EXECUTIVE SUMMARY

  1.  This memorandum responds to the Treasury Sub-committee's requests at the hearing on 14 November 2007.

STAFF BONUSES [Q 169-176]

  2.  The Committee asked about bonuses paid to HM Treasury staff. The parliamentary question referred to by the Committee outlined the total bonus payments for the more than 100,000 staff in the Chancellor's Departments (HM Treasury Group, HM Revenue and Customs, Office for National Statistics, the Royal Mint, the Government Actuaries Department and the Valuation Office Agency).

  3.  HM Treasury Group paid its staff bonuses worth £1.7 million in 2006--07. Table 1 outlines the total expenditure on remuneration, including bonuses, within the Treasury Group since 2002-03 for all staff (including permanent officials and contract and agency workers). To help manage its pay budget, HM Treasury's policy has been to recognise good performance increasingly through bonuses rather than consolidated pay increases. Bonuses are paid in two circumstances: performance bonuses are linked to the annual staff appraisal system; and, special bonuses are those paid to recognise specific contributions or pieces of work during the year.

  4.  The increase in base pay in 2005-06 is above the historical average, due to a number of factors including the creation of the new Gershon efficiency team in the OGC and increases in the pension contributions payable by government departments.

  5.  The Committee also enquired about the value of bonuses paid to senior members of HM Treasury. Table 2 details the bonuses received by the senior management of Treasury Group in 2006-07. Further details of senior staff remuneration are set out in the department's Annual Report and Accounts.

FINANCIAL IMPLICATIONS OF THE PRIVATE FINANCE INITIATIVE [QQ 232, 281]

  6.  The Committee asked about the scale of on, and off, balance sheet PFI operations and the size of payments over the next 25 years.

BALANCE SHEET TREATMENT OF SIGNED PFI DEALS

  7.  As of at September 2007 there were 621 signed PFI deals with a total capital value of £56.9 billion. Of this value, £24.1 billion is on the public sector balance sheet and £32.8 billion is off the public sector balance sheet, equivalent to 42% on and 58% off.

  8.  The committee inquired about the balance sheet treatment of PFI deals under IFRS. No accounting standard yet exists which sets out how the public sector should treat PFI. Until this standard is finalised and agreed with external accounting bodies it is not possible to calculate the balance sheet impact of the move to IFRS.

FUTURE UNITARY CHARGE PAYMENTS

  9.  Unitary charge payments are monthly sums that generally cover the cost of constructing, financing and operating a PFI asset. In almost all cases these include payment for hard facilities management such as repairs and maintenance. In many cases the payments also cover additional services such as cleaning, catering and reception. The payments are linked to performance and may be deducted if agreed standards of service are not met. The payments may also be renegotiated to cover changes made to the contracted services or to reflect any change, upwards or downwards, in the real-terms cost of providing the services. For these reasons it is possible only to give an estimate of the future unitary charge payments.

  10.  The total, if one were to add together these future and non-comparable figures would be £180.7 billion. However, it must be emphasised that this number has little meaning. It is not illuminating to add together a figure in today's money to a figure in the money of 2030, without making any adjustment for the changing value of money over time.

  11.  With these caveats, Table 3 contains the latest list of estimated future unitary charge payments, as published with the Pre-Budget Report in October this year. The figures between 2007-08 and 2017-18 include estimated payments for the LUL PPP PFI contracts. These contracts contain periodic reviews every 7.5 years and therefore the service payments are not fixed after 2009-10.

  12.  It would be incorrect to regard these future estimated unitary charge payments as additional to the balance sheet impact as recorded in the Public Sector Net Debt (PSND). This is for two reasons. First, as described in the section on balance sheet treatment of PFI, many of the liabilities are already on the public sector's balance sheet and so are also included within PSND. Second, unitary charges include payment for both the use of an asset and the associated services. It would be incorrect to consider estimates of payment for future maintenance work and other services to be the same as "debt". Payment for such work always scores as current expenditure.

HEAVILY INDEBTED POOR COUNTRIES [QQ 234, 235, 240]

  13.  The SR2002 PSA target in relation to the Heavily Indebted Poor Countries (HIPC) initiative was for three-quarters of all eligible HIPC countries committed to poverty reduction to receive irrevocable debt relief by 2006. [2]The technical note for HM Treasury's Public Service Agreement 2003-06, published alongside the PSA, clarified further the meaning of "eligible" stating that for those countries that are committed to poverty reduction and have reached their decision point the Department for International Development and HM Treasury would work towards ensuring that three-quarters reached Completion Point by 2006. Some 26 countries had reached Decision Point at the end of 2002, of which 21 had reached Completion Point by the end of 2006, meaning the target was met.

  14.  In SR2004, the PSA target was updated to continue the progress made in this area. The current target is to ensure that 90% of all eligible HIPCs committed to poverty reduction that have reached Decision Point by end 2005 receive irrevocable debt relief by end 2008. 28 countries had reached Decision Point by end 2005. [3]To date, 22 countries have reached Completion Point. Progress through HIPC can be difficult to predict accurately. However, the latest status of implementation report from the World Bank and IMF estimates[4] that up to a further 4 countries will reach Decision Point by the end of 2008. On this basis, we are on course to meet the target.

  15.  There has been progress since the publication of the Annual Report with regard to those countries yet to reach Decision Point (30 countries had reached Decision Point at the time the report was published). In July 2007 Afghanistan was assessed as meeting the Decision Point criteria, with the Central African Republic following in September 2007. Both are now receiving interim debt relief. This brings the total number of countries at Decision Point to 32, with nine pre-decision point HIPCs still to enter the initiative. With respect to one of those countries—Liberia—there has been significant progress. A financing solution has been found at the International Monetary Fund (IMF), paving the way for Liberia to access debt relief under HIPC. The IMF has secured pledges from over 80 IMF member countries to provide approximately US $840 million in financing for debt relief for Liberia. The UK made intensive efforts to secure support for Liberia and, as well as contributing our full share of IMF internal resources, we will contribute our share of an additional G8 contribution totalling approximately $71 million.

  16.  Of course, ensuring that the remaining eight countries are able to enter the HIPC initiative remains a challenge for HM Treasury, DfID and our international partners. As the Annual Report notes, the majority of these countries are post conflict and fragile states, while some remain in conflict. They will need additional support to meet the standards required for HIPC and the international community will need to show flexibility where appropriate. The UK is working through its bilateral development programmes and with international partners to build peace, strengthen governance, debt and financial management and help these countries meet the standards required to benefit from debt relief.

Debt sustainability

  17.  HIPC and MDRI debt relief are freeing up money to support poverty reduction strategies and other development priorities. They have also introduced significant headroom for new borrowing. Achieving the MDGs will require a large increase in resources, and all forms of development financing have a role to play. Borrowing can be a good way for countries with limited domestic capital to raise finance for development priorities. When countries put the money borrowed to productive use, they benefit from faster economic growth and increased investment, delivering effective social services.

  18.  However, it is important to ensure that debt levels in developing countries remain at sustainable levels and new lending continues to support development. The Treasury is therefore working with our international partners to promote debt sustainability, including through responsible borrowing and lending practices.

  19.  As part of our commitment to debt sustainability, the UK has supported the development of a Debt Sustainability Framework by the World Bank and the IMF. This is an important tool, which both debtors and creditors can use to inform decisions related to new borrowing.

  20.  To help ensure that sovereign lending to developing countries is consistent with sustainable debt levels, the UK, along with the Netherlands, Sweden, Italy, the IMF and World Bank, has also been leading efforts to strengthen guidelines on government-supported lending to low-income countries. The Treasury, in an effective partnership with ECGD and DFID, has been working through the EU and the OECD to establish a framework for Export Credit Agency (ECA) supported lending to low-income countries, including Heavily Indebted Poor Countries (HIPCs). This work will help to ensure that new lending takes account of the World Bank and IMF Debt Sustainability Framework (DSF), is appropriately concessional, well targeted and used for productive purposes. Proposals have been put forward to the OECD ECA Group and we hope that they will be agreed in coming months.

  21.  Finally, DFID is also working with Heavily Indebted Poor Countries (HIPCs) to strengthen their debt management capacity and supporting further efforts by the World Bank in this area.

  22.  The Treasury will continue to support further work on debt sustainability at the international level, and we will be taking forward discussions with other finance ministries, including those of key emerging lenders, next year in the G20.

"VULTURE FUND" ACTIVITY

  23.  The Government is concerned about the activities of so-called "vulture funds" and we are working to stop these funds profiting from poor countries. A recent World Bank and International Monetary Fund survey examined the extent of the issue. It identified 11 heavily indebted poor countries (HIPC) that had been targeted with lawsuits by a total of 46 litigating creditors. In addition, two countries reported being threatened by litigation.

  24.  Eight new legal actions were reported since the previous survey in 2006, of which five are against Nicaragua, two against Cameroon, and one against Ethiopia. The HIPCs facing the most litigation cases are Nicaragua, the Republic of Congo, Cameroon, and Uganda, with nine, eight, seven, and six lawsuits, respectively.

  25.  This information is included in the latest annual joint World Bank/International Monetary Fund status of implementation report on the Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI). The report is available on the World Bank website. [5]

  26.  We are working to address the problem of vulture fund activity in two ways—by seeking to prevent debts being sold to vulture funds in the first place and by limiting the damage done by cases already underway.

  27.  To reduce the risk of debts falling into the hands of vulture funds, we are working with the World Bank to help poor countries buy off their commercial debts at the earliest possible opportunity. Under these deals, which the UK and others provide the funding for, countries buy back their debts at a deep discount to face value. The debts are then cancelled forever, and cannot be taken through a court. More than $8 billion of debts have already been cancelled in this way and we are working to make this system more effective. We are also working with Heavily Indebted Poor Countries (HIPCs) to strengthen their debt management capacity.

  28.  In addition, Paris Club creditors have publicly stated their commitment not to sell their claims on HIPCs to creditors that might not be willing to implement the HIPC Initiative. At the Annual Meetings of the IMF and World Bank in October, G7 Finance Ministers welcomed this step and urged all sovereign creditors not to sell claims on HIPCs. We will take forward discussions on this issue in international fora and with private sector.

  29.  However, in some cases, poor countries' debts are—regrettably—already in the hands of vulture funds. In considering whether to change the existing law to address these cases, account has to be taken of potential unintended negative impacts, such as undermining developing countries' access to financial markets and thereby their economic growth. Furthermore, any legislative change could not apply retrospectively to claims (ie to claims on debts that have already been bought by vulture funds)

  30.  We therefore have no plans at present to bring forward legislation but are instead focussing our efforts on creating a level playing field in which HIPC countries have the legal resources and expertise necessary to defend themselves. We are working with the African Development Bank to develop a legal assistance facility to help countries facing creditor litigation and ensure they have access to the best legal advice available to help them fight inflated claims. The strong defence that the Government of Zambia mounted recently, for example, reduced its liability by around $40 million.

  31.  The Chancellor raised the problem of vulture fund activity with G7 Finance Ministers at the Annual Meetings of the IMF and World Bank in Washington this October. In their statement, G7 Finance Ministers reiterated their concern about the problem committed to examine additional steps that might be taken to tackle this issue. In addition, the Paris Club group of sovereign creditors has also intensified its work in this area. We will continue to take forward work with our international partners to tackle this issue.

PRODUCTIVITY [Q252]

  32.  The Committee asked for an overview of the indicators used to monitor the progress on the five drivers in the Government's productivity framework.

  33.  Productivity growth is essential for the UK's long-term prosperity and progress is being made to narrow the gap with comparator countries. The UK continues to make progress on improving prosperity (GDP per capita), through a mixture of a strong employment performance and productivity growth. Productivity growth appears to have increased relative to previous economic cycles and there has been clear progress in closing the productivity gaps with France and Germany since 1995. The UK is also the only G7 country to have kept pace with the US's impressive performance.

  34.  The Government's productivity framework identifies five key drivers that underlie long-term productivity:

(i)  Competition: Competition drives productivity through a range of channels. In a competitive market, customers are able to choose from whom and what they purchase. To stay ahead of their competitors firms need to compete on quality and price, and to look for new markets to generate profits.

(ii)  Innovation: Innovation—the transformation of an idea into a new or improved product or process—has a direct and significant effect on productivity growth. Not only does successful innovation benefit those firms undertaking it, but it also tends to have `spillover' effects that create wider benefits to the overall economy.

(iii)  Skills: The overall level of education and skills in the workforce can have a critical impact on productivity growth, particularly in more developed economies. Improved levels of skills contribute directly to improved productivity but can also have wider impacts helping to generate new innovations, technologies and ideas that benefit the whole economy.

(iv)  Investment: Increased investment will generally increase labour productivity by increasing the capital each worker can utilise. At the most fundamental level infrastructure is a necessary pre-condition to economic activity, through provision of basic utility services. More widely, transport and communication infrastructure can directly improve productivity by facilitating trade and competition in goods and services, allowing physical or electronic access to clusters of economic and social activity and influencing the location decisions of business.

(v)  Enterprise—the creation and growth of firms: increases ideas, knowledge and skills and provides incentives for others to innovate through raising competition.

  35.  The evidence to support these drivers is set out in detail in the Productivity in the UK series[6] and most recently in Productivity in the UK 7: Securing long-term prosperity, published on 27 November 2007. Chapter 2 of this document outlines key reforms that have addressed these drivers in the past decade. As well as increasing productivity in the private sector, improving the efficiency of the public sector is also crucial to improve overall productivity performance. This note considers the key reforms the Government has made since 1997, and the progress to date under each driver.

  36.  Progress on productivity and the five drivers is monitored regularly in BERR's UK Productivity and Competitiveness Indicators-Series, [7]with its most recent report published in March 2006. See the annex of this note for a list of indicators.

PERFORMANCE AGAINST CHILD POVERTY PSA INDICATORS [Q 258]

PSA: Halve the number of children in poverty by 2010-11, on the way to eradicating child poverty by 2020

  37.  The PSA has three indicators:

(i)  The number of children in absolute low-income households;

(ii)  The number of children in relative low income households; and

(iii)  The number of children in relative low-income households and material deprivation.

  38.  Absolute low-income households are defined as households with incomes of less than 60% of median income held constant in real terms from a 1998-99 baseline, equivalised using the Modified OECD scale. Relative low-income households are defined as households with incomes below 60% contemporary median income, before housing costs, equivalised using the Modified OECD scale. The combined low-income and material deprivation indicator measures the number of households below 70% contemporary median income, before housing costs, equivalised using the modified scale and in material deprivation, using a prevalence weighted approach. This indicator excludes those with low incomes, who have high living standards, and includes those who would not be captured by the relative low-income measure but who face certain unavoidably high costs.

  39.  The baseline for relative low-income and absolute low-income indicators ie the number of households with less than 60% of 1998-99 median income, is 3.4 million children.

  40.  Between 1998-99 and 2005-06, the latest year of data, the number of children in households with relative low-income fell by 600,000 from 3.4 million to 2.8 million and the number of children in absolute low-income households fell by 1.8 million to 1.6 million. Therefore, the number of children in poverty using the absolute low-income measure has more than halved.

  41.  The Pre-Budget Report announced increasing the child element of the Child Tax Credit by £25 above standard earnings indexation in April 2008 and again in April 2010, and doubling the child maintenance disregard in main-income related benefits by the end of 2008 and again by April 2010. The announcements build on the measures announced at Budget 2007, which amounted to an investment of £1bn in the Child Tax credit. Taken together, the PBR and Budget will help lift a further 300,000 children out of poverty.

  42.  Data on material deprivation first became available in March 2006 for 2004-05. Between 2004-05 and 2005-06, the number of children in the UK defined as poor using the combined indicator of relative low-income and material deprivation fell by 100,000 from 2.2 million to 2.1 million.

GROSS VALUE FOR MONEY SAVINGS [Q 270]

  43.  Following the approach outlined in Sir Peter Gershon's Independent Report into Public Sector Efficiency, some efficiency savings in the Spending Review 2004 (SR04) period were scored as gross savings, and some had costs netted off. This is the basis on which the SR04 targets were set.

  44.  Over the past couple of years, the Committee and other key stakeholders have argued that this approach could be improved by having a tighter definition of efficiency, which netted off costs. In developing the Value for Money (VfM) framework for the Comprehensive Spending Review (CSR) period these arguments have been taken on board and a system designed where all reported VfM savings are net of both implementation and up-front costs, and in which only cash-releasing savings are scored towards the target. All costs will be fully accounted for in the year in which they fall, and departments will report a net figure in Departmental Reports and Autumn Performance Reports.

  45.  The gross figure for VfM savings in the CSR period would clearly be greater than the £30 billion target for net cash-releasing savings, as it would include the total cost of all initiatives; however, because of the requirement for a net approach from departments for the CSR, HM Treasury does not hold detailed information about the costs of each VfM initiative. Unfortunately, as suggested during the Oral Evidence on the 14 November, it is not possible to provide a total gross figure for savings in the CSR period.

December 2007

3   The number of countries that have reached Decision Point has since risen to 32 as of the end of September 2007. However, the target measures progress of the 28 that had done so by end 2005. Back

4   http://siteresources.worldbank.org/INTDEBTDEPT/ProgressReports/21501008/HIPCProgressReport20070828.pdf Back

5   http://siteresources.worldbank.org/INTDEBTDEPT/ProgressReports/21501008/HIPCProgressReport20070828.pdf Back

6   http://www.hm-treasury.gov.uk/documents/enterprise-and-productivity/the-evidence/ent-prod-index.cfm Back

7   http://www.dti.gov.uk/files/file28173.pdf Back