RESEARCH COUNCIL'S OUTTURN EXPENDITURE 2004-05

Breakdown on the outturn expenditure of each of the Research Councils for the financial year 2004-05

  The financial information is presented both in terms of that reported and published in Research Councils' Annual Accounts (the Income and Expenditure Account) and as reported in the Departmental Expenditure Limit (DEL) Outturn. Both versions of the 2004-05 data are presented because the surplus or deficit in any financial year may differ significantly between the two due to differences in the inclusion and categorisation of certain income and expenditure items.

  To aid the Committee with its work, I have enclosed an accompanying paper explaining in more detail the differences between the two types of accounts, together with an explanation from each Research Council of the reasons for their under - or overspend based on the DEL Outturn.

RESEARCH COUNCILS UK

Background information on Annual Accounts and the DEL Outturn

  1.  The Research Councils are required to prepare two types of annual accounts:

—  Annual Accounts, as required under the Science and Technology Act 1965, and audited by the Comptroller and Auditor General to the Houses of Parliament. The Annual Accounts include an audited financial statement, the Income and Expenditure Account (I&E), detailing a surplus (under-spend) or deficit (over-spend) for the financial year. The Annual Accounts are prepared under an accounts direction from the OST; a generic version of this is attached at Annex 1.

—  A statement of Departmental Expenditure Limit (DEL) Outturn, an unaudited financial summary presented in Research Council's Operating Report or in the Annual Report, and prepared under the accounting rules defined by the Treasury for public sector bodies. Any underspend may be carried forward as End Year Flexibility (EYF) from one year to the next. The DEL Outturn may record a deficit for the year, subject to draw down of the previous year's EYF. The OST allocates resource DEL and capital DEL under the terms and conditions set out in the individual Council's Management Statement and Financial Memorandum.

  2.  The Councils are required by the Treasury, through the DTI and OST, to manage their EYF and cumulative EYF positions. Hence the Research Councils focus on the summary of DEL Outturn and the reported EYF positions.

  3.  Expenditure is reported on an accruals basis in both Annual Accounts and the DEL Outturn. The major differences in reported expenditure between the summary of DEL Outturn and the Annual Accounts are presentational and have no, or minor, net effect on reported surpluses:

—  The expenditure is shown net and gross of receipts in the summary of DEL Outturn, whereas the Annual Accounts contains only gross expenditure. The effects of these differences net off over the reports as a whole, hence this is a presentational issue only.

—  The summary of DEL Outturn includes capital payments and resultant depreciation charges, whereas the Income and Expenditure Account includes only the charges. The net difference between the two is not significant, hence this is largely a presentational issue.

  4.  The income declared may vary considerably between the Annual Accounts and DEL Outturn. Income in the Annual Accounts is required to record actual cash received in the period (mainly cash Grant-In-Aid drawn down from the OST) whilst income in the summary of DEL Outturn records allocated Departmental Expenditure Limit (DEL).

  5.  The reported surplus (or deficit) for the financial year may differ significantly between the Income and Expenditure Account and the summary of DEL Outturn due to differences in the inclusion and categorisation of certain income and expenditure items.

  6.  Whilst Grant-In-Aid is derived from DEL, the two can often vary. This difference is normally due to adjusting the Grant-In-Aid to meet the operational cash requirements of the organisation, eg due to working capital requirements. However, on the transition to Resource Accounting and Budgeting (RAB), Councils were given additional non-cash DEL allocation[1], which did not net off in the summary of DEL Outturn and this has caused a long lasting difference in the retained surpluses between the Annual Accounts and DEL Outturn statements.

  7.  Councils are allocated DEL and are required to use that allocation in the most efficient manner to meet the strategic goals of each Council. Normally Councils annually commit to allocate funds, which results in expenditure over several future financial periods, as this is deemed the most suitable manner to meet the goals of the Council. Councils seek to adjust the annual value of funds committed so as to produce a forecast level of expenditure in future that matches the allocated DEL over time.

  8.  Councils are generally expected to work within their budget for the year and are strongly discouraged from having a cumulative over-spend. In view of the significant forward liabilities of the Councils (eg £1.2 billion for ESPRC as at 31 March 2005), which are settled over several years, and the Councils' exposure to the impacts of changing external income streams, it is prudent to maintain a working EYF under-spend to deal with changes in income and in the timing of expenditure and to target new opportunities.

  9.  The magnitude of the EYF under-spend taken forward depends on the scale of the uncertainties, the most significant being:

—  Changes to DEL allocations, which are not known with sufficient notice as to develop sufficient commitment patterns in time to generate matching expenditure. This arises from the long term nature of the commitment process, and the shorter term nature of Councils' funding.

—  Actual timing of expenditure arising from commitment released varying from that forecast, eg due to unanticipated or abnormal delays in the start of grant spend after grant award is made. This arises from the desire of Councils to avoid the imposition of strict administration rules on funded bodies or persons, which would affect the operational effectiveness of their work.

—  Smoothing of commitment released over years to provide a consistent and non-lumpy profile, arising from the Councils' aim of providing a sustainable platform for long term research.

—  Exposure to uncertainties over future external income streams eg reduced external income as a result of changing priorities within customer base.

Summary of Research Council's Outturns

  10.  In summary the DEL Outturns for 2004-05 for the Research Councils (excluding AHRC) are:

£ millions	Allocation	Expenditure	surplus/(deficit)
BBSRC	289	296	(7)
CCLRC	147	163	(17)
CCLRC (Diamond)	87	85	2
EPSRC	501	488	13
ESRC	105	106	(1)
MRC	455	420	35
NERC	323	317	6
PPARC	297	295	2
	2,204	2,171	33

  11.  The summary stated above gives the net surplus/deficit for each Council and in total. The constituent parts of this net figure for each Council are Resource (both cash and non-cash) and Capital. The individual surpluses or deficits for each of these three constituent items are detailed in the separate tables for each Council. Whilst the total net surplus/deficit is important, the constituent parts for each Council should also be recognised and understood.

  12.  An explanation for the under, or over, spend by Council is given on the following pages.

  13.  Further details of the Councils' Annual Accounts and their 2004-05 DEL Outturns are given in the separate attachment. It should be noted that some of the stated EYFs are in the final stages of agreement between the respective Council and OST, hence the reported figures are provisional in some cases. The DEL Outturns report a £33 million EYF under-spend in 2004-05 and a cumulative EYF under-spend carried forward of £236 million.

BBSRC

  BBSRC reported a total net EYF over-spend in 2004-05:

£ millions	DEL Outturn
Income	289.1
Expenditure	(296.2)
EYF surplus/(deficit)	(7.1)
Less EYF surplus brought forward	4.8
EYF net (deficit)	(2.3)

  The focus for financial management in BBSRC has been to look at commitment and spend over the three year Spending Review (SR) period in order to ensure programme expenditure matches to allocation levels from OST. BBSRC was praised by the House of Commons Science and Technology Committee in 2004 for the quality of its financial management.

  The gross over-spend of £7.1M (2.5%) in 2004/05 before allowing for brought forward EYF surplus, was as forecast from early in the financial year, and was made-up of:

—  Cash resource (excluding capital grants) under-spend of £7.3 million;

—  Capital grant resource over-spend of £1.6 million;

—  Capital under-spend of £5.0 million; and

—  Non-cash resource over-spend of £17.9 million.

  The main reason for the variance is the large non-cash provision of £14.8 millionrelating to institute restructuring. This is partly offset by under-spend on core resource. There is also an under-spend on capital DEL as delays have occurred on major capital projects.

  BBSRC is forecasting a surplus in 2005/06 which will more than cover its small residual overspend in 2004-05, and is anticipating a small net under-spend over the SR2002 period as a whole.

CCLRC

  CCLRC reported a total net over-spend in 2004-05:

£ millions	DEL Outturn
Income	146.9
Expenditure	(163.5)
EYF surplus/(deficit)	(16.6)

  The over-spend noted is the net of:

—  Cash resource under-spend of £9.6 million.

—  Capital under-spend of £1.8 million.

—  Non-cash resource overspend of £28.0 million.

  The balances shown are the result of a large number of Capital and Resource projects, each with their own positive or negative outturn position. The shortfall on Resource of £9.6M was caused by:

—  £1.8 million virement to Capital.

—  £1.5 million Income & Expenditure Surplus (prior to provision for Daresbury SRS Closure and Restructuring).

—  £2.7 million cash DEL set aside in the SR2002 allocation for "capital charges" (vired to non-cash).

—  £0.4 million retrospective allocation to cover for expenditure on campus activities incurred in 2003-04.

—  £0.8 million under-spend against EU DEL.

—  £2.4 million net effect of under and over-spends on several projects.

  The primary reasons for the under-spend of £1.8 million against capital results from:

—  (£1.8 million) virement from Resource allocation.

—  £1.6 million slippage in the major capital project ISIS Target Station 2.

—  £1.6 million slippage in general Infrastructure projects.

—  £1.7 million retrospective allocation to cover expenditure on the Diamond Assembly Building which was actually incurred in 2003-04.

—  (£1.3 million) net effect of under and over-spends on several projects.

  The over-spend on non-cash of £28.0M results from:

—  £22.9 million provision made for SRS Closure.

—  £6.1 million "Fit For The Future" Restructuring.

—  £2.7 million virement from cash.

—  (£3.7 million) net under-spend against non-cash allocation.

  OST have agreed to provide DEL cover for the Daresbury SRS Closure and "Fit For The Future" restructuring provisions in future years, but were unable to provide this in 2004-05.

Diamond SRS

  CCLRC reported a total net over-spend in 2004-05:

£ millions	DEL Outturn
Income	86.9
Expenditure	(85.0)
EYF surplus/(deficit)	(1.9)

  The under-spend noted is the net of:

—  Capital under-spend of £4.4 million.

—  Non-cash resource overspend of £2.5 million.

  Diamond capital expenditure in 2004-05 was slower than expected expenditure on the machine and beamline elements of the project, due to slippage of this spend.

  The allocation of non-cash resource is recognised as being insufficient to fund the cost of capital which is calculated as 3.5% of the Net Book Value as at 31 March 2005. Until this insufficient allocation is addressed, further deficit will arise.

EPSRC

  EPSRC reported a net under-spend in 2004-05:

£ millions	DEL Outturn
Income	500.6
Expenditure	(487.8)
EYF surplus/(deficit)	12.8

  The most significant changes from the Operating Plan were:

—  £34.6 million under-spend on research grants due to:

—  commitment during the year was slower than originally planned, with the shortfall for the first three quarters being made up in the final quarter. This slippage pushed the start of the resultant grant expenditure to the subsequent year; and

—  an increase in the number of deferred grant start dates. This again delayed the start of expenditure on announced grants.

—  £21.3 million over-spend on studentships due to:

—  additional spend on Doctoral Training Accounts, resulting from early start dates on grants and extension of grants to 3.5 years, in response to the Roberts review of the supply of trained people; and

—  accelerated expenditure on Collaborative Training Accounts, to provide an impetus on their full implementation following completion of the pilot phase.

—  £3.1 million additional funding for Academic Fellowships, agreed after finalisation of the Plan.

—  £5.8 million over-spend on Fusion resulting from a revision to the grant payment profile for operational purposes after preparation of the budget.

—  £1.7 million reduction on expenditure on High Performance Computing. Although the gross expenditure was on budget, the relatively minor reduction in net expenditure resulted from higher than anticipated usage of the CSAR facility, hence a higher than anticipated reimbursement of service costs.

ESRC

  Although ESRC had slight resource and capital under- and over-spends, these balanced out:

£ millions	DEL Outturn
Income	105.3
Expenditure	(106.0)
EYF surplus/(deficit)	(0.7)

  ESRC incurred a net over-spend of £1.0 million in resource in 2004-05. This over-spend was as planned and represents planned use of EYF brought forward from previous years.

  The capital allocation was over-spent by £0.3 million. This allocation is for capital spend within ESRC only, and is not available to support revenue spend on research.

MRC

  MRC reported an under-spend for 2004-05:

£ millions	DEL Outturn[2]
Income	455.2
Expenditure	(420.4)
EYF surplus/(deficit)	34.8

  The under-spend noted is the net of:

—  Cash resource and capital under-spend of £19.1 million.

—  Non-cash resource under-spend of £15.7 million.

  The under-spend on cash resource DEL stemmed largely from grant-funded projects starting more slowly than forecast, often in the year after the money was awarded, and other items of expenditure originally planned for 2004-05 having been deferred to 2005--06. Since this cash had already been committed, the same funds could not have been made available in 2004-05 for further awards.

  The non-cash element of the under-spend is due to an over allocation of non-cash DEL to the MRC at the start of the RAB regime, before the magnitude of each Council's depreciation and cost of capital charges were known with certainty. OST will be clawing back the MRC's accumulated non-cash surplus over the years 2005-06 and 2006-07 through a reduced annual allocation and reallocating it.

  A key objective of MRC's medium term financial plan is to achieve a consistent, sustainable level of grant awards each year, and to avoid "boom and bust" cycles which are very disruptive for the research community. The ability to carry over surpluses from one year to the next is essential to achieving this. It is particularly important now, following the recent rapid growth in funding for new awards since 2003, that the MRC avoids "overheating" by making more awards and so establishing more ongoing commitments that it can afford. Such action might achieve a short term objective of using up surpluses more quickly, but would endanger stability by reducing funding below consistent sustainable levels in future years.

NERC

  NERC reported a relatively small under-spend in 2004-05:

£ millions	DEL Outturn
Income	323.0
Expenditure	(317.4)
EYF surplus/(deficit)	5.6

  The under-spend in 2004-05 noted is the net total of:

—  Cash resource over-spend of £6.4 million.

—  Capital over-spend of £1.2 million.

—  Non-cash resource under-spend of £13.1 million.

  As planned by NERC, the cash resource and capital allocations were both over-spent in 2004-05, this represents planned use of EYF bought forward from previous years. The combined total of cash resource and capital EYF carried forward of £8.8 million comprises just 2.6% of NERC's annual cash allocation, NERC's agreed policy is to retain £7 million cash resource and capital as reserves (less than 1% of the allocation over the spending review period) it is anticipated that by the end of SR2004 NERC cumulative EYF will be limited to the reserves level.

  In 2004-05 significant provisions were used, which are shown as negative non-cash expenditure under the PES regime. As such, the final non-cash outturn is reduced. The level of non-cash EYF was taken into account when calculating the non-cash allocations for SR2004, consequently, over SR2004, the accumulated EYF will be consumed by rising depreciation and cost of capital charges.

PPARC

  PPARC reported a relatively small under-spend in 2004-05:

£ millions	DEL Outturn
Income	297.4
Expenditure	(295.0)
EYF surplus/(deficit)	2.5

  Of the reported under-spend in 2004-05, £2.1 million of the under-spend was on capital. PPARC has insufficient need for ongoing expenditure to use its capital allocation, as its capital spend is more focussed on its international collaborations than its own establishments. PPARC has been in negotiations with OST to vire some of its capital allocation to capital grants in order to match the funds supplied to the current demand, and is confident that it will use its vired allocation once agreed.

AHRC

  AHRC was not a Research Council in 2004-05 and was therefore not under the rule of OST, did not receive an allocation from OST, and were not subject to DEL or Grant in Aid issues.

  The AHRB had a £2.5 million under-spend at the end of March 2005. This comprised a £1.6 million brought forward under-spend and a £0.9 million under-spend arising during the financial year ending March 2005.

  There had been an agreed policy in the AHRB of a steady build up of allocations and payments in the early years, particularly in the research programme, where it can take several years for the full impact of annual award cycles to be reflected in the payments being made each year.

  The under-spends arose in the main in the Programmes areas where the AHRB was setting up new funding initiatives and the start-ups have been slower than anticipated and expenditure has been later than planned.  Returns due to under-spending on awards has also contributed to the overall under-spend.

November 2005

2   These numbers are based on provisional outturns submitted to OST. They differ slightly from the figures quoted in our annual report, which are based on final audited accounts. Back