv2_0.pdf];
•
other relevant guidance and instructions issued by the Treasury in respect of Whole
of Government Accounts;
•
other relevant instructions and guidance issued by the central Departments;
•
specific instructions and guidance issued by the sponsor Department;
•
recommendations made by the Public Accounts Committee, or by other
Parliamentary authority, that have been accepted by the Government and relevant
to the ALB.
201
Annex 7.3
A7.3
Trading funds
This annex discusses how sponsor departm ents should assess proposals for trading
fund status, control and m onitor their trading funds, and deal w ith public dividend
capital (PD C).
Proposals for trading fund status
A 7.3.1 Bodies seeking trading fund status will usually need two years or so to get their
proposals agreed. They will need to demonstrate that their income will largely sustain their
operations and that they have the capacity to control and manage their business effectively. It is
usual to establish a trading fund1 to begin on 1 April with a trading year to coincide with the
government’s financial year, ending at end March. The key steps are set out in box A7.3A.
A 7.3.2
Further guidance may be found in the Treasury’s
Guide to the Establishment and
Operation of Trading Funds2.
Public dividend capital
A 7.3.3
Trading funds are normally established with deemed capital in the form of public
dividend capital (PDC) though often no cash transaction takes place. PDC may include an
allowance for working capital. Once established, the trading fund should pay a dividend on the
PDC and to service any loan capital from the NLF.
A 7.3.4
Under resource budgeting arrangements, sponsor departments score their
trading funds’ PDC as an asset. They also incur a cost of capital charge on the value of the net
assets of bodies in which they have an investment, including trading funds. This charge is offset
by the receipt of dividends on the PDC and interest on any loan capital. So if the trading fund is
unable to pay a dividend, the sponsor department may need to find offsetting savings.
Monitoring and control
A 7.3.5
Sponsor departments should monitor the performance of their trading funds, as
any other part of their departments or ALBs. They should take an active part in assessing the
(annual) corporate plans prepared by their trading funds, which should be agreed with the
relevant departmental minister.
A 7.3.6
The trading fund’s corporate plan should be supplemented by a more detailed
annual business plan against which the sponsor department should measure performance
monthly. In some cases, the Shareholder Executive may act for or advise the sponsor
department.
1 Under the Government Trading Fund Act 1973
2
http://webarchive.nationalarchives.gov.uk/20130129110402/http:/www.hm-treasury.gov.uk/psr_reporting_centralgovernment.htm
202
A7.3 Trading funds
A 7.3.7
The Treasury takes a strategic role. It needs to be confident that the department
has adequate procedures for monitoring and controlling its trading funds. It may take a more
direct role if particular questions or problems arise.
Box A 7.3A : m ain steps in processing applications for trading fund status
Any body proposing to become a trading fund should be part of a department or a department in its
own right.
Sponsor departm ents should:
•
consider whether the body really will get most of its income from trading;
•
assess whether trading fund status will improve the body’s efficiency and effectiveness in
managing its activities;
•
obtain the agreement of both departmental ministers and the Chief Secretary to the body’s
outline business case;
•
prepare a detailed business case, including financial forecasts, financing arrangements (eg loans
or PDC), valuation of specialised assets, and determination of financial targets;
•
arrange independent assessment of the business case (perhaps by private sector consultants),
including a fitness to trade review where goods or services are not currently charged for. The
review will need to confirm that the systems are adequate to identify costs of goods or services
provided, make necessary charges to customers, control debtors, manage incoming cash, and
maintain adequate accounting and reporting systems;
•
consult and advise customers, staff and other stakeholders about the proposal to establish a
trading fund (the results of the consultation will eventually be laid before Parliament);
•
consult the Treasury about:
-
the capitalisation of the trading fund, eg a cash injection, NLF loans or PDC
-
arrangements for monitoring the financial performance of the trading fund
-
financial targets
-
appointment of the Accounting Officer for the trading fund
-
the Framework Document
-
the draft Trading Fund order;
•
seek final approval of both departmental ministers and the Chief Secretary;
•
arrange the necessary Parliamentary debate.
The Treasury
•
agrees the basic business case and capitalisation of the trading fund;
•
issues a direction under the Government Trading Funds Act 1973 setting out how the assets and
liabilities to be appropriated to the trading fund are to be valued;
•
directs the trading fund to be guided by the FReM and by standard directions on its report and
accounts.
203
Annex 7.4
A7.4
Using private finance
Som e public services are delivered in partnership w ith private sector providers, using
som e carefully controlled private finance. Because the private sector contractor puts
its ow n funds at risk, it can incentivise delivery of assets and services to tim e and
cost, and can offer value for m oney w here the benefits of risk transfer and private
sector delivery offset the additional cost of private finance. Such deals are not
appropriate for every project.
A 7.4.1 Although the use of private finance in the delivery of public sector assets and services is
one method of procurement, it is not suited to all types. Where it is used effectively it can offer
a number of strengths in delivering public assets (see box A7.4A). These stem from:
•
sharing risk in delivering public projects within a structure in which the private
sector contractor puts its own capital at risk;
•
payment to the private sector being structured in such a way as to ensure the
private sector is incentivised to deliver the required services or obligations under the
arrangement; and
•
the private sector being incentivised to grow market share in the joint delivery of
services, or to grow the value in the joint management of assets.
A 7.4.2 Contracts using private finance may include the ongoing maintenance and operation of
the asset and the delivery of associated services to outcome specifications set by the public
sector. Generally they are long term arrangement between the parties.
Box A 7.4A : strengths of using private finance to deliver public sector assets
and services
•
getting projects built to time and to budget
•
improving whole-of-life risk allocation and management, creating disciplines and incentives on
the private sector to manage risk effectively
•
securing a greater focus on due diligence
•
securing better integration of design, construction and operational skills
•
securing a greater focus on growing market share or value of a joint asset or business
A 7.4.3 Private finance does not suit every project. It should only be used after the rigorous
scrutiny of all alternative procurement options, where:
•
the use of private finance offers better value for money for the public sector
compared with other forms of procurement. Annex 4.6 gives additional guidance
on the value for money analysis that is required alongside the assurance and
approval process;
204
A7.4 Using private finance
•
the structure of the project allows the public sector to define its needs after
construction as service outputs that can be adequately contracted for in a way that
ensures an effective and accountable delivery of long-term public services;
•
the public sector partner is able to predict the nature and level of its long term
service requirements with a reasonable degree of certainty.
A 7.4.4 Conversely, private finance is not usually suitable for:
•
individual projects too small to justify the transaction costs; or
•
large innovative IT projects, or other services where it is not practical to specify the
requirements sufficiently firmly in advance or over the long time-frame of the
prospective contract life.
A 7.4.5 The main procurement principles continue to apply when using private finance. It is
important that the output to be achieved is clearly specified rather than the method to be used
in carrying out the contract, so that the supplier can innovate and manage risk effectively.
However, it is sensible to clarify key areas of design early on, to prevent false starts and later
misunderstandings.
A 7.4.6
Public sector organisations should not, however, use standard contracts
automatically. They should be intelligent customers, providing incentives to stimulate enough
competition to achieve good value in procurement costs. They should also be aware that their
own reputations may be at risk when privately financed contracts are carried out. Where
contracts include the ongoing maintenance and operation of assets, public sector organisations
need to commit sufficient resource to effective long term contract management, including
monitoring performance and managing any service variation requirements or other contract
delivery issues over the project life.
A 7.4.7 Once a major asset has been constructed, it may be possible for the private sector
partner to refinance the project debt on more favourable terms than achieved at financial close.
The contract should specify how the financial benefit of any refinancing should be shared with
the public sector purchaser. The Treasury has produced a standard refinancing protocol to
achieve this.
205
Glossary
Name
Definition
Accounting officer
A person appointed by the Treasury or designated by a department to be
accountable for the operations of an organisation and the preparation of
its accounts. The appointee is the head of a department or other
organisation or the Chief Executive of a non-departmental public body
(NDPB) or other arms-length-body. See chapter 3.
Accounts direction
A direction issued setting out the accounts which a body must prepare,
and the form and content of those accounts.
Affirmative resolution
A parliamentary procedure exercising control over secondary legislation (ie,
a Statutory Instrument in the form of an order or regulation). Parliament’s
positive approval is required before the instrument can take effect.
Annually Managed
Spending included in Total Managed Expenditure (TME), which does not
Expenditure, AME
fall within Departmental Expenditure Limits (DELs). Expenditure in AME is
generally less predictable and controllable than expenditure in DEL.
Arm’s length bodies, ALBs
Central government bodies that carry out discrete functions on behalf of
departments, but which are controlled or owned by them. They include
executive agencies, NDPBs and government-owned companies.
Capital spending
Spending on the purchase of assets (including buildings, equipment and
land), above a certain threshold (set by the body concerned), which are
expected to be used for a period of at least one year. Items valued below
it are not counted as capital assets, even where they have a productive life
of more than one year.
Central government bodies
Departments and departmental executive agencies, NDPBs, and NHS
health authorities and boards. The Office for National Statistics determines
which bodies are classified to central government.
Chief executive
Title for the head of an arm’s length body, normally appointed as
accounting officer.
Civil Service Code
A concise statement issued by the Cabinet Office setting out the
framework within which all civil servants work, and the core values and
standards they are expected to hold.
Clawback
The concept that where an asset financed by public money is sold, all or
part of the proceeds of the sales should be returned to the Exchequer.
Commercial banks
Bodies other than the Government Banking Service which provide banking
services, including private sector banks and building societies.
Committee of Public
A committee of the House of Commons which examines the accounting
Accounts
for, and the regularity and propriety of, government expenditure. It also
examines the economy, efficiency and effectiveness, and feasibility of
expenditure. Commonly known as the Public Accounts Committee (PAC).
Common law
One of the historical sources of law in the United Kingdom. Often used to
distinguish judge-made case-law and longstanding legal principles from
legislation which has been made by parliament.
206
Glossary
Comptroller and Auditor
The chief executive of the National Audit Office, appointed by the Crown,
General, C&AG
and an Officer of the House of Commons. As Comptroller, the C&AG’s
duties are to authorise the issue by the Treasury of public funds from the
Consolidated Fund and the National Loans Fund to government
departments and others: As Auditor General, the C&AG certifies the
accounts of all government departments and some other public bodies,
and carries out value-for-money examinations. See annex 1.1.
Concordat
A long-standing agreement between the Treasury and the Public Accounts
Committee that continuing functions of government should be defined in
specific statute. See annex 2.3.
Consolidated Fund, CF
The government’s current account, operated by the Treasury, through
which most government payments and receipts pass.
Consolidated Fund standing Payments for services which Parliament has decided by statute should be
services
met directly from the Consolidated Fund, rather than financed annually by
voted money.
Consolidated Fund extra
Income, or related cash, that passes through a department’s accounts but
receipt (CFER)
may not be retained by the department and is surrendered to the
Consolidated Fund.
Contingencies Fund
A government fund, controlled by the Treasury, which, subject to certain
criteria, can provide repayable advances to finance urgent expenditure in
anticipation of parliamentary approval of legislation or Estimates, or used
to finance expenditure in advance of receipts. See annex 2.4.
Contingent liabilities
Potential liabilities that are uncertain but recognise that future expenditure
may arise if certain conditions are met or certain events happen.
Corporate governance
The system and principles by which organisations are directed and
controlled.
Cost of capital
The cost to the government of financing investment, ie the rate at which it
borrows. This is included in the calculation when setting fees and charges
and is calculated as a percentage of the net asset value.
Data Protection Act
Legislation (1998) which governs how organisations can use personal
information which they hold.
Delegated authority
A standing authorisation by the Treasury under which a body may commit
resources or incur expenditure from money voted by Parliament without
specific prior approval from the Treasury. Delegated authorities may also
authorise commitments to spend (including the acceptance of contingent
liabilities) and to deal with special transactions (such as write-offs) without
prior approval.
Depreciation
A measure of the wearing out, consumption or other reduction in the
useful life of a fixed asset whether arising from use, passage of time or
obsolescence through technological or market changes.
Derivative
A financial instrument derived from another, usually sold singly or in
packages to promote hedging, eg, interest rate and exchange rate options.
Detective controls
Controls designed to detect error, fraud, irregularity or inefficiency.
207
Glossary
Devolved administrations
The administrations established in Scotland, Wales and Northern Ireland
under the Scotland Act 1998, the Government of Wales Act 1998 and the
Northern Ireland Act 1998.
Discretionary services
Services that are not required by statute but are provided, often into
competitive markets.
Efficiency and Reform
A part of the Cabinet Office, which works closely with the Treasury to
Group
tackle waste and improve accountability across Whitehall.
Estimate Manual
A practical reference guide issued by the Treasury which provides detailed
information on the Supply Estimates policy and process.
Estimates Memorandum
An explanation of how provision sought in the Estimate is intended to be
used and the relationship with other spending controls. Primarily provided
for the departmental select committee but made freely available online.
Excess Vote
The means by which excess expenditure, or otherwise unauthorised
expenditure, of cash, capital or resources, is regularised through an
additional vote by Parliament. See section 5.4.
Exchequer
Central government’s central financing arrangements, based on the
Consolidated Fund and National Loans Fund, and managed by the
Treasury and the Bank of England.
Exchequer Pyramid
A serious of accounts held at the Bank of England through which the
overnight sweep and funding flows.
Feasibility
The principle that proposals with public expenditure implications should be
implemented accurately, sustainable and to the intended timetable.
Finance Act
The legislation through which Parliament agrees the government’s tax
decisions. Normally passed in the summer after the spring budget.
Framework document
A document setting out the accountabilities and relationships of arms-
length-bodies with their sponsor departments – see annex 7.2
Freedom of Information
Legislation designed to promote public access to a wide range of public
sector data and information (but not personal data).
Full cost
The total cost of all the resources used in providing a good or service in
any accounting period (usually one year). This includes all direct and
indirect costs of producing the output (cash and non-cash costs) including
a full proportional share of overhead costs and any selling and distribution
costs, insurance, depreciation, and the cost of capital, including any
appropriate adjustment for expected cost increases.
Funding
Transferring monies to an account, so that they are available when needed
for payments.
Generally accepted
The accounting and disclosure requirements of the Companies Act and
accounting practice in the
pronouncements by the Financial Reporting Council (principally accounting
UK, UK GAAP
standards and Urgent Issues Task Force abstracts), supplemented by
accumulated professional judgements.
Governance Statement
An annual statement that accounting officers are required to make as part
of the accounts on a range of risk and control issues.
208
Glossary
Grant
Payments made by departments to outside bodies to reimburse
expenditure on agreed items or functions, and often paid only on statutory
conditions.
Grant in aid
Regular payments by departments to outside bodies (usually NDPBs) to
finance their operating expenditure.
Hedging
Transaction(s) designed to reduce or eliminate financial risk, eg, because of
interest rate or exchange rate fluctuations.
International Financial
International accounting standards reflected in UK GAAP. Adapted by
Reporting Standards (IFRS)
government for the public sector.
Irregular expenditure
Expenditure outside the ambit of a vote, ie resources spent on matters
outside the ambit of a vote which were not included in the relevant ambit in the departmental
Estimate and therefore Parliament has not authorised. See section 5.4.
Joined-up government
Arrangements under which policy-making and service delivery are
unhindered by departmental boundaries.
Judicial review
A procedure by which the courts can review the legality of decisions and
actions of public authorities, including the government. Judicial review
looks at the fairness of the decision-making process rather than the merits
of the decision itself.
Levies
Licences to operate public goods, often set to recover associated costs
such as supervision by a regulator.
Misstatement
A statement which is untrue. The maker of a misstatement can be sued
for damages by those who have relied on the misstatement, but only if in
the circumstances it was reasonable to rely on it.
National Accounts
Accounts produced by the Office for National Statistics in accordance with
the European System of Accounts 1995, which promotes standardisation
in the way in which public sector income and expenditure is measured.
National Audit Office, NAO A corporate Parliamentary body set up to provide resources, support and
constructive challenge to the C&AG. See annex 1.1.
National Insurance Fund,
A government fund used to meet the cost of contribution-based benefits,
NIF
financed mainly by contributions paid by employers and individuals.
National Loans Fund, NLF
The fund through which passes most of the government’s borrowing
transactions and some domestic transactions.
Non-departmental public
A body with a role in the processes of government, but not a government
body, NDPB
department or part of one. NDPBs accordingly operate at arm’s length
from Ministers.
Notional costs of insurance
A cost which is taken into account in setting fees and charges to improve
comparability with private sector service providers. The charge takes
account of the fact that public bodies do not generally pay an insurance
premium to a commercial insurer.
Office for National Statistics, The independent body responsible for collecting and publishing official
ONS
statistics about the UK’s society and economy.
Office of the Paymaster
Now incorporated within the Government Banking Service, it has statutory
General, OPG
responsibilities to hold accounts and make payment for government
departments and other public bodies.
209
Glossary
Orange book
The informal title for
Management of Risks: Principles and Concepts,
guidance published by the Treasury for public sector bodies.
Overdraft
An account with a negative balance.
Parliamentary authority
Parliament’s formal agreement to authorise an activity or expenditure.
Prerogative powers
Powers exercisable under the Royal Prerogative, ie, powers which are
unique to the Crown, as contrasted with common-law powers which may
be available to the Crown on the same basis as to natural persons.
Primary legislation
Acts which have been passed by the Westminster Parliament and, where
they have appropriate powers, the Scottish Parliament and the Northern
Ireland Assembly. Begin as Bills until they have received Royal Assent.
Propriety
The principle that patterns of resource consumption should meet high
standards of public conduct, and robust governance and respect
Parliament’s intentions, conventions and control procedures, including any
laid down by the PAC. See box 2.4.
Public Accounts Committee See Committee of Public Accounts.
Public Accounts Commission A Select Committee of the House of Commons set up under the National
Audit Act 1983 to regulate the National Audit Office.
Public corporation
A trading body controlled by central government, local authority or other
public corporation that has substantial day to day operating
independence. See section 7.7.
Public Dividend Capital, PDC Finance provided by government to public sector bodies as an equity stake;
an alternative to loan finance.
Public Private partnership,
A structured arrangement between a public sector and a private sector
PPP
organisation to secure an outcome delivering good value for money for
the public sector. It is classified to the public or private sector according to
which has more control.
Rate of return
The financial remuneration delivered by a particular project or enterprise,
expressed as a percentage of the net assets employed.
Regularity
The principle that resource consumption should accord with the relevant
legislation, delegated authorities and this document. See box 2.4.
Restitution
A legal concept which allows money and property to be returned to its
rightful owner. It typically operates where another person can be said to
have been unjustly enriched by receiving such monies.
Return on capital employed, The ratio of profit to capital employed of an accounting entity during an
ROCE
identified period. Various measures of profit and of capital employed may
be used in calculating the ratio.
Royal charter
The document setting out the powers and constitution of a corporation
established under prerogative power of the monarch acting on Privy
Council advice.
Second reading
The second formal time that a House of Parliament may debate a bill,
although in practice the first substantive debate on its content. If
successful, it is deemed to denote parliamentary approval of the principle
of the proposed legislation.
210
Glossary
Secondary legislation
Laws, including orders and regulations, which are made using powers in
primary legislation. Normally used to set out technical and administrative
provision in greater detail than primary legislation, they are subject to a
less intense level of scrutiny in Parliament. European legislation is,
however, often implemented in secondary legislation using powers in the
European Communities Act 1972.
Section
An ‘Estimate line’ within the Part II: Subhead detail table in an Estimate.
Select Committee
Both Houses of Parliament have select committees that scrutinise the work
and expenditure of government. In the House of Commons,
responsibilities of departmental select committees include oversight of the
policies, administration and spending of particular government
departments.
Service-level agreement
Agreement between parties, setting out in detail the level of service to be
performed. Where agreements are between central government bodies,
they are not legally a contract but have a similar function.
Shareholder Executive
A body created to improve the government’s performance as a
shareholder in businesses.
Spending review
A cross-government review of departmental aims and objectives and
analysis of spending programmes. Results in the allocation of multi-year
budgetary limits.
State aid
State support for a domestic body or company which could distort EU
competition and so is not usually allowed. See annex 4.7.
Statement of Excesses
A formal statement detailing departments’ overspends and irregular
spending as identified by the Comptroller and Auditor General as a result
of undertaking annual audits.
Supply
Resources voted by Parliament in response to Estimates, for expenditure by
government departments.
Supply and Appropriation
Acts of Parliament, which give formal approval to departmental Supply
Acts
Estimates. The Main Estimates are approved by a Supply and
Appropriation (Main Estimates) Act and the Supplementary Estimates by a
Supply and Appropriation (Anticipation and Adjustments) Act.
Supplementary Estimate
The means by which departments seek to amend parliamentary authority
provided through Main Estimates by altering the limits on resources,
capital and/or cash or varying the way in which provision is allocated.
Normally presented in February each year.
Target rate of return
The rate of return required of a project or enterprise over a given period,
usually at least a year.
Trading fund
Public sector organisation that has a financing framework allowing it to
meet outgoings from commercial revenues. In national accounts they are
normally classified as public corporations.
Value for money
The process under which organisation’s procurement, projects and
processes are systematically evaluated and assessed to provide confidence
about suitability, effectiveness, prudence, quality, value and avoidance of
error and other waste, judged for the Exchequer as a whole.
211
Glossary
Virement
The use of savings on one or more sections (Estimate lines) or subheads to
meet excesses on another section or subhead within the same voted limit
in an Estimate.
Vote
The process by which Parliament approves funds in response to supply
Estimates.
Voted expenditure
Provision for expenditure that has been authorised by Parliament.
Parliament ‘votes’ authority for public expenditure through the Supply
Estimates process. Most expenditure by central government departments
is authorised in this way.
Windfall
Monies received by a department which were not anticipated in the
spending review.
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If you require this information in an alternative
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HM Treasury and its work, contact:
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