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Managing Public Money
October 2007
HM TREASURY
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HM TREASURY
Managing Public Money
October 2007
London: TSO
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PU068
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ConTENTS
This printed version of Managing Public Money includes all the chapters and associated boxes
but not the annexes. The annexes are available on HM Treasury's website.
Page No.
FoREwoRD 5
CHaPTER I: RESPONSIBILITIES 7
1.1 Managing public money: principles 7
* Box I.1: standards expected of all public services 7
1.2 Ministers 7
13 Parliament 8
14 The Treasury 8
1.5 Departments 9
1.6 The Comptroller and Auditor General 10
1.7 The Parliamentary and Health Service Ombudsman 10
Annex I.1 The Comptroller and Auditor General
CHAPTER 2: USE OF PUBLIC RESOURCES W
2.1 Power to commit public funds Wl
* Box 2.1: schematic account of how central government expenditure is authorised
and accounted for 12
* Box 2.2: examples of approaches to delegated authorities 12
+ Box 2.3: some transactions requiring specific Treasury consent 13
2.2 Regularity and propriety 13
+ Box 2.4: regularity and propriety 13
2.3. Using the authority of the Appropriation Act 14
+ Box 2.5: resource use which an Appropriation Act may authorise 1s
24 New services 1s
Annex 2.1 The PAC concordat of 1932
Annex 2.2. Treasury approval of legislation
Annex 2.3 Treasury approval of expenditure
Annex 2.4 — The seven principles of public life (the Nolan principles)
Annex 2.5 The new services rules
CHAPTER 3: ACCOUNTING OFFICERS 17
3.1 Role of the Accounting Officer 17
* Box 3.1: the standards expected of the Accounting Officer’s organisation 18
3.2 Appointment of Accounting Officers 17
3.3 Special responsibilities of Accounting Officers 17
3.4 Advice to ministers 19
+ Box 3.2: examples when Accounting Officers should seek a direction reflecting
previous cases 20
Managing Public Money I
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ConTENTS
3.5 Public Accounts Committee
3.6 I When the Accounting Officer is not available
3.7 Conflicts of interest
3.8 Arm’s length bodies
3.9 In the round
CHAPTER 4: INTERNAL MANAGEMENT
4.1 Governance structure
+ Box 4.1: checklist of key governing body decisions
4.2 Processes
+ Box 4.2: essentials of effective internal decision making
4.3 Opportunity and risk
* Box 4.3: responses to risk
44 Insurance
45 Control of expenditure
+ Box 4.4: essential features of systems for committing and paying funds
46 — Receipts
+ Box 4.5: essential features of systems for collecting sums due
4.7 Unusual circumstances
+ Box 4.6: examples of one off pragmatic schemes
48 — Dealing with initiatives
+ Box 4.7: factors to consider when planning policies or projects
4.9 — Staff
+ Box 4.8: public sector organisations as good employers
4.10 Assets
4.11 Non-standard transactions
4.12 Standards of service
4.13 Complaints
4.14 Transparency
+ Box 4.9: annual publications by central government departments
Annex 4.1 Finance Directors
Annex 4.2 The civil service code
Annex 4.3 Principles of good administration
Annex 4.4 Procurement
Annex 4.5 Insurance
Annex 4.6 Expenditure and payments
Annex 4.7 Fraud
Annex 4.8 Asset management
Annex 4.9 State aid
Annex 4.10 Losses and write-offs
Annex 4.11 Overpayments
Annex 4.12 Gifts
Annex 4.13. Special payments
Annex 4.14 Remedy
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CHAPTER 5: FUNDING
5.1 The framework for public expenditure control
+ Box 5.1: elements of resource budgets
5.2 Estimates
5.3. Excess votes
5.4 Commitments
* Box 5.2: contingent liabilities: notifying Parliament
5.5. Public dividend capital
5.6 — Borrowing by public sector organisations
5.7 External borrowing
5.8 Banking
5.9 Other financing techniques
Annex 5.1 Grants and grants-in-aid
Annex 5.2 Protecting public investments (clawback)
Annex 5.3. Treatment of income and receipts
Annex 5.4 How Estimates provision is derived from departmental budgets
Annex 5.5 Liabilities
Annex 5.6 Departmental lending
Annex 5.7 Banking
CHAPTER 6: FEES, CHARGES AND LEVIES
6.1 Basic policy
* Box 6.1: exceptions to full cost charging
62 Setting the charge
+ Box 6.2: restructuring charges using s102
+ Box 6.3: possible ways of distinguishing categories of service in setting
6.3 Levies
64 Commercial services
+ Box 6.4: setting up a commercial service
65 Taking stock
+ Box 6.5: reviewing a public service for which a charge is made
6.6 Accounts
Annex 6.1 Checklist for setting up new services
Annex 6.2. How to calculate fees
Annex 6.3 Charging for information
Annex 6.4 Competition law
CHAPTER 7: WORKING WITH OTHERS
7.1 The case for working partnerships
* Box 7.1: issues for every partnership with a public sector member
7.2 Setting up a new arms length body
7.3 What to clarify
+ Box 7.2: framework terms for partnership agreements
74 Agencies
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charges
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ConTENTS
7.5 Trading funds
+ Box 7.3: sources of finance for trading funds
7.6 Departments working together
+ Box 7.4: example models of joined up activities in central government
7.7 Non-departmental public bodies
+ Box 7.5: sources of finance for NDPBs
7.8 Public corporations
+ Box 7.6: outline terms for a relationship with a private corporation
7.9 Outsourcing
7.10 PPPs and PFls
7.11 Wider markets activity
+ Box 7.7: planning wider markets activity
7.12 Working with third sector bodies
Annex 7.1 Sources of guidance on setting up ALBs
Annex 7.2 Setting up new ALBs
Annex 7.3. Trading funds
Annex 7.4 Model management statement for executive NDPBs
Annex 7.5 Private finance initiative (PFI) projects
Annex 7.6 Wider markets activities
Annex 7.7. Working with the third sector
GLossary OF TERMS
INDEX
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65
FOREWORD
i This document sets out the main principles for dealing with
resources used by public sector organisations in the UK. Its origin lies
in the requirements for departments in central government. Some of
the specifics, especially those in the annexes, relate to England only
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 as
necessary. And everyone working in public services in the UK should be
aware of the need to manage and deploy public resources responsibly
in the public interest.
ii Vital as these principles are, the advice in this document cannot
stand forever. The law moves forward; the standards used in business
and public life evolve; new techniques emerge; and public expectations
change. Through all these shifts, Parliament rightly expects that public
funds, whether raised through taxation or public sector charges, will
be used properly. And Parliament looks to the Treasury to help the
government and its public servants meet these expectations in a
transparent, responsible and consistent fashion. So it will expect the
guidance and standards in this document to be followed.
iii The duty to safeguard public funds is invariant. But how it is
carried out will change over time. Public sector organisations can and
should innovate in carrying out their responsibilities, using new
technology and taking advantage of best practice in business
efficiency. This could mean new kinds of organisation, new
institutional arrangements or new delivery methods. Each will need to
be evaluated and implemented carefully to protect Parliament's rights
to authorise and oversee use of public resources.
iv Nothing in this document is intended to prevent such healthy
developments.
v Nor should anything in this document discourage the
application of sheer common sense.
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The relationship between the government, acting on behalf of the Crown, and Parliament,
representing the public, is central to how public resources are managed. Ministers seek to
implement government policies, and deliver public services, through public servants; but are able
to do so only when Parliament grants the right to raise, commit and spend resources. It falls to
the Treasury to respect and secure the rights of both government and Parliament in this process.
I.1 Managing public money: principles
1.1.1 The principles which apply to managing public resources run right across the many diverse
organisations delivering public services in the UK. There are requirements for each kind of body,
reflecting its duties, its responsibilities and public expectations. The standards which the public
services should seek to deliver are set out in box 1.1. These are generally understood to be
demanding.
box I.1: standards expected of all public service
© 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
1.12. At a high level the principles in this handbook apply to public services in the UK,
complementing the guidance on good governance in the Code of Good Practice on Corporate
Governance in Central Government Departments (the Corporate Governance Code'). Some of the
detail applies to England only, or just to departments of state. There is separate guidance for the
devolved administrations. The text identifies any restrictions on where the principles apply.
1.13 Much of this document is about meeting the expectations of Parliament. Many of the
disciplines should also deliver accountability to the general public. The delivery channels used
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.
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 practice. This mix may of course change from time to time.
I The Corporate Governance Code - see http://www.hm-treasury.gov.uk/documents/public_spending_reporting/governments_risks/psr_
governance_corporate.cfm
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1.22 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 broader sweep of government policy
determined in Cabinet. He or she:
e determines the department's policies;
¢ allocates responsibilities among the other ministers in the department and the officials
of the department;
e chooses which areas of business to delegate to the department's officials, and with what
conditions;
¢ looks to the department’s Accounting Officer (see chapter 3) to delegate responsibility
within the department to deliver the minister's decisions and to support the minister in
making policy decisions; and
« may also have general oversight of other bodies on whose behalf he or she may answer in
Parliament.
1.23 Within the department, the minister in charge may delegate defined areas of the
department's business, including associated Parliamentary work, to his or her junior ministers.
The Accounting Officer is always responsible for the organisation of the officials in the
department. The senior minister in the department, though not junior ministers, may give
directions to the Accounting Officer. Ministers are not accountable to the Accounting Officer.
1.24 Ministers have wide powers to make policies and to issue instructions to their officials.
However, specific legislation is required to authorise expenditure of public funds to pursue their
objectives (see section 2.1).
1.2.5 Only ministers can propose to Parliament to raise public revenue through taxation, or to
commit or spend public funds to pursue their policy objectives. Taxes may be collected, and
public funds may be drawn, only with Parliamentary authority to do so; and only as Parliament has
authorised. The House of Commons (and not the House of Lords) exercises these powers.
1.3 Parliament
13.1 Parliament approves the legislation which empowers ministers to carry out their policies. It
finances services when it approves Requests for Resources, including approval of net cash
resources, year by year. Further information about this process is in the Estimates Manual.
13.2 From time to time Parliament may examine particular policies or delivery of services. In
addition, select committees may examine policies, expenditure, administration and service
delivery in particular sectors. Of these, the Committee of Public Accounts (PAC - see section 3.5)
has a special role in examining financial accounts, scrutinising value for money and generally
holding the government and its public servants to account for the quality of administration.
1.4 The Treasury
14.1 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.
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14.2 Hence it falls to the Treasury to:
* set the ground rules for the administration of public money; and
e account to Parliament for doing so.
143 This document sets out how the Treasury seeks to meet these Parliamentary expectations.
The key requirements are regularity, propriety (see box 2.4) and value for money (see 3.3.3).
Supporting this, the Treasury:
e designs and runs the resource planning system and sets budgets for individual
departments to meet ministers’ fiscal policy objectives;
* oversees the operation of the Estimates presented by departments to obtain authority to
spend year by year. The Estimates Manual contains more detail about the requirements;
e maintains the Financial Reporting Manual (FReM) setting the standards to which
departments, Non-departmental public bodies (NDPBs) and other parts of the public
sector publish annual reports and accounts. The FReM adapts generally accepted
accounting practice (GAAP) to take account of the public sector context; and
* sets Accounts Directions for the different kinds of central government organisations
whose accounts are laid in Parliament.
1.5 Departments
15.1 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, to control and account for the department's
business.
15.2 The Corporate Governance Code encourages departments to use a departmental board as a
disciplined way of leading and managing the department's business. The character and
organisation of the board in a department will depend on its ministers’ preferences and the nature
of its business (see section 4.1). Boards can be valuable in bringing to bear a range and variety of
skills and experiences from elsewhere in, and outside of, the public sector.
1.5.3 Within a department, its staff, resources and assets should be organised to deliver ministers’
policies. There should be adequate delegations, controls and reporting arrangements to provide
assurance to the board, the Accounting Officer? and ultimately ministers about what is being
achieved, to what standards and with what effect. In turn these arrangements should provide the
management information to enable delivery plans to be adjusted as necessary. Similar feedback
should enable ministers to reconsider their policies where the evidence shows that this is
appropriate. This is discussed further in chapter 4.
15.4 In supporting ministers, civil servants in a department 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 Code, annex 4.2).
1.5.5 Departments often operate with and through a variety of partners to deliver their ministers’
policies. It is important that these relationships too operate in the public interest: see chapter 7.
2 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 resource accounts, using assurances as necessary.
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1.6 The Comptroller and Auditor General
1.6.1 Supported by the National Audit Office (NAO), the Comptroller and Auditor General (C&AG)
helps Parliament scrutinise how public funds have been deployed in practice. Independent of
government, the C&AG is the external auditor of nearly all bodies in central government. To help
carry out this important role, the C&AG has significant and far reaching rights to inspect the books
of a wider variety of public bodies. Further information about the role of the NAO is available on
their website? and in annex 1.1.
1.6.2 The C&AG provides Parliament with two sorts of audit:
¢ financial audit of the resource accounts of departments and NDPBs, covering:
- assurance that resource accounts have been properly prepared and are free from
material misstatements‘; 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 rolling
programme of these reviews covers a wide variety of subjects over a period, taking
account of the risks to value for money and Parliament's interests.
1.63 In addition, the C&AG publishes a range of other independent reports to Parliament. The
PAC (see section 3.5) may hold hearings to examine evidence on any of these reports.
1.7 The Parliamentary and Health Service Ombudsman
1.1.1 Public sector organisations are expected to deliver reliable services of good quality.
Independent of both the government and the National Health Service (NHS), the Parliamentary
and Health Service Ombudsman (PHSO) provides a service to the public by investigating
complaints that government departments, a range of other public organisations in the UK and the
NHS in England have not acted properly or fairly, or have provided a poor service. The role of the
PHSO is discussed further in section 4.13.
Annex 1.1 The Comptroller and Auditor General
3 The NAO website address is hetp://www.nao.org.uk.
4 See Audit Practice Note 10 of the Audit Practices Board on the FRC website at Hetp://ww.fre.org.uk
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This chapter explains the process for Parliamentary authorisation of public resources.
Parliament expects the Treasury to oversee the operation of these controls.
Parliament consents in principle to the use of public funds through legislation to enable specified
policies. It approves use of public resources to carry out those policies year by year. Only in very
limited circumstances can lesser authority suffice. Where there are uncertainties Parliament
should be given meaningful information about what is likely to be involved.
At the close of each financial year, Parliament expects a clear account of the use of the public
funds it has authorised for use. The PAC may investigate specific issues further.
2.1 Power to commit public funds
11.1 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 continue business as usual. But they must normally seek Parliamentary authority for specific
legislation to empower any significant new commitment which seems likely to persist. In the
Concordat of 1932¢ (see annex 2.1) the Treasury undertook to aim that departments would respect
this requirement.
112 The Treasury controls public expenditure. So all legislation with expenditure implications,
both primary and secondary, must have the support of the Treasury before it is introduced, laid in
draft or made, as the case may be (see annex 2.2).
2.13 Box 2.1 outlines how public expenditure is controlled by the Treasury, authorised by
Parliament and accounted for in public. It is important to note that Treasury agreement to budget
provision in spending reviews does not alone provide adequate authorisation. Nor does the
existence of specific legal authority. Parliamentary approval for drawdown of funds is also
essential. The Estimates process is designed to achieve this. Chapter 5 examines this further.
114 The Accounting Officer of a department (see chapter 3) is responsible for ensuring that:
e the Estimate(s) presented to Parliament for the department’s annual expenditure are
consistent with the statutory powers and with the government’s expenditure plans; and
° use of resources in the department is consistent with the Estimate(s);
and must answer to Parliament for stewardship of these responsibilities.
21.5 In addition, departments need Treasury consent before undertaking expenditure or
committing to other resource consumption. Usually the Treasury agrees general approvals for
resource consumption subject to delegated limits and/or exclusions. This avoids the need for
specific consent to each item. Some common approaches to setting delegations are suggested in
Whatever form they take, it is good practice to
review these delegated authorities from time to time to make sure that they remain up to date and
appropriate.
box 2.2 and are discussed further in annex
5 The Ram doctrine of November 1945, after Sir Granville Ram, then First Parliamentary Counsel.
® Also known as the Baldwin convention.
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accounted for
box 2.1: schematic account of how central government expenditure is authorised and
departmental budgets agreed in spending reviews;
setting 3-year Departmental Expenditure Limits (DEL), with
Annually Managed Expenditure (AME) forecast in the budget
Parliamentary
legislation to empower any new
activities
approval
request(s) for resources and net cash
requirements (Estimates)
oe
sometimes
Treasury delegations and approvals] I Appropriation Act (covering all departmental select committee
departments) hearings
detailed departmental plans for
use of resources with internal grants
delegation and reporting and loans arm’s length
arrangements t+}———P} bodies (ALBs)
published and laid in Parliament
annual reports and accounts
I=
hearings
departmental select committee
PAC hearing
(~80 a year)
‘Treasury Minutes
NAO vim studies of specfic
activies indepth and NDPBs
(~60 a year)
not auserfiatic
[PAC debates (floor of House)
2.1.6 Similarly, departments should agree with any bodies to which they provide resources, or
over which they have oversight, how their resources should be used. Chapter 7 discusses how such
relationships should work in greater depth.
box 2.2:
examples of approaches to delegated authorities
© objective criteria for exceptions requiring specific Treasury scrutiny; and/or
© _asampling mechanism to allow specimen cases to be checked; and/or
* a threshold above which certain kinds of projects must achieve specific consent.
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2.1.1 There is an important category of resource commitments for which the Treasury cannot
delegate responsibility. It is transactions which set precedents, are novel, potentially contentious,
or could cause repercussions elsewhere in the public sector - see box 2.3. Departments should
always obtain Treasury consent to resource commitments of this kind before proceeding, even for
transactions within the agreed delegated limits which appear to offer value for money.
1.1.8 Some legislation calls for explicit Treasury consents, eg for certain large projects. In such
cases proceeding without Treasury approval is unlawful. In other cases resource consumption
without Treasury approval is irregular.
2.1.9 Neither unlawful nor irregular expenditure can be authorised by Parliamentary approval for
the relevant Estimate, so the resource account must be noted accordingly. When such expenditure
comes to light, both the Treasury and the NAO should be alerted. If the Treasury gives
retrospective consent to irregular expenditure, the transaction is treated in the resource accounts
as if it had achieved consent in time. Where there is a statutory requirement for Treasury consent,
however, retrospective authority for improper (unlawful) expenditure is not possible. Section 5.3
explores this further.
box 2.3: some transactions requiring specific Treasury consent
‘* extra statutory payments in settlement of legal disputes out of court
© certain private expenses of employees made necessary because of their public duties
* severance payments in excess of the employer's contractual commitment
* non-standard payments in kind
© unusual financing transactions, especialy those with lasting commitments
2.2 Regularity and propriety
22.1 Accounting Officers must make sure that their organisations’ activities achieve high and
reliable standards of regularity and propriety (see the Treasury's Guide to scrutiny of
public expenditure’). These important terms, which are often used together because they are so
closely linked, are defined in box 2.4.
box 2.4: regularity and propriety
© Regularity: resource consumption should accord with the relevant legislation, the relevant
delegated authority and this document.
* Propriety: patterns of resource consumption should respect Parliament's intentions,
conventions and control procedures, including any laid down by the PAC.
22.2 The concept of regularity and propriety is powerful. Parliament has consistently interpreted
it as 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 principles - see annex
2.4), 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.
2.23 Each departmental Accounting Officer should make sure that ministers in his or her
department appreciate:
7 The Guide to scrutiny of public expenditure - see www.hm-treasury.gov.uk/documents/public_spending_reporting/
governance_risk/psr_governance_public_expenditure.cim and the Regularity, Propriety and Value for Money handbook ~ see www.hm-
treasury gov.uk/ documents/public_spending_reporting/governance_risk/psr_governance_valueformoney.cfm
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° the importance of operating with regularity and propriety; and
e the need for efficiency, economy, effectiveness and prudence in the administration of
public resources, to deliver value for money.
224 Should a minister seek a course of action which the Accounting Officer cannot reconcile
with any of these requirements, he or she should seek instructions in writing from the minister
before proceeding (see chapter 3).
2.15 Should departments need to resolve an issue about regularity or propriety, they should
consult the relevant Treasury spending team. Similarly, arm’s length bodies (ALBs - NDPBs,
companies in which the department has a significant shareholding and other sponsored bodies)
should consult their sponsor departments about such issues, and the department concerned may
need in turn to consult the Treasury.
2.3 Using the authority of the Appropriation Act
23.1 In certain limited circumstances departments may obtain authorisation for their planned
expenditure not through specific empowering legislation but by relying just on the authority of an
Appropriation Act. Such Acts cover the whole range of voted expenditure in Estimates. Parliament
does not normally authorise consumption of public resources through these instruments alone
because the approval process does not provide a meaningful opportunity for detailed scrutiny.
23.2 The two Appropriation Acts for a given year provide aggregate Parliamentary approval for
the year’s Estimates, authorising resource consumption one year at a time. By convention, this is
sufficient authority for expenditure on administration. The same convention also allows
departments to seek Parliamentary authority to use resources one year at a time for administration
where there is a more lasting commitment of some kind. Some examples are mentioned in box 2.5.
The list is not exhaustive.
23.3 With Treasury approval, it is sometimes possible to rely on an Appropriation Act alone for
certain other expenditure in order to avoid an undue burden on the Parliamentary timetable. So
Parliament is routinely prepared to authorise certain expenditure through an Appropriation Act
alone, subject to the conditions:
e the expenditure is no more than £1.5m a year; or
° itis expected to last for no more than two years, eg to finance a pilot study;
and
° — any existing explicit statutory limits are respected; and
* no specific legislation on the matter in question is before Parliament (though see
annex 2.5).
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box 2.5: resource use which an Appropriation Act may authorise
* expenditure on administration: employment costs, rent, cleaning etc
e lease agreements, eg for photocopiers
* contractual obligations to purchase goods or services (where it might be poor value for money
to agree single year contracts only)
© employing staff with significant notice periods
© supporting capital projects lasting for more than a year
* staged grants phased over more than a single financial year
* resources used under prerogative powers such as international treaty obligations
2.4 New services
24.1 When ministers decide on a new activity, such a new service normally requires both specific
legislative authority and cover in an Appropriation Act. However, the authority of an
Appropriation Act alone can suffice if the conditions in paragraph 2.3.3 are satisfied. This of course
is not adequate for any new policy which is intended to last more than a couple of years.
24.2 Neverthel sometimes ministers are anxious to make an early start on a new activity
which is expected to continue but for which explicit Parliamentary authority has not yet been
secured. In these circumstances there are limited steps that can be taken to make the new service
ready for delivery when Parliament has assented. Specific Treasury consent is always required.
243 Relying on the Appropriation Act ahead of full and specific legal authority will often mean
borrowing from the Contingencies Fund (see annex 2.5). Access to this Fund is controlled by the
Treasury and cannot be assumed. The conditions for drawing on it are:
e the proposed expenditure must be genuinely urgent and in the public interest, ie there
must be wider benefits to outweigh the convention of awaiting Parliamentary authority;
e the relevant bill must have successfully passed second reading in the House of
Commons;
e Parliament must have been made aware of the intended steps in appropriate detail when
relevant previous legislative steps were taken;
e the planned legislation must be certain, or virtually certain, to pass into law in the near
future, and usually within the financial year; and
e the department responsible must explain clearly to Parliament what is taking place, why,
and by when matters should be placed on a normal footing.
Annex 2.1 The PAC concordat of 1932
Annex 2.2 Treasury approval of legislation
Annex 2.3 Treasury approval of Expenditure
Annex 2.4 The Seven Principles of Public Life (the Nolan Principles)
Annex 2.5 The new services rules
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This chapter sets out the personal responsibilities of all Accounting Officers, both in government
departments and in other parts of central government. Essentially Accounting Officers must be
able to assure Parliament and the public of high standards of probity in the management of
public funds. This chapter is drawn to the attention of all Accounting Officers when they are
appointed.
3.1 Role of the Accounting Officer
3.1.1 Each organisation in central government - department, agency, trading fund, NHS body,
NDPB or significant arm’s length body - must have an Accounting Officer. This person is usually
the senior official in the organisation. In line with the Code of Good Practice on Corporate
Governance in Central Government Departments, it is now usual for the Accounting Officer to be
supported by a board whose structure should be agreed with the responsible minister(s) where it is
not set in statute. Arrangements for leadership and accountability may be slightly different in other
parts of the public sector.
3.1.2 Formally the Accounting Officer is someone who may be called to account in Parliament for
the stewardship of the resources within the organisation’s control. The standards the Accounting
Officer is expected to deliver in the organisation are summarised in box 3.1. The senior business
managers of other public sector organisations are expected to deliver similar 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 Within departments, the Treasury also appoints the chief executive of each trading fund as
its Accounting Officer; and may also appoint Additional Accounting Officers with responsibility for
certain Requests for Resources.
3.23 In turn the Accounting Officer of each department normally appoints the permanent heads:
. of its executive agencies, as Agency Accounting Officers for their agencies; and
° of all its NDPBs®, and of most other significant arm’s length bodies, as Accounting
Officers for these bodies.
3.3 Special responsibilities of Accounting Officers
33.1 It is important that each Accounting Officer takes personal responsibility for ensuring that
the organisation he or she manages delivers the standards in box 1.1. In particular, the Accounting
Officer must personally sign:
. the resource accounts
° the annual report
® In certain NDPBs with small budgets, an Accounting Officer in the sponsor department may be appointed as the Accounting Officer for the
NDPB, with the costs of the NDPB charged directly to the sponsor department's Estimate. This is the usual arrangement for advisory bodies and
Royal Commissions.
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the statement on internal control (SIC);
and, having been satisfied that they have been properly prepared to reflect the business of the
organisation, must personally approve:
* any Request(s) for Resources; 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 subsidiary to it or organisation sponsored by it, operates effectively and
to a high standard of probity. The organisation should:
governance
* havea governance structure which transmits, delegates, implements and enforces decisions
© _ have trustworthy internal controls to safeguard, channel and record resources as intended
© operate with propriety and regularity in all its transactions
‘© treat its customers and business counterparties fairly and honestly
* offer redress for failure to meet agreed customer standards where appropriate
¢ give timely, transparent and realistic accounts of its business, underpinning public confidence;
decision-making
© 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
© meet the Treasury's requirements about limits on use of public resources
‘© manage its staff fairly, with inclusive policies designed to promote and integrate diversity
© communicate its decisions openly and transparently;
financial management
© use its resources efficiently, economically and effectively, avoiding waste and extravagance
* carry out procurement and project appraisal objectively and fairly, seeking good value for the public
sector as a whole
© use management information systems to secure assurance about value for money and the quality of
delivery and so make timely adjustments
* avoid overdefining detail and imposing undue compliance costs, either on its own staff or on its
customers and stakeholders
© have practical documented arrangements for working in partnership with other organisations
© use internal and external audit to improve its internal controls and performance.
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33.2 In the case of Accounting Officers of corporate arm’s length bodies, the Accounting Officer
should also arrange for a board member to sign the accounts as well, if (unusually) he or she is
not a member of the board.
333 There are several other areas where Parliament expects Accounting Officers to take
personal responsibility:
e regularity and propriety (see box 2.4), including seeking Treasury approval for any
expenditure outside the normal delegations or outside the subheads of Estimates, and
carried through with appropriate disclosures in the resource accounts;
e selection and appraisal of programmes and projects: using the Treasury's Green Book to
evaluate alternatives, and good quality project and programme management
techniques, such as Office of Government Commerce (OGC) Gateways™, to track and
where necessary adjust progress;
e value for money: ensuring that the organisation's procurement, projects and processes
are systematically evaluated and assessed to provide confidence about suitability,
effectiveness, prudence, quality, good value and avoidance of error and other waste,
judged for the public sector as a whole, not just for the Accounting Officer's
organisation;
*® management of opportunity and risk to achieve the right balance commensurate with
the institution’s business and risk appetite;
e learning from experience, both using internal feedback, and from right across the public
sector; and
* accounting accurately for the organisation’s financial position and transactions: to
ensure that the government published financial information is transparent and up to
date; and that the organisation’s efficiency in the use of resources is tracked and
recorded.
3.4 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. There is no set form for doing this, though the Accounting Officer should be
specific about the nature of his or her objections. The acid test is whether the Accounting Officer
could justify the proposed activity if asked to defend it.
342 If, despite the Accounting Officer's advice, the minister decides to continue with a course
the Accounting Officer has advised against, the Accounting Officer should ask for a formal
direction to proceed. This can be oral but, if so, should be confirmed in writing as soon as
possible. Examples of concerns where this procedure is appropriate are in box 3.2.
343 Directions of this kind are rare. It is good practice for an Accounting Officer to discuss the
matter with the Treasury if time permits. The ultimate judgement must lie with the Accounting
Officer personally.
3.44 When a direction is made, the Accounting Officer should:
° copy the relevant papers to the C&AG 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 minister’s direction without further ado; and
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e ifasked, explain the minister’s course of action. This respects ministers’ rights to frank
advice, while protecting the quality of internal debate.
box 3.2: examples when Accounting Officers should seek a direction
reflecting previous cases
© Irregularity: if a proposal is outside the legal powers, Parliamentary consents, or Treasury
delegations.
* _Impropriety: if a proposal would breach Parliamentary control procedures.
* Poor value for money: if an alternative proposal, or doing nothing, would deliver better value,
eg a cheaper or higher quality outcome.
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. The PAC expects that NAO will agree the texts of these reports with the Accounting
Officer(s) of the organisation(s) concerned so there is a clear evidence base for their scrutiny to
proceed.
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, the Accounting Officer may send
a substitute. 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.
3.5.3 The PAC expects witnesses to give clear, accurate and complete evidence. If evidence is
sensitive, witnesses may ask to give it in private. It is also acceptable to offer supplementary notes
if a witness does not have the detail to hand at the hearing. Where such notes are offered, they
should be provided within two weeks and with attention to the PAC’s concerns in asking for the
information. If the evidence might take longer to prepare, witnesses may seek an extension. They
should do so without delay.
3.54 The Treasury Officer of Accounts (or an alternate) attends all PAC hearings. This allows
scope for the PAC to explore any issues of more general application arising out of the subject of the
hearing.
3.6 When the Accounting Officer is not available
3.6.1 Each 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 should invite
the Treasury (or the sponsor department, as the case may be) to appoint a temporary acting
Accounting Officer.
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3.7 Conflicts of interest
3.1.1 Ifan Accounting Officer faces an actual or potential conflict of interest, it is essential to find
a way of eliminating it. 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:
e for a significant but temporary conflict, inviting the Treasury (or sponsor department, as
the case may be) to appoint an interim Accounting Officer for the period of the conflict of
interest;
e fora minor conflict, arranging for someone other than the Accounting Officer to make
the key decisions on the issue(s) in question; or
e 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 very similar. But 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 the terms of the framework document agreed with the sponsor
department. The relationship between sponsor departments and their ALBs is discussed further in
chapter 7.
3.82 The Accounting Officer of a department which sponsors an ALB should, in addition, make
arrangements to satisfy himself or herself that the Accounting Officer of the ALB is carrying out his
or her responsibilities. Similarly, the Accounting Officer of an ALB with a subsidiary should have
some meaningful oversight of the subsidiary. This means taking steps to gain assurance that public
resources in the ALB, or its subsidiary, are being managed to appropriate standards (see box 3.1). It
is not acceptable to establish ALBs, or subsidiaries to ALBs, in order to avoid or weaken
Parliamentary scrutiny.
3.83 The framework document agreed between an ALB and its sponsor always envisages the
sponsor department exercising meaningful oversight of the ALB’s strategy and performance, pay
arrangements and/or major financial transactions, eg by monthly returns, standard delegations,
exception reporting or other techniques. ALBs should refer to their sponsor departments any
activities which appear novel, contentious or repercussive; in turn the sponsor department may
need to seek Treasury consent.
3.84 There are some sensitivities about the role of the Accounting Officer in an ALB which is
governed by an independent board, eg a charity or a company. The Accounting Officer, who will
normally be a member of the board, must take care that his or her personal responsibilities do not
conflict with his or her duties as 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.
3.85 Moreover, if the chair or board of such an ALB is minded to instruct the Accounting Officer
to carry out some course which appears 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
minded nevertheless to proceed, the 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;
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* proceed to implement without delay; and
* inform the C&AG of what has happened.
3.86 This process is similar to what happens in departments (section 3.4), allowing for the special
position of the organisation’s board, which will often have been 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 where precedents are of limited value. Should that happen, the Accounting
Officer should be guided by the standards in box 3.1, adapted if need be to suit the issue. Where
time permits, the Treasury stands ready to help Accounting Officers think through and decide
upon an appropriate course of action.
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This chapter discusses how public sector organisations should manage their governance, systems
and processes. In general it is for each public sector organisation to define its own standards
within the policy framework set by ministers and public expectations of public services, including
openness about governance and public sector activities generally. There are some specific
requirements for central government organisations, notably reporting to Parliament.
4.1 Governance structure
4.).1 Each public sector organisation needs explicit arrangements for its internal governance,
complemented by appropriate accountability. Most will have some key ground rules laid down in
statute or by convention. But significant discretion usually remains. Those running the
organisation should make, and then periodically review, decisions about how in practice the
organisation should operate.
4.1.2 Box 4.1 contains a checklist of decisions that the governing body of each public sector
organisation should take to clarify how it should operate. In a government department this will be
for the management board or its equivalent; in many ALBs it will be for a statutory board of some
kind.
box 4.1: checklist of key governing body decisions
* its role and responsibilities
‘* its remit and objectives
‘© the scope of its delegations
© its procedures and processes
arrangements for monitoring performance and reporting back
control and management of relationships with ALBs and other partners
* the organisation's risk appetite and risk control procedures
. how it should account for its decisions and actions — to its ministers, to its staff, and to the wider
public
. how, and how often, its membership should be refreshed to furnish the desired skill set
* how, and how often, it should review its working practices
413 In central government departments, it may be necessary to clear these decisions with
ministers. It is good practice to document the chain of responsibilities and the processes by which
they will be delivered. There should be clear records of the processes for reporting to the board,
taking forward board decisions, and resolving disputes and uncertainties.
414 In central government departments, the board should be guided by the Corporate
Governance Code. In particular, the board of a central government department should include a
professional finance director (see guidance in annex 4.1). With appropriate adjustments, the same
principles should apply in other kinds of organisation in the public sector.
415 The governing body of each public sector organisation should have clear arrangements for
resolving disputes, including any concerns that the Accounting Officer may have. It should always
be possible for the Accounting Officer to seek a written direction, if need be, from the appropriate
authority, eg the minister in the case of a department. Sections 3.4 and 3.8 expand on this.
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4.1.6 Itis good practice to define the roles of the different kinds of board members, typically:
¢ executives drawn from the organisation's staff;
* executives from operationally independent internal units, eg people from agencies
within a department;
* non-executives from connected organisations, eg people from NDPBs (or other ALBs)
sponsored by a department;
e independent non-executives, among whom a senior non-executive may be appointed as
primary spokesperson; or
« (sometimes) members with specific responsibilities, eg for regional or professional
issues.
4.2 Processes
4.1.1 Each public sector organisation should strive to attain and maintain the standards described
in box 3.1, adopting or adapting good modern commercial practice where it makes sense to do so.
The Civil Service Code (annex 4.2) shows what is expected of civil servants. The Ombudsman’s
Principles of Good Administration (annex 4.3) sets out the standards against which services may be
judged in the event of failure of delivery or complaint.
422 Each public sector organisation should have robust and effective systems for decision
making. Box 4.2 sets out some key essentials. Some organisations may require special additional
processes, eg where it is important to integrate scientific, artistic or other professional standards
with administrative procedure.
423 A key concept in use of public funds is achieving value for money. It bears on nearly all
aspects of deployment of public resources: procurement, asset management, disposals,
administrative systems and financing arrangements such as leases and PFI transactions. It means
finding solutions which achieve the best mix of quality and effectiveness for the least outlay. This
may not always mean choosing the immediately cheapest option since, for instance, it may be
more cost effective to buy a more reliable service or a better quality asset with lower maintenance
costs and a longer operating life.
424 As part of reaching and maintaining high standards of ethical behaviour, all central
government organisations should support the Treasury in meeting its obligations to Parliament
under the Concordat (see annex 2.1). It is important that they are able to provide timely and
accurate information to the Treasury about their planned and actual use of public funds (see
section 5.1). So:
* departments should provide the Treasury with high level information about in-year
developments of their expenditure, performance against objectives and evolution of risk
(eg serious unforeseen events or discovery of fraud);
e 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.
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box 4.2: essentials of effective internal decision making
choice
* active management of the portfolio of risks and opportunities, drawing on the Orange Book
© appraisal of alternative courses of action using the techniques in the Green Book, and including
assessment of feasibility
* where appropriate, use of pilot studies to provide evidence on which to make decisions among
policy or project choices
© active steering of initiatives, eg using Gateway™ reviews to help guide progress at critical points
of projects
operation
© appropriate internal delegations
© regular and meaningful management information on costs (including unit costs), efficiency, quality
and performance against targets to enable assessment of value for money
© — proportionate administration and enforcement mechanisms, without unnecessary complexity
* periodic assessment of whether decisions taken remain appropriate, drawing on feedback from
internal and external audit and elsewhere
* systematic iterative appraisal of risk, to track changes and make adjustments in response
afterwards
© after the event evaluation of policy, project and programme outputs and outcomes, including
whether to continue, adjust or cease any lasting activities
© arrangements to draw out and propagate lessons from experience
425 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 2.1.7 and box 2.3).
42.6 One such class of transactions is those involving tax planning or tax avoidance on the part of
the supplier, often in the context of procurement. Generally, public sector organisations should
avoid using tax advisers or tax avoidance schemes as any apparent savings can only be made at the
expense of other taxpayers or other parts of the public sector.
42.1 It is important to a: s the impact on the public sector as a whole in considering proposa
for non-standard tax treatment. It is good practice to seek expert advice from Her Majesty's
Revenue and Customs (HMRC) before proceeding. Treasury approval is nearly always required
because such transactions tend to be novel, contentious, or both (see section 2.1). Annex 4.4
discusses this further.
4.3 Opportunity and k
43.1 Embedded in each public sector organisation's internal systems there should be
arrangements for recognising, managing and tracking its opportunities and risks. Each
organisation’s governing body should make a considered choice about its desired risk profile,
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 very
different approaches to the same risks.
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432 There should be a regular discipline of reappraising the opportunities and risks facing the
organisation as both alter with time and circumstances, as indeed the chosen responses may do
too. In the public sector there is a common risk to reputation, since poor performance could
undermine the credibility, and ultimately the creditworthiness, of the public sector as a whole. It is
also important to be aware that excessive caution can be as damaging as unnecessary risk taking.
433 Decisions on how to control and manage risk generally draw from the five standard
responses outlined in box 4.3. In choosing among them, factors to consider include cost,
feasibility, probability and the potential impact. For routine processes, it is a good discipline to
consider building in safeguards to manage risk out, or at least downwards, so that some protection
is automatic. For other risks, it can be useful to consider the scope for risk sharing, or for copying
or adapting the conditions imposed by commercial insurers, who often keep their premiums down
by reducing risk potential.
434 Evidence from internal and external audit is especially valuable for those making decisions
about how to manage and control opportunity and risk. Audit can provide specific, objective and
well-informed insight to help an organisation evaluate its effectiveness in achieving the outcomes
it seeks. It can be helpful for the audit committee to advise the governing board of a public sector
organisation on the key decisions it must make on governance and managing opportunities and
risks. In turn the board should support the Accounting Officer in drawing up the Statement on
Internal Control (SIC), which forms part of the resource accounts. Further information on this
important discipline is in the Orange Book.
box 4.3: responses to risk
* take opportunities: for circumstances where the potential gain seems likely to outweigh the potential
downside
e tolerate: for unavoidable risks, or those so mild or remote as to make avoidance action
disproportionate or unattractive
* treat: for risks that can be reduced or eliminated by prevention or other control action
© transfer: where another party can take on some or all of the risk more economically or more
effectively, eg through insurance, sharing risk with a contractor, or management techniques such as
public-private partnership
* terminate: for intolerable risks, but only where it is possible for the organisation to exit (note that
some risks can only be assumed by the public sector)
4.4 Insurance
44.1 It is generally not good value for money for central government organisations to take out
commercial insurance. This is because the public sector has a wide and diversified asset portfolio
as well as a reliable income by virtue of the ability to raise revenue through taxation. So the public
purse is uniquely able to finance the repair or replacement of damaged assets or deal with other
crystallised risks, even very large ones. If the government were to insure its large range of risks, it
would add to its costs, even allowing for the expense of remedying damage, because it would also
have to meet the costs and profit margins of the commercial insurers.
44.1 However, there are some limited circumstances in which it is appropriate for public sector
organisations to insure. They include legal obligations (eg arms length bodies should insure
vehicles where the Road Traffic Acts require it) and, depending on the circumstances, wider
markets activities (see section 7.11). In the latter case, it is important that the value or availability
of public assets is not damaged by activities outside statutory requirements. Further information
about insurance generally is in annex 4.5.
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4.5 Control of expenditure
45.1 The Treasury coordinates a system through which departments are allocated
administrative 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. Public
sector organisations should keep their use of public resources within the agreed budgets, and
take them into account when entering into commitments.
45. Public sector organisations should also ensure that their use of resources is properly
authorised and controlled. The nature of these arrangements will depend on the range of
payments to be made, the techniques available and the risks to be managed (annex 4.6 provides
advice on types of payments). It is good practice to review these systems from time to time to
check that they are fit for purpose and deliver good value. A checklist of essential features is at
box 4.4. Advice about countering and dealing with fraud is at annex 4.7.
box 4.4: essentials of systems for committing and paying funds
© Internal controls to provide authority for acquiring the goods or services to be purchased (including
controls on new suppliers), within any legal constraints.
. Authorisation for payment separated from the process of making the payment, with appropriate
validation and recording at each step.
* Checks that the goods or services acquired have been supplied in accordance with the relevant
agreement(s) before paying for them.
© Payment terms chosen or negotiated to provide good value.
* Invoices paid accurately when mature, once and on time, avoiding late payment penalties.
* Abalance of preventive and detective controls to tackle and deter fraud, corruption, etc.
© Audit trails, which can readily be checked and reported upon both internally and externally.
© Periodic reviews to bring to bear any lessons from internal audit examination or other relevant
experience, or to implement developments in good practice.
453 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 ex gratia
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 public sector as a whole (see also
section 4.11).
4.6 Receipts
46.1 Similarly, 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.
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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.
© Decisions about any fees and charges made in line with the principles in chapter 6.
© Audit trails which can readily be checked and reported upon both internally and externally.
4.7
41.1
Unusual circumstances
Sometimes public sector organisations face a dilemma in dealing with transactions in public
funds. They may have a legal or business obligation which it would be uneconomic or
inappropriate to carry out assiduously to the letter. In such cases it may be right to seek a just,
pragmatic and transparent alternative approach, appropriately reported to Parliament and set out
in the organisation’s report and accounts. One-off schemes of this kind are nearly always novel
and so require Treasury approval, not least because they may also require legislation or have to
rest on the authority of the Appropriation Act. Box 4.6 suggests precedented examples.
box 4.6: examples of one-off pragmatic schemes
© — Acourt ruling could mean that a public sector organisation owed each of a large number of people a
very small sum of money. It might cost more to set up and operate a payment scheme than the total
payable. The organisation could instead make one-off donation(s) equal to the sum outstanding to
‘one or more charities connected with the recipient group.
© A dispute with a contractor might conclude that the contractor owed a public sector body an amount
too big for it to meet in a single year while staying solvent. The customer organisation might agree
more favourable payment terms for the remainder of an existing contract instead, provided it was
satisfied that this arrangement would be value for money, and with appropriate safeguards.
4.8
4.8.1
Dealing with initiatives
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 4.7 may help to bring all the different factors together. It applies primarily to
central government organisations but the principles will be of value elsewhere.
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box 4.7: factors to consider when planning policies or projects
design
© Has the proposal been evaluated against alternative options, including doing nothing?
¢ Is there a case for pilot testing before full roll out?
* Are the controls documented clearly?
* Have the risks and opportunities been considered systematically? How will they be managed? Is the
process resilient to shocks? What contingencies might arise?
* _ Is the intended policy proportionate to the perceived need for intervention?
* Will the outcome(s) to be delivered achieve adequate standards?
© Could the proposal be simplified without loss of function?
© Ifitis to operate with one or more partners, is the allocation of responsibilities documented?
© Will the proposal be efficient, effective and offer good value for money?
‘* _ Isthe 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 in a feasible fashion?
control
«Is the proposal empowered in legislation? If not, what steps are needed to secure the necessary vires?
* Is the policy or project within European law, including limits on state aids?
«How will the proposal be financed? Is there budget and Estimate cover?
* Is the proposed action within the department's delegated authorities?
© What Treasury agreement is required, if any?
© How will the internal governance and delegation work? Will it be effective? Is it transparent?
© What financial techniques will be used to manage rollout and implementation?
* Are project and programme management techniques likely to be useful?
* How will the intended new arrangements be monitored and efficiency measured?
© Are there arrangements to use feedback to improve outcomes?
© What safeguards are planned to encourage proper and accurate use of resources, prevent misuse and
counter fraud?
* How will the associated risks be tracked and the responses adjusted?
‘© What intervention will be possible if things go off track?
accountability
© Should Parliament be told of the proposal? If'so how?
© How will Parliament be kept informed of progress?
© What targets will be used? Are they stretching? Do they need to be linked to any PSAs?
‘© Should there be customer standards? Should there be feedback to learn from complaints?
© Should there be arrangements for redress after poor delivery?
* Is enforcement required? If so, is it proportionate?
‘© Is public access called for? How?
* Will any new policy or service be administered and enforced openly, fairly and impartially?
© Is an appeal mechanism needed?
© Isany regulatory oversight called for?
learning lessons
© What audit arrangements (internal and external) are intended?
© What information about and records of 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?
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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 will depend on its
objectives, responsibilities and resources. There should be an appropriate balance between those
with professional, practical or operational skills and policy makers, 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. Public sector organisations should seek to be fair, honest and considerate employers. Some
desirable characteristics are suggested in box 4.8.
box 4.8: public sector organisations as good employers
© fairness, integrity, honesty, impartiality and objectivity
* clear lines of reporting and responsibility
© equal access to development opportunities to make good use of staff potential
* diversity valued and personal privacy respected
© processes to identify and deal with poor performance
* discipline to underpin the department's integrity
* mechanisms to support efficient working practices, both normally and under pressure
© arrangements for whistle blowers to raise worries privately without personal repercussions
493 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 (annex 4.2). 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 4.8 discusses some features that
are usually worth covering in such a strategy.
4.10.2 An important part of asset management is good procurement delivering value for money.
Public sector organisations should normally acquire goods and services through fair and open
competition, using OGC advice to determine best practice. Annex 4.4 offers further advice on
techniques. It is important to ensure that procurement is in line with European law, including
restrictions on state aids, discussed further in annex 4.9.
4.103 It is good practice for public sector organisations to take stock of their assets from time to
time and reconsider whether they are being used efficiently. 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 - sometimes called wider markets activity. These can generate
additional income for the organisation, improving its efficiency (see section 7.11).
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4.11 Non-standard transactions
4.\I.1 From time to time public sector organisations may find it makes sense to carry out
transactions outside the usual planned range, eg:
* write-offs of unrecoverable debts or overpayments;
* recognising losses of stocks or other assets;
¢ long term loans of assets; or
e gifts of assets.
4.11.2 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 4.13 set out what is expected when such
transactions take place in central government, including notifying Parliament.
4.113 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;
ex gratia payments to customers; or
severance payments to employees leaving voluntarily before retirement or the end of
their contract.
4.114 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 compensation schemes,
both statutory and ex gratia, are discussed in annex 4.14.
4.12 Standards of service
4.12.1 Parliament and the public do not find poor quality public services acceptable. Public
sector organisations should therefore define what their customers, business counterparties and
other stakeholders can expect of them.
4.12.2 Standards of this kind 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. In
central government these will sometimes be defined in departmental strategic objectives or
public service agreements (PSAs). Even where standards are not set explicitly, they may
sometimes be inferred from the way the provider organisation carries out its responsibilities.
4.123 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 they remain
appropriate and meaningful to customers.
4.124 Where public sector organisations fail to meet their standards, or where they fall short of
reasonable behaviour in relation to those they do business with, 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 beyond what the law or
contract strictly requires. When deciding whether financial remedies might be appropriate, each
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organisation should consider the legal rights of the other party or parties, the potential effects on
its reputation and the impact on its future business.
4.12.5 When central government organisations consider making such payments, whether
statutory or ex gratia, they should follow the guidance in annex 4.14, which includes the PHSO’s
Principles for Remedy. Any schemes of financial redress which are unusual or could have
implications elsewhere should be discussed with the Treasury before commitments are made, just
as with any other public expenditure out of the normal pattern (see sections 2.1 and 2.2).
4.13 Complaints
4.13.1 The PHSO (see www.ombudsman.org.uk) investigates complaints that government
departments, a range of other public organisations in the UK and the NHS in England have not
acted properly or fairly, or have provided a poor service. In the light of the investigation of a case,
the PHSO decides whether those complaining have suffered injustice or hardship because of
maladministration or service failure, and whether any injustice or hardship has been, or will be,
remedied. The PHSO’s view is final, subject to judicial review by the courts.
4.13.2 Where maladministration or service failure is found, the PHSO may recommend that the
public organisation concerned should provide redress for those complaining, and for any others
who may have suffered in the same way. Further guidance about redress is at annex 4.14. If the
PHSO considers that the injustice has not been, or will not be, remedied, the PHSO may lay a
special report before Parliament. Such reports are examined by the Public Administration Select
Committee.
4133 There are a number of other organisations charged with investigating complaints and
recommending further action where it is merited. Some of these are also called Ombudsmen. In
general they operate according to similar principles to those governing the PHSO, though not with
the same reporting arrangements to Parliament.
4.14 Transparency
4.14.1 All public sector organisations should operate as openly as is compatible with the
requirements of their business. In line with public rights under the Freedom of Information Act
2000, the Data Protection Act 1998, the Environmental Information Regulations 2004, and the Re-
use of Public Sector Information Regulations 2005, they should make available timely information
about their services, standards and performance. This material should strike an appropriate
balance between protecting confidentiality and open disclosure in the public interest. It is good
practice to adopt a publication scheme routinely offering information about the organisation’s
activities.
4.142 All public sector organisations should also publish regular information about their plans,
performance and use of public resources. For instance, box 4.9 shows what is expected of central
government departments.
box 4.9: annual publications by central government departments
¢ Estimates, including an Estimates memorandum.
° resource accounts, including a Statement on Internal Control and a management commentary,
subject to Treasury direction
© departmental reports: annual and autumn performance
© anaccount of corporate governance systems and performance
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4.143 In addition, the Treasury is responsible for publishing certain aggregate information about
use of public resources, for example including comparisons of outturn with budgets. Office for
National Statistics (ONS) also uses input from data gathered by the Treasury to publish the
national accounts.
4.144 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.
Annex 4.1 Finance Directors
Annex 4.2 The civil service code
Annex 4.3 Principles of good administration
Annex 4.4 Procurement
Annex 4.5 Insurance
Annex 4.6 Expenditure and payments
Annex 4.7 Fraud
Annex 4.8 Asset management
Annex 4.9 State aid
Annex 4.10 Losses and write-offs
Annex 4.11 Overpayments
Annex 4.12 Gifts
Annex4.13 Special payments
Annex4.14 Remedy
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This chapter explores the means by which central government organisations may obtain funds,
and the framework for controlling expenditure so financed. In line with the Concordat, the
Treasury operates disciplines to respect Parliament’s concern to prevent unauthorised
expenditure.
5.1 The framework for public expenditure control
5.1.1 Departments’ centrally allocated budgets for use of resources (see para 4.5.1) are split into
resource and capital totals. Each department’s budget is in turn split between a departmental
expenditure limit (DEL) and annually managed expenditure (AME). The totals of DEL and AME
(some of the latter, such as debt interest, not allocated to departments) together make up total
managed expenditure (TME). More information is in box 5.1.
box 5.1: elements of resource budgets
Departmental expenditure limits (DEL): provision planned and managed over three years, with scope
(subject to Treasury agreement) for carrying forward unspent provision into future years to provide flexibility,
encourage setting priorities and deter end-year surges in spending, Usually comprises most of each department's
resource budget. Includes limits on near-cash expenditure and on the cost of administration.
Annually managed expenditure (AME): expenditure which is not as readily controlled as DEL is, but which
must be budgeted for each year, including social security expenditure and local authority expenditure financed
from local taxation.
Both DEL and AME may include capital and current resource provision.
5.1.2 In turn each central government department allocates its budget among its own
responsibilities, cascading provision appropriately to those which receive grants from it, eg NDPBs.
Annex 5.1 discusses the principles on which grants (for specific purposes) and grants-in-aid
(unspecific support) should be based. 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).
5.13 Within the resource budgeting framework, a variety of mechanisms are used to encourage
the wise and effective deployment of public expenditure to meet the government's objectives
including:
¢ administration budgets: limiting the amount of resource DEL provision that can be used
for basic support services such as salaries;
° asset management strategies: plans to build and manage capital stock through investment;
° departmental strategic objectives, often including public service agreements (PSAs):
performance targets for public services, such as waiting times, crime rates or educational
standards.
5.14 The budgeting framework is explained in the Consolidated Budgeting Guidance’.
9 Consolidated Budgeting Guidance — see http:/Avww.hm-
treasury.gov.uk/documents/public_spending_reporting/budgeting_classification/psr_bc_consolidated_budgeting.cfm
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5.2 Estimates
5.2.1 The agreed departmental budgets do not of themselves confer authority to spend or commit
resources. That requires Parliamentary agreement through the Estimates process. Departmental
Estimates containing one or more Requests for Resources (RfRs) are put to Parliament covering
one financial year at a time. In turn many departments’ Estimates also contain provision for cash
and other resources to finance their ALBs through grants or loans. Departmental Select
Committees may examine departments on the plans contained in Estimates.
5.2.2 Once agreed, the Estimates become the expenditure limits voted by Parliament, set in the
Appropriation Acts. These provide the legal authority for public expenditure within the ambit of
each RfR. The ambit describes the activities on which expenditure is permitted by the RfR. There is
some scope for transferring (viring) provision from one section or subhead to another within the
same RFR. Details are in the Estimates Manual.
5.23 Agreed Estimate provision for one year cannot be carried forward to the next. If a
department needs to spend resources it did not consume in a previous year, and provided the
budget will bear it, authority to spend in a subsequent year must be requested afresh. Annex 5.3
explains the treatment of receipts, in particular when they can score as appropriations in aid, so
reducing the gross provision for resource consumption for which Parliamentary approval must be
sought.
5.14 There are some limited exceptions to the need for Estimates. The main ones are the National
Insurance Fund (financed by its own hypothecated revenue stream) and various Consolidated
Fund Standing Services.
5.5 The annual expenditure which Parliament authorises in Estimates is not calculated in quite
the same way as multi year resource budgets. Annex 5.4 explains how the two are related. Detailed
information on the operation of Estimates is in the Estimates Manual.
5.3 Excess votes
53.1 Accounting Officers have an important role in overseeing the overall accuracy of the
presentation of the RfRs for which they are responsible. In particular, Accounting Officers are
responsible for ensuring that actual spending is within the ambit of each RfR, is regular (see
box 2.4), and does not exceed the amount of Estimate provision. The Treasury presents Parliament
each year with a Statement of Excesses to request retrospective authority for the unauthorised
resources (or cash or income) consumed above the relevant limits.
53.2 This statement identifies two kinds of excess expenditure:
° expenditure outside the ambit (EOTA)
* spending above the amount provided in an RER.
533. Parliament usually regards EOTA as particularly unsatisfactory because it means that the
department concerned has flouted the intentions that Parliament has set in statute. It is important
to note that an RfR may be noted for EOTA for any excess not covered by suitable statutory powers,
even if the total amount spent does not exceed the Appropriation Act limit.
534 Expenditure in excess of provision is also to be avoided since the authority of an
Appropriation Act is required just as much as specific statutory authority. It is possible, with
Treasury agreement, to raise the amount in an RfR during the course of the year through a
Supplementary Estimate. But if need be, Accounting Officers should reduce or postpone use of
resources to keep within the provision Parliament has agreed.
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53.5 The C&AG reports both kinds of excess vote to Parliament. The PAC may examine
the responsible Accounting Officers to see whether there is evidence of some underlying
weakness of control.
5.4 Commitments
54.1 Just as Parliamentary authority is required for use of public funds in a given financial year,
so Parliament also expects advance notice of any government commitment to future use of
public funds for which there is no active request for resources through Estimates.
542 Ministers may commit the government to policies with financial implications without
statutory authority. But commitments in time translate into resource consumption. So all
commitments should be scrutinised and appraised as stringently as specific proposals for
resource consumption (box 4.7 may help). It is essential for departments to have Treasury
agreement before going firm. It is best practice then to obtain statutory authority before entering
into all commitments to future deployment of public resources.
543 As the Concordat (annex 2.1) notes, Parliament is not bound to honour ministers’
commitments unless and until there are statutory powers to meet them and it authorises public
funds to finance them in a given year. So it is essential to give Parliament prompt and timely
notice of any significant commitments, including contingent liabilities (above a specified
threshold) into which the government intends to enter. This is especially important if the
business in question is outside the department's existing statutory powers. The process for
informing Parliament is set out in annex 5.5.
544 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 5.2.
box 5.2: contingent liabilities: notifying Parliament
. Parliament should be notified of uncertain liabilities in a way that is meaningful without attempt at
spurious accuracy. It is good practice to notify Parliament if the estimated liability changes
significantly, or can be clarified.
* Ifa contingent liability affects several departments but cannot confidently be allocated among them,
the relevant ministers should inform Parliament in a way which offers pragmatic information while
recognising the scope for variation.
© If, exceptionally, the liability needs to remain confidential, the minister should inform the chairs of
the relevant select committee and the PAC; then inform Parliament openly if the need for
confidentiality lifts.
. Ministers should inform Parliament if an NDPB assumes a contingent liability which it could not
absorb within its own resources, since the risk ultimately lies with the sponsor department's
budget,
5.5 Public dividend capital
55.1 Certain public sector businesses, notably trading funds, 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. 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.
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5.5.2 A department needs specific statutory power to issue PDC to an arm’s length body, together
with Estimates 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.
55.3 Further information about the use of PDC is in section 7.5 (trading funds) and in the
Estimates Manual.
5.6 Borrowing by public sector organisations
5.6.1 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).
Treasury consent and specific legal powers are always required. Limits and other conditions are
common. Further discussion is at annex 5.6.
5.6.2 Every loan should be made with reasonable expectation that it will be serviced and repaid on
the agreed schedule. Departments are responsible for scrutinising borrowers’ creditworthiness,
not relying solely on their track record. If timely repayment could not realistically be expected, the
loan would be unlawful. Should a sponsor department become aware of concerns about the
security of outstanding loans, it should warn the Treasury promptly and consider what action it
can take to minimise any potential loss.
5.63 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. This is because there is a working
assumption that the NLF continues to meet the cost of financing the amount outstanding and so
the public sector as a whole would make a loss if the NLF offered cheaper replacement loans.
5.64 While NLF loans are repaid to the NLF direct, voted loans are repaid to the Consolidated
Fund. The treatment of repayments and interest payments in Estimates and resource accounts is
discussed in the Consolidated Budgeting Guidance, the Estimates Manual and the FReM. The
Treasury also accounts for NLF transactions in the NLF’s accounts. Any proposed write-offs must
be notified to Parliament after obtaining Treasury agreement: see annex 5.6.
5.7 External borrowing
5.1.1 Public sector organisations may borrow from private sector sources only if they can achieve
better value for money for the public sector as a whole by doing so. In practice it is usually difficult
to satisfy this condition unless efficiency gains arise in the delivery of a project because of the
introduction of externally raised debt (eg PFI). Treasury agreement to any such borrowing for ALBs
is essential, and must be justified on value for money grounds. Nevertheless it can sometimes be
expedient for public sector bodies to borrow short term, for example by overdraft.
5.1.2 When a sponsor department's ALB borrows in this way, the department should normally
arrange to guarantee the loan to secure a fine rate. There may sometimes be overriding
constraints, eg where such a guarantee would rank as a state aid (see annex 4.9). A department
which guarantees a loan needs a specific statutory power as well as Estimate provision. On rare
and exceptional occasions temporary non-statutory loans may be possible. In either case,
Parliament must be notified when a loan guarantee is given, using the reporting procedures in
annex 5.5,
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513 Occasionally there is a case for a sponsored body 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.
5.14 The same principles apply to the borrowing of any bodies, such as subsidiaries, for which a
sponsor department's ALBs are responsible. This is because their borrowing affects the
creditworthiness of their sponsor department and thus of the UK as a sovereign borrower.
5.8 Banking
581 The various organisations in central government together handle very large flows of public
funds every working day. 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. So there is considerable advantage to be gained for the public sector as a whole by
minimising this net position. In practice this means gathering balances together at the end of each
working day. Together all these accounts make up the Exchequer Pyramid at the Bank of England.
Mostare held with the Office of the Paymaster General (OPG).
5.82 This is why it is essential for departments and NDPBs 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. Annex 5.7 sets
out the requirements. In particular, balances held with commercial banks bear a capital charge,
whereas OPG balances attract no such charge.
5.8.3 It is good practice for each organisation in central government to establish a policy for its use
of banking services. See annex 5.7 for guidance. Sponsor departments should make sure that their
ALBs are aware of the importance of managing this aspect of their business efficiently and
effectively (see box 7.2).
5.9 Other financing techniques
5.9.1 Depending on its circumstances, purposes and risk profile, a public sector organisation may
consider using financial instruments provided by the commercial markets. Among the techniques
which may merit consideration 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. Another possibility is permitting payments
by various electronic means, including credit cards.
5.9.2 As with making decisions about other policies and projects, an organisation considering using
an unfamiliar financing technique should evaluate it carefully. The checklists in boxes 4.3 and 4.7
have reminders of factors that may need to be considered. If the proposed transaction(s) are novel,
contentious or repercussive, it is essential to consult the Treasury. Any organisation using a new
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 (and ALBs their sponsoring departments) before using derivatives for the first time.
5.9.3 When assessing an unfamiliar financial 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 novel financial techniques. The Treasury will always refuse proposals to
speculate. Offers which appear too good to be true usually are.
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5.94 A simple example is the use of credit cards to pay debts owed to public sector organisations.
When evaluating the options, it is important to balance any extra cost against the value of additional
or faster flows of funds expected by offering this facility. There may be a case for limiting the
transactions acceptable in this way, eg for payments up to certain amounts, or only using certain
cards (depending on the commercial deals that can be negotiated). Parliament expects the public
sector to make shrewd and well-informed decisions based on sound commercial principles.
595 A more complex example is deals financed under the Private Finance Initiative. There is
more about this in section 7.10.
5.9.6 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
Annex 5.2
Annex 5.3
Annex 5.4
Annex 5.5
Annex 5.6
Annex 5.7
Grants and grants-in-aid
Protecting public investments (clawback)
Treatment of income and receipts
How Estimates provision is derived from departmental budgets
Liabilities
Departmental lending
Banking
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Where a fee is charged for access to public goods or services, there are some specific rules about
how the charge should be determined. It is important to protect Parliaments right to decide
which services should be charged for, and how public resources are to be allocated.
Basic policy
6.1.1 It is government policy to charge for many publicly provided goods and services. This
approach helps allocate use of goods or services in a rational way because it prevents waste
through excessive or badly targeted consumption. It also makes for easier comparisons with the
private sector, promotes competition and helps develop markets.
6.1.2 The norm is to charge at full cost. Some exceptions are noted in box 6.1.
box 6.1: exceptions to full cost charging
* Subsidised services: where ministers decide to spend public resources on lowering costs for some
or all consumers of public services, eg free prescriptions for children.
* Taxation: where Parliament authorises charges above cost, eg vehicle excise duty.
* Information services: where charges are generally low or minimal as a matter of policy, eg most
freedom of information (Fol) requests.
© Certain discretionary services provided in competition with the private sector, where a commercial
rate is normally charged, eg letting out public space for private use.
* Levies: licences to operate using public goods, often set to recover associated costs such as
supervision by a regulator, eg gambling licences.
6.1.3 The guidance in this chapter applies to all charges and levies set by ministers or 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. It also applies to
charges for goods and services one central government organisation supplies to another; and to
certain other statutory charges set by ministers, eg some local government fees. Those setting up a
service carrying a charge may find the checklist in annex 6.1 useful.
614 Central government bodies usually need primary legislation to charge for a service
provided to the public since Parliament expects to control use of public resources. Except in the
case of commercial services (see section 6.4), if the charge exceeds the cost of supply, the excess
must be remitted to the Consolidated Fund. If the excess is significant, the Office of National
Statistics (ONS) may classify the whole charge as a tax.
6.2 Setting the charge
62.1 Setting a fee for a public service normally" requires powers in primary legislation. These
powers are usually fairly general, with the fee structure and each fee set in secondary legislation.
Prior Treasury approval is required for primary legislation empowering charges. Even if the
primary legislation does not call for it, the delegated authorities within which the organisation
operates (see paragraph 2.1.5) will often insist upon Treasury consent to charges.
10 This requirement does not apply to discretionary services: see section 6.4.
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6.2 Ina limited range of cases, it may be possible to rely on secondary (rather than primary)
legislation. One such group of cases is implementation of EU legislation. Depending on the policy
to be implemented, it may be possible to use secondary orders under s2(2) of the European
Communities Act 1972 for the substantive policy and under s56 of the Finance Act 1973 to set
charge levels.
6.23 In certain other cases, charges can be adjusted where otherwise primary legislation would
be necessary by using an order under $102 of the Finance (no 2) Act 1987. Because such orders
amend primary legislation, they are unpopular in Parliament and are therefore used rarely. Box 6.2
explains the routine. Use of the s102 procedure often indicates that the fee is classified as a tax.
box 6.2: restructuring charges using s102
* Explicit prior Treasury agreement is essential.
¢ The order can vary or extend the powers in existing primary legislation by permitting specified
factors to be taken into account in setting fees, eg to restructure fees to recover costs not directly
related to the current costs of the service, or to recover past deficits.
But
* A102 order cannot undermine primary legislation, eg it cannot authorise a charge for which no
primary legislation exists, nor lift explicit statutory restrictions on which groups of consumers should
pay a charge for a service.
6.24 When deciding the level of a charge, it is important to define:
e the range(s) of services for which a charge is to be made; and
¢ how any different categories of service are to be differentiated, if at all, in setting
charges.
625 Normally the same charge should apply to all users of a defined category of service. The
policy might be to charge at a uniform rate for all varieties of a service; or different fees may be set
for objectively different categories of service costing different amounts to provide. Box 6.3 has
some acceptable distinctions. It is often helpful to consult the Treasury as the categories to bear
different charge levels are developed. This is essential if the proposed arrangements entail any
features which could affect other parts of the public sector or set precedents for them.
626 Annex 6.2 contains guidance about how full cost should be measured for the purpose of
setting charges. Special rules apply to charges for information services: see annex 6.3.
box 6.3: possible ways of setting charge for different categories of service
© Supply differences, eg in person, through the post, over the telephone or using the internet.
* Priority, eg where consumers pay more for a faster, more expensive, service.
* Scale or value, eg where a premium service offers more facilities to the customer than others.
* Structural, where it costs more to supply some consumers with a consistent service.
But not
© __ Differentiation by different kinds of customer, eg less for personal consumers and more for corporates
(unless permitted or required by the primary powers).
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6.2.7 Once defined, the full cost of each category of service should be measured realistically and
objectively: see annex 6.2. The cost should be estimated, extrapolating past trends and forecasting
future consumption patterns. The calculation should take full account of non-cash items eg
depreciation, the cost of capital and the notional cost of insurance where applicable. There is
some limited flexibility about the charge in any single year, since demand cannot be forecast
precisely and it may make practical sense to round charges. But neither factor can justify planning
to recover less or more than 100% of costs.
6.2.8 If ministers decide on a financial target short of full cost recovery, there should be a plan to
achieve full cost recovery within a reasonable period. If this is not intended, it is important to
decide (and document) clearly why and how long any deliberate public subsidy should last.
6.2.9 In general, cross subsidies are not good practice, eg businesses subsidising individuals or
large businesses subsidising small ones. They may foster inefficient or wasteful patterns of
consumption. Thus they always require explicit ministerial agreement and primary legislation (or
as102 order). And such charges are often classified as taxes.
6.2.10 I Charges within and among central government organisations should be made at full cost,
including the standard cost of capital. To charge otherwise would risk creating unwarranted
subsidies or distorting competition.
6.3 Levies
63.1 Compulsory levies, eg licences to operate charged by statutory regulators, or to support
industry specific research foundations, are normally classified as taxation. Such licences are
justified in the wider public interest and not to provide a beneficial service to those who pay them.
The Treasury may allow such bodies to retain the fees charged if this approach is efficient and in
the public interest.
63.2 As with other fees and charges, levies of this kind should be designed to recover the full costs
of the service provided. If the legislation permits, these costs can include the costs of the statutory
body, eg a regulator could be empowered to recover the cost of supervision as well as registration
to provide a licence. It may be appropriate to charge different levies to different kinds of licensees,
depending on the cost of providing the licence.
6.4 Commercial services
64.1 Some public sector services are discretionary, ie no statute requires them. Services of this
kind are often supplied into competitive markets, though sometimes the public sector supplier has
a monopoly or other natural advantage. The key steps to take before setting up such a service are
outlined in box 6.4.
box 6.4: setting up a commercial service
* Check whether the service is supplied in a competitive market.
© _ Establish whether adequate statutory authority exists for undertaking the planned activity.
* Consider whether Estimate authority is required to use public resources to supply the service.
* Agree the required rate of return with the Treasury.
© Obtain Treasury consent for any adjustment to the supplier's financial objective.
* If the intended commercial service is likely to be significant and to endure, tell Parliament of the plan to
provide it.
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64.2 For these services, the charges should be set at a commercial rate, including delivering a
proper return on the use of resources acquired with public funds. So the financial target should be
in line with market prices, using an appropriate risk weighted rate of return on capital. 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 6.2).
643 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. In
particular, discretionary services should never undermine the supplier organisation’s public
duties, including its financial objective(s).
644 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.
6.4.5 Wider markets acti
discussion.
ies are a special case of commercial services. See annex 7.6 for a fuller
6.5 Taking stock
6.5.1 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 6.5 suggests some issues to examine.
box 6.5: reviewing a public service for which a charge is made
‘¢ _Is it still right for a public sector organisation to use public resources to supply the service?
° Does the business structure still make sense? Are the assets used for the service adequate?
* Would another business model (eg licensing, contracting out, privatising) be more satisfactory?
* For services supplied within the public sector, is there scope to supply others to take advantage of
economies of scale?
© Is the financial objective right?
= fora statutory service (or one supplied to another public organisation) if full costs are not
recovered, why not?
- fora commercial service, does the target rate of return still reflect market rates?
© Can efficiency and effectiveness be improved?
* Looking ahead, 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 for wider markets activity, or sold?
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6.6 Accounts
6.6.1 As with public expenditure, the resources used in supplying public services and the proceeds
of charges should be properly recorded and accounted for. Each service should keep records of its
costs and the associated receipts. A memorandum trading account (MTA) prepared in accordance
with GAAP and any relevant accounts direction is often a convenient way of doing this. Because
MTAs record how the costs and revenues evolve, they help generate the end year resource
accounts, whether the operation of the service is consolidated with the parent department's
business or not.
66. The FReM discusses audit and reporting of trading funds in more detail.
Annex 6.1 Checklist for setting up new services
Annex 6.2 How to calculate fees
Annex 6.3 Charging for information
Annex 6.4 Competition law
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This chapter considers the working partnerships that public sector organisations may establish in
order to deliver their objectives more effectively than they could acting alone. There are some
common features to competent management of these relationships, and some specifics which
apply to certain sorts of relationships. It is essential that the public interest and value for public
resources are given a high priority in the management of all these relationships.
7.1 The case for working partnerships
7.1.1 Parliament and the public expect high quality public services, adapted flexibly to suit the
needs of different kinds of customers. It can make sense for public sector organisations to work with
partners to deliver these services. The partners may be other public sector organisations,
commercial organisations, or bodies from the third sector such as charities and voluntary groups. In
this way the public sector can harness skills appropriate to the purpose in hand.
11.2 There are many different kinds of partnership. Each involves some tension between
autonomy and accountability with scope for conflict if the terms of engagement are not resolved
openly at the outset. Box 7.1 outlines some key areas that need to be decided early in the
relationship. Each partnership requires its own customised terms to work effectively. One size does
not fit all.
box 7.1: issues for every partnership with a public sector member
* As for projects, the decision to engage with a partner should rest on a business case in the public
interest, evaluated against a range of alternative courses, including doing nothing.
. Conflicts of interest, including reputation risks, should be consciously recognised and dealt with, eg
through explicit safeguards in the terms of the partnership.
* The cultural fit of the partners should be good enough to give each party confidence about trusting the
other(s).
* The partnership framework should be documented and the terms of engagement kept up to date so
that there is no doubt about responsibilities.
© Partnerships should not be a way of weakening accountability for the use of public resources, including
reporting to Parliament.
7.2 Setting up new arm’s length bodies
7.1.1 When a department sets up a new arm’s length body (ALB), it needs to decide which kind of
body it should be. Each has its strengths and merits. In general it makes sense to let the functions of
the new body determine its form. It is important to consult the Cabinet Office and the Treasury in
this process. Annex 7.1 suggests sources of guidance on some common types of ALB, while annex
7.2 outlines how to determine whether a new ALB should be an agency, an NDPB or a non-
ministerial department.
7.1.2 Designing a new body for partnership with a public sector organisation always requires
careful planning. It is important to ensure that the new arrangement will deliver the intended
outcome(s) without unnecessary and confusing complexity. The sponsor department is responsible
in the first instance for ensuring that the budgetary control and internal disciplines of new ALBs are
satisfactory. It is desirable to arrange for a clear line of sight between those making the key decisions
and the machinery for implementing them.
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7.23 While the established models of public sector bodies are often useful, it can sometimes
make sense to design new kinds of ALB. When departments plan to innovate in this way, it is
usually necessary to consider whether primary legislation is required and to secure appropriate
Estimate cover. Treasury support for any innovative development of this kind is always
essential.
7.3 What to clarify
73.1 When documenting an agreement with a partner, public sector organisations should
analyse the relationship and consider how it might evolve. The terms of the agreement must be
clearly understood by each party to avoid confusion as the partnership develops. Box 7.2 lists
terms which should always be considered for inclusion in partnership agreements. The list is
not exhaustive.
73.2 In framing founding documentation of this kind, the partners should adopt a
proportionate approach in line with the scale and risk of the business involved. 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. It is good practice to develop
structured arrangements for regular dialogue between the parties to avoid misunderstandings
and surprises.
733 In this process the aim should be to put the Accounting Officer(s) of the parties in a
position to take a well-informed view on the status of the relationship, enabling timely
adjustments to be made as necessary. So there might initially be a significant degree of
reporting and other exchanges, with potential for intervention, underpinning a venture which
is large, experimental and/or risky; and scaling back later if experience gives confidence about
performance. Conversely, a partnership following a well-tested pattern in a familiar area might
call for less intervention.
73.4 Where a new partnership is being developed, it may be necessary or desirable to devise
bespoke working arrangements sensitive to the position of each of the partners. Box 7.1 may
not cover every angle. For instance, a partnership with a charity will need to be compatible
with the charity’s purposes and constitution, while safeguarding the public investment.
7.4 Agencies
741 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.
74. 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 7.5), they are
normally funded through public expenditure supplied by Estimates. Departments should
consult the Treasury and Cabinet Office about the preparation of framework documents.
743 Depending on the scale and nature of an agency’s responsibilities, it may be appropriate
for a senior official of an agency to be a member of the sponsor department's departmental
board. It may also be appropriate for a representative of the sponsor department to join the
agency’s board, as part of the sponsor department's responsibilities for strategy, performance,
risk taking and delivery within the department.
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box 7.2: framework terms for partnership agreements
purpose
© The aims of the relationship, its working remit, standards, and the key objectives and targets.
governance and accountability
* The statutory position, including any financial or other limits and any regulatory requirements.
© The governance of the partnership: the terms of engagement of the partners and any
arrangements for appointment (or approval) of the senior people in the other partner.
* The extent to which any department is responsible to Parliament for the conduct of a partner
(this is always appropriate for partnerships with departments’ ALBs).
© Any other important features of the sponsorship role of the public sector partner, eg acting as
intelligent shareholder or consulting third parties.
* Any arrangements for successor activity, eg establishing similar partnerships elsewhere.
decision making
¢ How strategic decisions about the future of the partnership will be made, with timetable, terms
for intervention, break points, dispute resolution procedures, termination process, and so on.
* How the chain of responsibility should work, eg stewardship reporting, keeping track of
efficiency, risk assessment, project appraisal, management of interdependencies, and so on.
* 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.
financial management
© The financial relationship of the partners, eg:
= any founding capital (including assets, goods, financial sums or other valuables)
- any grants, one off or periodic, and their terms
= how any charges to customers or users are to be set
+ 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 target, eg return on capital employed (ROCE)
= terms for disposal of assets acquired with public funds
= any agreed limits on the partnership’s business.
* Monitoring, reporting, regular liaison and any other tracking arrangements.
¢ Internal and external audit arrangements, with any relevant accounts directions.
7.5 Trading funds
715.1 A trading fund is either part of a department or a department in its own right. Its business
must finance most or all of its operations.
75.2 Each trading fund is set up through an order under the Government Trading Act 1990,
subject to affirmative resolution procedure. Before such an order can be laid in Parliament, the
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Treasury will need to be satisfied that a proposed trading fund can satisfy the statutory
requirement that it is likely to deliver better efficiency and effectiveness. A period of shadow
operation as a pilot trading fund may help inform this assessment.
153. Each trading fund must primarily be financed out of its trading income like any other
enterprise. 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 vagaries of the market in which the trading
fund operates.
154 The possible sources of capital for trading funds are shown in box 7.3. They are designed to
give trading funds freedom from the discipline of annual Estimate funding. The actual mix for a
given trading fund must be agreed with the sponsor department (if there is one) and with the
Treasury.
box 7.3: sources of finance for trading funds
* public dividend capital (equivalent to equity, bearing dividends - see annex 7.2)
* reserves built up from trading surpluses
* long or short term borrowing (either voted from a sponsor department or direct 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
755 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.
15.6 Some trading funds move on to become wholly owned companies within the public sector.
When this process is in prospect, the appropriate disciplines (see section 7.8) should be adopted.
7.6 Departments working together
1.6.1 To promote better delivery and enhance efficiency, departments often find it useful to work
with other government departments (or NDPBs - see section 7.7). 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. Another model might entail
sharing common services, perhaps in a common building. Such arrangements offer opportunities
for departments to reduce costs overall while each department plays to its strengths.
7.6.2 Such relationships can be constituted in a number of different ways. Some models are
sketched in box 7.4. The list is not exhaustive.
1.63 Shared services often need funding to set up infrastructure, eg specialist IT for procurement.
This could be agreed in a spending review, or customers could buy in by transferring budget
provision to the lead provider. Each of the Accounting Officers involved will need assurance that
the project offers value for money for the public sector as a whole. The provider’s charges should
be at cost, following the standard fees and charges rules within central government (see chapter 6).
1.64 If the PAC decides to investigate joined up activity, the Accounting Officers of each of the
participants should expect to be summoned as witnesses.
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box 7.4: example models 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 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
7.7 Non-departmental public bodies
7.1.1 Non-departmental public bodies (NDPBs) may take a number of legal forms, including
various corporate models and/or charities. Most executive NDPBs have a bespoke framework in
legislation or its equivalent (eg a Royal Charter). This framework may specify in some detail what
the NDPB is to do, what powers are invested in it, and how it should be financed. Annex 7.1 has
links to further information about NDPBs.
7.12 Each NDPB is a special purpose body which plays a part in the process of government. Each
has a sponsor department charged with general oversight and responsibility for reporting its activity
to the Treasury. So sponsor departments should have appropriate arrangements for regular
monitoring with scope for steering the NDPB’s performance as necessary. Sometimes other
departments also take an interest in particular aspects of an NDPB’s business.
1.13 NDPBs’ sources of finance vary according to their constitution and function. Box 7.5 shows
the main options available.
box 7.5: 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 goods or services the NDPB may sell
* public dividend capital
7.14 In practice NDPBs 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
have the ultimate sanction of winding up unsatisfactory NDPBs.
71.15 As with agencies (see 7.4.3) there may be value in some cross membership of an NDPB board
with its sponsor department’s board. This can foster mutual confidence and provide valuable
insight for both parties. In any case sponsor departments need arrangements to monitor and
understand their NDPBs’ strategy, performance and delivery, usually built around a framework
document which includes terms on the lines of box 7.2 (see annex 7.4 for a suggested outline and a
specimen example). In practice these arrangements can be very similar to those departments need
for their relationships with agencies (see section 7.4).
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7.8 Public corporations
7.8.1 Some departments own controlling shareholdings in public corporations or Companies Act
companies, perhaps (but not necessarily) as a step toward disposal. Except where a public
corporation’s powers are defined in statute, such a company is subject to all the disciplines of
corporate legislation; and may also be an NDPB. Shareholdings of this kind may be managed
through the Shareholder Executive, which also provides advice on managing strategic
relationships.
1.82 To manage relationships of this kind, departments need to adapt the framework in box 7.2 to
suit the corporate context while delivering public sector disciplines. The financial performance
expected of a public corporation should give the shareholding department a fair return on the
public funds invested in the business. Box 7.6 offers a checklist. The same approach may be
appropriate for a trading fund, especially if it is expected to become a Companies Act company
in time.
box 7.6: 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
5 procedure for appointments
. performance monitoring
: any necessary approvals processes
- the circumstances of, and rights upon, intervention
7.83 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).
7.9 Outsourcing
7.9.1 Public sector organisations often find it useful to outsource some non-core services or
functions rather than provide them internally. Typical candidates include cleaning, catering and
IT support. A much wider range of services is potentially suitable, depending on the nature of the
organisation's business. 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.
719.2 It is good practice to arrange some form of competition for all outsourcing. In most cases, it
is legally essential to open the competition to all firms in the EU (see annex 4.4). Where the
organisation foresees the need to hire services at short notice, for example legal services to support
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 from which services
can be called upon to deal with rapidly emerging needs.
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1.9.3 In choosing partners to provide outsourced services, public sector organisations should seek
the best value available. This may not be the same as the cheapest price.
7.10 PPPs and PFls
7.10.1 Public private partnerships (PPPs) use structured arrangements between the public and
private sectors to secure an outcome delivering good value for money for the public sector. These
arrangements use private sector management skills, with suitable arrangements to protect staff
terms and conditions. Various different business models are possible.
7.10.2 One special kind of PPP is the private finance initiative (PFI). In such deals a public sector
organisation contracts with a private sector entity to construct a facility and provide associated
services of a specified quality over a sustained period. Because the private sector contractor puts
its own funds at risk, it has powerful incentives to deliver to time and cost, and can thus offer value
for money. Such contracts should normally be built up using standard terms published by the
Treasury (see annex 7.5).
7.10.3 PFI procurement is a flexible, versatile and often effective technique. But it is not
appropriate for every project. Annex 7.5 discusses when PFI is worth considering and how it
should best be used for good results.
7.11 Wider markets activity
T.\I.1 Wider markets activity is part of good asset management in the public sector (see annex 4.8).
Significant projects nearly always require some form of public-private partnership to operate and
grow successfully, eg harnessing a private sector firm’s marketing reach. In this way public sector
organisations can make use of private sector expertise and finance to exploit the commercial
potential of government assets. A great variety of business models is possible.
7.11.2 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. Any kind of public sector asset can and should be considered. These can include both
physical and intangible assets, for example land, buildings, equipment, software and intellectual
property.
7.11.3 Such commercial services always go beyond the public sector supplier's core duties.
Nevertheless the assets concerned have been acquired with public funds. So it is important that
services are priced fairly: see chapter 6. It is also important to respect the rules on state aids: see
annex 4.9. In planning any wider markets activity, central government organisations should work
through the checklist at box 7.7 and the guidance in annex 7.6.
box 7.7: planning wider market acti
© 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, or could exceed
5% of the department's DEL provision, obtain Treasury approval
© take account of the normal requirements for propriety, regularity and value for money
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7.114 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, wider markets activity. If a public sector supplier's wider markets activity reaches a
point where further investment is needed 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.
7.115 Itis a matter of judgement when departments should inform Parliament of the existence, or
growth, of significant wider markets 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.
7.12 Working with third sector bodies
7.12.1. Central government organisations may also find it helpful to form working relationships
with third sector bodies: that is, charities, social, voluntary or community institutions, mutual
organisations and other not-for-profit bodies. Partnership with such bodies can achieve more than
either the public or the third sector can achieve alone. For example, it can offer an extra dimension
by providing insight into what particular groups and communities want, and what they can
contribute, to the delivery of public services.
7.122 In this kind of relationship it is common for a public sector funder to make resources
available to a third sector partner. These could be payments for services, assets, grants or other
transfers for particular purposes. It is usual to include safeguards to ensure that any grants are used
for the intended purpose (see annex 5.2). Otherwise Parliament might not be confident that its
approval of voted resources is being honoured.
7.123 The safeguards to be applied should be agreed at the start of the relationship. They should
be designed to suit the purpose and circumstances of the transaction. It is often right to agree terms
in which public sector donors reclaim the proceeds if former publicly owned assets are sold
(clawback). But it can be appropriate and valuable to set more flexible terms and conditions so long
as they ensure that publicly funded assets are used for the intended purposes in broad terms. This is
explored further in annex 7.7.
Annex 7.1 Sources of guidance on setting up ALBs
Annex 7.2 Guidelines for choosing the form of an ALB
Annex 7.3 Trading funds
Annex 7.4 Specimen framework document for executive NDPBs
Annex 7.5 Private finance initiative (PFI) projects
Annex 7.6 Wider markets activities
Annex 7.7 Working with the third sector
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Term 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, by
convention, usually the head of a department or other organisation or the Chief Executive
‘of an non-departmental public body (NDPB). 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 for exercising control over secondary legislation (je a Statutory
Instrument in the form of an order or regulation). The positive approval of Parliament is
required before the instrument can take effect.
Annually Managed is spending included in Total Managed Expenditure (TME), which does not fall within
Expenditure, AME Departmental Expenditure Limits (DELs). Expenditure in AME is generally less predictable
and controllable than expenditure in DEL.
Appropriation Act annual Act of Parliament, which gives formal approval to departmental Supply Estimates. The
Consolidated Fund (Appropriation) Bill when enacted becomes the Appropriation Act.
Appropriations in Aid income received by a department which it is authorised to retain (rather than surrender to
the Consolidated Fund) to finance related expenditure. Such income is voted by Parliament
and accounted for in departmental resource accounts.
Arm’s length bodies, I NDPBs, companies in which the department has a significant shareholding and other
ALBs sponsored bodies.
Capital spending spending on the purchase of assets, above a certain threshold, which are expected to be
used for a period of at least one year. It includes the purchase of buildings, equipment and
land. The threshold is set by each body: items valued below it are not counted as capital
assets, even if they do have a productive life of more than one year.
Central government — departments and departmental executive agencies, including trading funds, non-
bodies departmental public bodies, and NHS health authorities and boards.
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 which sets out the framework within
which all civil servants work, and the core values and standards they are expected to
uphold. See annex 4.2
Clawback the concept that where an asset financed by public money is sold, all or part of the proceeds
of the sale should be returned to the Exchequer.
Commercial banks bodies other than the OPG which provide banking services, including private sector banks
and building societies.
Committee of a committee of the House of Commons which examines the accounting for, and the
Public Accounts regularity and propriety of, government expenditure. It also examines the economy,
efficiency and effectiveness of expenditure. Also 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.
Managing Public Money 57
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GLossary
Comptroller and the head of the National Audit Office, appointed by the Crown, and an Officer of the House
Auditor General, of Commons. As Comptroller, the C&AG's duties are to authorise the issue by the Treasury
C&AG of public funds from the Consolidated Fund and 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 I.
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 2.1.
Consolidated Fund payments for services which Parliament has decided by statute should be met directly from
standing services the Consolidated Fund, rather than financed annually by voted money.
Consolidated Fund, CF the government's current account, operated by the Treasury, through which pass most
government payments and receipts.
Contingencies Fund a government fund, controlled by the Treasury, which, subject to certain criteria, can be used
to finance urgent expenditure (through issue of repayable advances) in anticipation of
parliamentary approval of Estimates, or used to finance expenditure in advance of receipts.
See annex 2.5.
Contingent liabilities _ potential liabilities that are uncertain but recognise that future expenditure may arise if
certain conditions are met or certain events happen.
Control total the measure used by the government to plan public expenditure for the medium term, and
monitor and control it within each financial year.
Corporate governance the system 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
charged to departments to improve transparency under resource accounting and encourage
efficient use of assets. It 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.
Departmental expenditure limit within which a department has responsibility for resource allocation
Expenditure Limit, though some elements may be demand-led.
DEL
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.
Devolved 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.
Estimate a statement of how much money the government needs in the coming financial year, and for
what purpose(s), by which Parliamentary authority is sought for the planned level of
expenditure and receipts in a department.
58 Managing Public Money
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GLossary
Estimates Manual a practical reference guide issued by the Treasury which provides detailed information on
the Supply Estimates process.
Estimates an explanation to the relevant departmental select committee setting out the links to other
Memorandum spending controls and the contents of a departmental Estimate.
Excess vote a request for resources which, after the year end, is found to have financed expenditure not
agreed by Parliament, whether because it exceeds the prescribed amount of expenditure or
because part is outside the descriptions Parliament has approved. See section 5.3.
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 series of accounts operated by the Treasury through which the overnight sweep and
funding flows.
Expenditure outside expenditure outside the ambit of a vote, ie resources spent on matters which were not
the ambit of a vote, included in the relevant ambit in the departmental Estimate and therefore Parliament
EOTA has not authorised. See section 5.3
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 key principles of accountability for agencies. See annex 7.4.
Freedom of legislation (2000) designed to promote public access to a wide range of public sector data
Information 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 will include all direct and indirect costs of producing the
‘output (both 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.
Gateway’ a review process operated under OGC rules in which people not associated with a
programme, policy or project assess its progress and offer pointers to improve its delivery.
Generally accepted __ the accounting and disclosure requirements of the Companies Acts and pronouncements
by the Accounting Standards Board (principally accounting standards and Urgent Issues
in the UK, UK GAAP Task Force abstracts), supplemented by accumulated professional judgement.
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 made by departments to outside bodies (eg non-departmental public
bodies) to finance their operating expenditure.
Green book informal title of a document published by the Treasury called Appraisal and Evalwation in
Central Government to guide central government organisations in investment appraisal.
Hedging transaction(s) designed to reduce or eliminate financial risk, eg because of interest rate or
exchange rate fluctuations.
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 the 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. See section 6.3.
Managing Public Money 59
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GLossary
Maladministration any form of administrative failing or bad practice. Maladministration can be investigated by
various complaints handling authorities, including the Parliamentary and Health Service
Ombudsman.
Memorandum Trading an informal working document, prepared before the start of the financial year in the form
Accounts, MTAs of a forecast to determine the appropriate level of fees and charges for a repayment service,
and after the end of the year in the form of an outturn statement to provide a record of
performance.
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 of the Comptroller and Auditor General, which audits resource accounts. See
Office, NAO annex 1.1.
National Insurance a government fund used to meet the cost of contribution-based benefits, financed mainly by
Fund, NIF contributions paid by employers and individuals.
National Loans the fund through which passes most of the government's borrowing transactions and some
Fund, NLF domestic lending transactions.
Near-cash resource expenditure that has a related cash implication, even though the timing of the cash
payment may be slightly different. For example, expenditure on gas or electricity supply is
incurred as the fuel is used, though the cash payment might be made in arrears on a
quarterly basis. Other examples of near-cash expenditure are: pay, rental.
Net cash requirement the upper limit agreed by Parliament on the cash which a department may draw from the
Consolidated Fund to finance the expenditure within the ambit of its Request for
Resources. It is equal to the agreed amount of net resources and net capital less non-cash
items and working capital.
Non-cash cost costs where there is no cash transaction but which are included in a body’s accounts (or
taken into account in charging for a service) to establish the true cost of all the resources
used.
Non-departmental a body which has a role in the processes of government, but is not a government
public body, NDPB department or part of one. NDPBs accordingly operate at arm’s length from government
Ministers.
Notional cost of a cost which is taken into account in setting fees and charges to improve comparability with
insurance 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 the independent body responsible for collecting and publishing official statistics about the
Statistics, ONS UK's society and economy. (At the time of going to print legislation was progressing to
change this body to the Statistics Board)
Office of Government _ an office of the Treasury, with a status similar to that of an agency, which aims to maximise
Commerce, OGC the government's purchasing power for routine items and combine professional expertise
to bear on capital projects.
Office of the the government department responsible for discharging the Paymaster General's statutory
Paymaster General, responsibilities to hold accounts and make payments for government departments and
OPG other public bodies.
Orange book the informal title for Management of Risks: Principles and Concepts, which is published by the
Treasury for the guidance of public sector bodies
60 Managing Public Money
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GLossary
Overdraft an account with a negative balance.
Parliamentary Parliament's formal agreement to authorise an activity or expenditure.
authority
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.
Private Finance arrangements under which a public sector organisation contracts with a private sector
Initiative, PFI entity to construct a facility and provide associated services of a specified quality over a
sustained period. See annex 7.5
Propriety the principle that patterns of resource consumption should respect Parliament's intentions,
conventions and control procedures, including any laid down by the PAC. See box 2.4.
Public Accounts see Committee of Public Accounts.
Committee
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 7.8.
Public Dividend finance provided by government to public sector bodies as an equity stake; an alternative to
Capital, PDC loan finance.
Public Service sets out what the public can expect the government to deliver with its resources. Every
Agreement, PSA large government department has PSA(s) which specify deliverables as targets or aims
related to objectives.
Public Private a structured arrangement between a public sector and a private sector organisation to
partnership, PPP 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, the
relevant delegated authority and this document. See box 2.4.
Request for the functional level into which departmental Estimates may be split. RfRs contain a number
Resources, RfR of functions being carried out by the department in pursuit of one or more of that
department's objectives.
Resource account an accruals account produced in line with the Financial Reporting Manual (FReM)
Resource accounting _ the system under which budgets, Estimates and accounts are constructed in a similar way
to commercial audited accounts, so that both plans and records of expenditure allow in full
for the goods and services which are to be, or have been, consumed — ie not just the cash
expended.
Resource budget the means by which the government plans and controls the expenditure of resources to
meet its objectives.
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 the ratio of profit to capital employed of an accounting entity during an identified period.
employed, ROCE Various measures of profit and of capital employed may be used in calculating the ratio.
Managing Public Money 61
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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.
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.
Service-level agreement between parties, setting out in detail the level of service to be performed.
agreement 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 sets out the key improvements in public services that the public can expect over a given
period. It includes a thorough review of departmental aims and objectives to find the best
way of delivering the government's objectives, and sets out the spending plans for the given
period.
State aid state support for a domestic body or company which could distort EU competition and so
is not usually allowed. See annex 4.9.
Statement of Excess a formal statement detailing departments’ overspends prepared by the Comptroller and
Auditor General as a result of undertaking annual audits.
Statement on Internal an annual statement that Accounting Officers are required to make as part of the accounts
Control, SIC ‘on a range of risk and control issues.
Subhead individual elements of departmental expenditure identifiable in Estimates as single cells, for
example cell Al being administration costs within a particular line of departmental spending.
Supply resources voted by Parliament in response to Estimates, for expenditure by government
departments.
Supply Estimates a statement of the resources the government needs in the coming financial year, and for
what purpose(s), by which Parliamentary authority is sought for the planned level of
expenditure and income.
Target rate of return the rate of return required of a project or enterprise over a given period, usually at least
a year.
Third sector private sector bodies which do not act commercially, including charities, social and voluntary
organisations and other not-for-profit collectives. See annex 7.7.
Total Managed a Treasury budgeting term which covers all current and capital spending carried out by the
Expenditure, TME public sector (ie not just by central departments).
Trading fund an organisation (either within a government department or forming one) which is largely or
wholly financed from commercial revenue generated by its activities. Its Estimate shows its
net impact, allowing its income from receipts to be devoted entirely to its business.
Treasury Minute a formal administrative document drawn up by the Treasury, which may serve a wide variety
of purposes including seeking Parliamentary approval for the use of receipts as
appropriations in aid, a remission of some or all of the principal of voted loans, and
responding on behalf of the government to reports by the Public Accounts Committee
(PAC).
62 Managing Public Money
Value for money
Virement
Vote
Voted expenditure
Wider market activity
Windfall
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GLossary
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 public sector
as a whole.
the process through which funds are moved between subheads such that additional
expenditure on one is met by savings on one or more others.
the process by which Parliament approves funds in response to supply Estimates.
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.
activities undertaken by central government organisations outside their statutory duties,
using spare capacity and aimed at generating a commercial profit. See annex 7.6.
monies received by a department which were not anticipated in the spending review.
Managing Public Money 63
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64 Managing Public Money
INDEX
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Note to users: References are to sections, paragraphs, boxes and annexes, Section references appear in bold.
A
Accounting Officers
acting on facts where no precedents exist 3.9
advice to ministers 3.4
appointments 3.2
arm’s length bodies 3.8
availability 3.6
conflicts of interest 3.7, 3.8.4
corporate arm’s length bodies 3.3.2
deputy 3.6.2
formal directions 3.4.2-3.4.4, 3.8.5, box 3.2, 4.1.6
Public Accounts Committee hearings 3.5.2
regularity and propriety concept 2.2.3~2.2.4, 3.3.3
relationship with ministers 123
role 1.2.3, 1.5.1, 2.1.4, 3.1, 5.3.1
special responsibilities 3.3
standards 3.1.2, box 3.1, 3.7.1,3.9
accounts 3.3.1, 4.14, 6.6
Accounts Directions 14.3
administration budgets 5.1.3
agencies 1.4
ALBs see arm’s length bodies
annually managed expenditure (AME) 5.1.1, box 5.1
Appropriation Acts
authority
authority for new services
2.3, box 2.5, 5.2.2
2.3.3, 2.4, annex 2.5
excess votes 533-534
Arm’s length bodies (ALBs)
Accounting Officers’ responsibilities 3.8
agencies 1A
corporate 3.3.2, 7.8, box 7.6
external borrowing 5.7
non-departmental public bodies 7.7, box 7.5,
annexes 7.1 and 7.4
partnership agreements 7.3, box 7.2
setting up 7.2, annexes 7.-7.2
third sector bodies 7.12, annex 7.7
trading funds 7.5, box 7.3
Assets
management 4.10, annex 4.8
public access to physical assets 4.144
wider markets activity 4.10.3, 7.11, annex 7.6
Audit
Comptroller and Auditor General 1.6, annex 1.1
financial 1.6.2
management tool 4.3.4
value for money reports 1.6.2
Authorisation of public expenditure 24
Appropriation Act authority 2.3, box 2.5
delegated authorities 2.1.5, box 2.2, annex 2.3
2.3.3, 2.4, annex 2.5
219
see also Treasury consents
new services
retrospective authority
bad debt write-offs
Baldwin convention
Bank of England
4.11.1, annex 4.10
see Concordat of 1932
Exchequer pyramid 5.8.1
banking 5.8, annex 5.7
board 4.1
borrowing
from departments 5.7
from NLF 5.6
Budgets 4.5.1, 5.1, box 5.1
administration 5.1.3
asset management strategies 5.1.3
c
Charges
basic policy 6.1
calculating 6.2.6-6.2.7, box 6.3, annex 6.2
categories of services 6.2.5, box 6.3
commercial services 6.4, annex 6.2
cross subsidies 6.2.9
exceptions to full cost charging 6.1.2, box 6.1
full cost 6.2.7-6.2.8, 6.2.10, annex 6.2
information services box 6.1, 6.2.6, annex 6.3
new services 6.1.3, annex 6.1
restructuring 6.2.3, box 6.2
setting 6.2, boxes 6.2-6.3
subsidy 6.2.8-6.2.10
taking stock of service provided 6.5, box 6.5
see also levies; taxation
Charities
7.12, annex 7.7
1.5.4, 4.2.1, 4.9.3, annex 4.2
partnerships with
Civil Service Code
Clawback
grants 5.1.2,annex 5.2
Code of Good Practice on Corporate Governance
in Central Government Departments 1.2
departmental boards 15.23.1144
ministers’ responsibilities 1.2.2
Commercial services
charges 6.4, annex 6,2
setting up box 6.4
wider markets activity 6.4.5, TH, box 7.7,
annex 7.6
Managing Public Money 65
5.4, box 5.2, annex 5.5
box 4.4, 5.4.2
211
Commitments
control of expenditure
new
Committee of Public Accounts
see Public Accounts Committee
2A
7.8, box 7.6
6.4.4, annex 6.4
‘Common law powers
Companies Act companies
Competition law
Complaints
Ombudsmen 4.13
Comptroller and Auditor General (C&AG)
responsibilities 1.6, annex 1.1
Concordat of 1932
Conflicts of interest
2.1.1, annex 2.1, 4.2.4, 5.4.3
Accounting Officers 3.7,3.8.4
partnerships 7.1.2, box 7.1
Consolidated Budgeting Guidance 5.14, 5.64
Consolidated Fund
repayment of voted loans 5.64
Consolidated Fund Standing Services 5.24
Contentious transactions
Treasury consultation 217,426,
annex 4.4, 5.9.2-5.9.3
Contingencies Fund
conditions for drawing on
Contingent liabilities
notifying Parliament —_5.4.3~5.4.4, box 5.2, annex 5.5
Corporate governance code
see Code of Good Practice on Corporate Governance
in Central Government Departments
2.4.3, annex 2.5
credit card payments 5.9.1, 5.9.4
D
Data Protection Act 1998 4.14.1
decision making 4.2.2, box 4.2
delegated authorities 2.1.5, annex 2.3
examples box 2.2
Treasury consent to charges 6.2.1
delegation of work
within departments 1.2.3, 1.5.3
Departmental Expenditure Limit (DEL) 5.1.1, box 5.1
Departments
Accounting Officer's responsibilities 1.2.3, 15.1
boards 1.5.2, 3.1.1, 4.14
joined up activities 7.6, box 7.4
loans 5.6, annex 5.6
responsibilities 1S
derivatives 5.9.2
directions
Accounting Officers procedure in seeking
3.4.2-3.4.4, box 3.2
disclosure 4.14, box 4.9
discretionary services see commercial services
disputes 3.4, 3.7, 3.8.5-3.8.6, 4.1.5
66 Managing Public Money
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E
employees see staff
employers in the public sector 4.9.2-4.9.3, box 4.8
Environmental Information Regulations 4.14.1
EOTA 5.3.2-5.3.3
Estimates 5.2
Accounting Officer's role 2.1.4, 5.3.1
calculation from departmental budgets 5.2.5, annex 5.4
exceptions to need 5.24
process 2.1.3-2.1.4, box 2.1
transferring (viring) provision within RfRs 5.2.2
Treasury responsibilities 143
Estimates Manual 13.1, 1.4.3, 5.2.5, 5.6.4
ethics box 1.1, 4.24
European Communities Act 1972
s2(2) 6.2.2
exceptional transactions
management of non-standard transactions
4.11, annexes 4.10-4.13
‘Treasury consultation 2.1.7, box 2.3, 4.2.5
excess votes 5.3
expenditure outside the ambit (EOTA) 53.25.33
F
fees see charges; levies; taxation
Finance Act 1973
356 6.2.2
Finance (No 2) Act 1987
sl02 6.2.3, box 6.2
finance directors 4.1.4, annex 4.1
financial audit 1.6.2
financial instruments 5.9.1, 5.9.3
financial reporting 6.6
Financial Reporting Manual (FReM) 1.4.3, 5.6.4, 6.6.2
Foreign Currency
loans 5.7.3
transactions 5.9.1
framework document 3.8.1, 3.8.3, 7.4.2, box 7.2,
7.7.5, annex 7.4
Fraud 4.5.2, annex 4.7
Freedom of Information Act 4.14.1
Funding
banking 5.8, annex 5.7
borrowing by public sector organisations 5.6
commitments 5.4
control framework 5.1, box 5.1
Estimates 5.2
exceptions to need for Estimates 5.24
excess votes 5.3
external borrowing 5.7
financial instruments. 5.9.1, 5.9.3
public dividend capital 5.5
unfamiliar financing techniques 59
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G
Gateway™ box 4.2
gifts 4.11.1, annex 4.12
govcos see public corporations
governance
see Code of Good Practice on Corporate Governance in
Central Government Departments; internal management
grants 5.1.2, annex 5.1
clawback 5.1.2, annex 5.2
grants-in-aid 5.1.2
Green Book 3.3.3
Guide to Scrutiny of public expenditure 22.1
H
hedging instruments 5.9.1
Information
charges for services box 6.1, 6.2.6, annex 6.3
publication 4.14, box 4.9
information assets register 4.14.1
insurance 4.4, annex 4.5
Internal management
assets 4.10, annex 4.8
complaints 4.13
dealing with initiatives 4.8, box 4.7
decision making 4.2.2, box 4.2
expenditure control 4.5, annex 4.6
governance structure 4.1, box 4.1
insurance 4.4, annex 4.5
internal audit 434
non-standard transactions 4.11, annexes 4.10~4.13
opportunity and risk 4.3, box 4.3
processes 4.2
receipts 4.6, box 4.5
reporting 4.14, box 4.9
staff 4.9, box 4.8
standards of service 4.12
unusual circumstances 4.7, box 4.6, 4.1 1.3-4.11.4,
annex 4.13
irregular expenditure 2.1.8-2.1.9
J
Junior ministers 1.23
L
levies box 6.1, 6.3
see also charges; taxation
licence fees box 6.1, 6.3
loan guarantees 5.7.2, annex 5.5
Loans
by public sector organisations 5.6, annex 5.6
foreign currency 573
private sector 5.7
write-offs 5.6.4, annex 5.6
losses
write-offs 4.11.1, annex 4.10
M
memorandum trading account (MTA) 66.1
Ministers
advice from Accounting Officers 3.4
delegation to junior ministers 1.23
power to commit public funds 201
relationship with Accounting Officer 1.23
responsibilities and powers 1.2
N
National Audit Office (NAO) 1.6.1
National Insurance Fund 5.2.4
National Loans Fund (NLF) 5.6.1, 5.6.3~-5.6.4
NDPBs
new commitments
authority to commit public funds
new services
Appropriation Act authority
charges 6.1.3, annex 6.1
checklist for setting up annex 6.1
rules on authorisation of public expenditure
2.4, annex 2.5
NLF see National Loans Fund
Nolan principles 2.2.2, annex 2.4
Non-Departmental Public Bodies (NDPBs) _7.7,
box 7.5, annexes 7.1 and 7.4
see non-departmental public bodies
2d
2.3.3, 2.4, annex 2.5
sources of finance 7.7.3, box 7.5
Non-profit organisations
partnerships with 7.12, annex 7.7
novel transactions
one-off pragmatic approach 4.7, box 4.6, 4.1 1.3—
4.11.4, annex 4.13
Treasury consultation 2.1.7, 4.2.6, annex 2.2-2.3,
5.9.2-5.9.3
°
Office of the Paymaster General (OPG) 5.8.1-5.8.2
Ombudsmen 4.13
Parliamentary and Health Services Ombudsman
(PHSO) 1.7, 4.13.1, 4.13.3
Principles of Good Administration 4.2.1, annex 4.3
Orange Book box 4.2, 4.3.4
organisational management _see internal management
outsourcing 19
overdraft 57.1
overpayments 4.11 [annex 4.11
Managing Public Money 67
P
PAC see Public Accounts Committee
Parliament
advance notice of commitments 5.4, box 5.2,
annex 5.5
approval of Request for Resources 13.1,5.21
responsibilities 1.3
select committees 1.3.2
see also authorisation of public expenditure
Parliamentary and Health Services Ombudsman (PHSO)
1.7, 4.13.1, 4.13.3
Partnerships
agreements 7.3, box 7.2
departments working together 7.6, box 7.4
issues 7.1, box 7.1
see also arm’s length bodies
Payments
control of expenditure 4.5, annex 4.6
redress 4.12.4-4.12.5, annex 4.14
special 4.1 1.4, annex 4.13 , annex 4.14
systems 45.2, box 4.4
underpayment 453
PDC see public dividend capital
performance targets 5.1.3
PFI see private finance initiative
PHSO
see Parliamentary and Health Services Ombudsman
policies
dealing with introduction of new policies 4.8, box 4.7
political bias 15.4
PPPs see public private partnerships
Principles of Good Administration
(Ombudsman's code) 4.2.1, annex 4.3
Private Finance Initiative (PFI) 7.10.2~7.10.3, annex 7.5
Procurement
management 4.10.2, annex 4.4
private finance initiative projects 7.10.2-7.10.3,
annex 7.5
transactions involving tax planning/avoidance 4.2.6,
annex 4.4
Projects
planning of new projects 3.3.3, 4.8, box 4.7
propriety see regularity and propriety
PSA see Public Service Agreements
Public Accounts Committee (PAC)
Concordat of 1932 2A.Lannex 2.1, 4.2.4, 5.4.3
hearings 1.6.3, 3.5
role 132
Public Corporations 7.5.6, 7.8, box 7.6
public dividend capital (PDC) 5.5
trading funds 5.5.1, box 7.3
public liability insurance 442
public private partnerships (PPPs) 7.10
public service agreements (PSAs) 5.13
publication of information 4.14, box 4.9
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R
Ram doctrine 21d
Re-use of Public Sector Information Regulations 4.14.1
receipts
management and control 4.6, box 4.5
treatment for funding 5.2.3, annex 5.3
redress see remedy
Regularity and propriety 1.43, 2.2
Accounting Officers 2.2.3-2.2.4,3.3.3
definitions box 2.4
remedies 4.12.4-4.12.5, annex 4.14
reporting 4.14, box 4.9
Request for Resources (RRs) 5.2.1-8.2.2
Parliamentary approval
spending above the amount 53.25.34
Resource Accounts 3.3.1, 4.14, 6.6.1
Statement on Internal Control (SIC) 434
restitution 4124
Risk management 4,3, box 4.3
insurance 4.4, annex 4.5
s
Seven Principles of Public Life (the Nolan principles)
2.2.2, annex 2.4
4.11.4, annex 4.13, annex 4.14
5.93
4.9, box 4.8
1.5.4,4.2.1, 4.9.3, annex 4.2
Ht, box 1.1, 4.2.1, 4.12
3.1.2, box 3.1, 3.7.1, 3.9
1.5.4,4.2.1, 4.9.3, annex 4.2
424
special payments
speculation
staff
Civil Service Code
standards of public service
Accounting Officers
Civil Service Code
ethical behaviour
Principles of Good Public Administration
(Ombudsman's code) 4.2.1, annex 4.3
Seven Principles of Public Life (the Nolan principles)
2.2.2, annex 2.4
State Aids
restrictions
Statement of Excesses
Statement on Internal Control (SIC)
Subsidised services
charges
4.10.2, annex 4.9, 5.7.2, 7.11.3
T
Tax planning and tax avoidance
transactions involving
Taxation
4.2.6, annex 4.4
4.4.1, 6.1.4, box 6.1
authority to raise 125
Finance (No 2) Act 1987 s102 procedure 6.23
see also levies
Third sector bodies 7.12, annex 7.7
SLL
5.5.1, 7.5, annex 7.3
5.5.5, 5.6.1, 7.5.4, box 7.3,
annex 7.3
total managed expenditure (TME)
Trading funds
sources of finance
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Index
The Treasury
control of access to Contingencies Fund
2.4.3, annex 2.5
control of public expenditure —2.1.2-2.1.3, box 2.1,
annex 2.2,4.5.1
delegated authorities 2.1.5, box 2.2, annex 2.3
financing techniques 59
regularity and propriety 1.4.3, 2.2, box 2.4
responsibilities 14
Treasury Consents
charges 62.1
exceptional transactions 2.1.7, box 2.3
expenditure 21S
explicit consents 2.18
specific consents box 2.3
u
underpayments 453
unlawful expenditure 2.1.8-2.1.9
Unusual transactions
management of non-standard transactions 4.11,
annexes 4.10~4.13
one-off pragmatic approach 4.7, box 4.6,
4.113-4.114, annex 4.13
Treasury consultation 2.1.7, box 2.3,4.2.5
Vv
Value for money 1.4.3
Accounting Officers’ responsibilities 33.3
achieving 423
reports 1.6.2
w
Wider markets activity 6.45, TH annex 7.6
assets 4.10.3, 7.11, annex 7.6
insurance 442
planning box 7.7
Write-offs
bad debts 4.11. [ annex 4.10
loans 5.6.4
losses 4.11.1,annex 4.10
Written confirmations
formal directions 3.4.2, 3.8.5, 4.1.5
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ANNEX I.1
COMPTROLLER AND AUDITOR GENERAL
Assisted by staff of the National Audit Office (NAO), the Comptroller and Auditor General
(C&AG) is the independent auditor of nearly all central government institutions. Using extensive
rights of access to records the C&AG provides direct advice and assurance to Parliament.
AllI 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 either NAO staff (see www.nao.org.uk) or by contracting out. The
C&AG can be removed from office only by the Queen on an address by both Houses of
Parliament.
Aj.1.2 The NAO is financed by an Estimate on which the government has no influence. The
Public Accounts Commission (TPAC) oversees NAO’s expenditure.
AJ.1.3 These arrangements mean that the C&AG is independent of the government of the day,
deciding the scope of all the work NAO carries out.
Audit
Al.14 In order to carry out financial audit work, the C&AG has extensive statutory rights of
access to central government institutions’ records, wherever they are and whatever form they
may take. This includes any material 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.
AL.I.5 The C&AG audits both expenditure and revenue accounts and reports on them to
Parliament. Financial audits are carried out in accordance with International Standards on
Auditing (UK and Ireland).
Al.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 CRAG
alone. It is government policy that the C&AG has the same access rights for vim examinations
as for financial audit. This does not extend to access to policy (eg Cabinet) papers.
AL.I.7 The Public Accounts Committee (PAC) may decide to examine witnesses on either
financial or vfm studies.
The Comptroller function
AJ.1.8 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.
Other studies
AJ.1.9 From time to time ministers may ask the C&AG to carry out independent studies of
various kinds. For example, the C&AG reports regularly on the reasonableness of the
assumptions underlying the budget, and these reports are published as part of the budget suite
of documents.
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ANNEX 2.1
THE PAC CONCORDAT
Chapter 2 explains that Parliament expects both specific legislation and Parliamentary authority
for each year’s expenditure to be in place for continuing expenditure. It expects the Treasury to
police this requirement. This annex sets Parliament's concerns in context.
A2J.1 The PAC has had long standing concerns about how the government gains authority
from Parliament for each area of spending.
A212 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.
A213 By 1885 the PAC had become concerned that the authority of the Estimate and its
successor Appropriation Act was not really sufficient either:
ssses-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 overriden by a Supplementary Estimate
supported by the Appropriation Act..........this matter....is one of great importance from
a constitutional point of view.....
A114 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.
A115 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:
wees 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.
A2..6 In reply, the Treasury Minute said:
seve 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,
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.
seen 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,
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ANNEX 2.1 THE PAC CONcoRDAT
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.
A2.1.1 With this Concordat, the matter still rests.
A2.1.8 Use of the Appropriation Act as authority for expenditure is discussed in annex 2.5.
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ANNEX 2.2
LEGISLATION: TREASURY APPROVAL
This annex sets out how departments should clear proposed legislation with the Treasury where
there are financial implications, either for expenditure or raising revenue. More detailed
guidance on the preparation of legislation and the legislative process should be sought from
departmental parliamentary clerks.
Consulting the Treasury
A221 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.
A222 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
A223 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 minsterial decisions, are in box A.2.2A. Treasury consent is
required to protect the authority of the Chancellor of the Exchequer in matters of finance or
establishment.
A224 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
° the need for most resource accounts to gain Treasury approval 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.
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ANNEX 2.2 LEGISLATION: TREASURY APPROVAL
box A.2.2A examples of legislation which require explicit Treasury approval
expenditure met from the Consolidated Fund (CF):
* asa 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 level and 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
Money resolutions
A225 A money resolution is required'' 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.
A226 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.
Ways and Means resolutions
A227 Aways 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.
I By virtue of Standing Order 49 of the House of Commons
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ANNEX 2.2 LEGISLATION: TREASURY APPROVAL
A228 Departments should clear ways and means resolutions with the Treasury. Further
advice should be sought from Parliamentary Clerks.
Explanatory Notes
AQIS 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 A.2.2B. Guidance on preparation is at www.cabinet-office.gov.uk/parliamentary-counsel .
box A.2.2B legislation authorising expenditure: explanatory 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 (NDPBs) and local authorities.
A2210 Explanatory notes must be ready in time for the introduction of each bill. Any
containing details of financial or manpower effects must be cleared with the Treasury, before
the responsible department sends it to Parliamentary Counsel.
Consultation with others
A22.11 Departments should also clear any legislation which has implications for audit by the
C&AG with the National Audit Office (NAO). It is usual to provide that the C&AG has rights of
inspection and access so that he or she can carry out value for money examinations.
A2212 Departments should also consult the Paymaster General (via HMRC) about any new
legislation that may have tax implications (eg the legislation creates taxable bodies, transfers
assets to new bodies or make changes to other legislation which affects tax treatment).
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ANNEX 2.3
TREASURY APPROVAL OF EXPENDITURE
This annex expands on the requirement for departments to obtain Treasury consent to their
public expenditure. It includes advice on delegated authorities.
423.1 The requirement for Treasury approval for expenditure is one aspect of the long-
standing 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) for ensuring that prior Treasury approval is obtained in all cases where it is
needed.
A232 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 A2.3A identifies the main ways in which the need can arise. It may not be exhaustive.
box A.2.3A where Treasury approval is required
* Treasury agreement is needed for public statements or other commitments to use of public resources
beyond the agreed budget plans
* guarantees, indemnities or letters of comfort creating contingent liabilities require Treasury agreement as if
they were expenditure
© Treasury approval is required for any proposals outside the department's delegated limits
* all expenditure which is novel, contentious or repercussive, irrespective of size, requires Treasury approval
even if it appears to offer value for money taken in isolation
* where Treasury approval has been overlooked, the case should immediately be brought to the Treasury's
attention.
A233 Treasury approval:
e 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.
Departmental ministers should be made aware when Treasury consent is required in addition
to their own.
Delegation
A234 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.2.3.9 for exceptions). Delegated authorities may also allow departments to enter into
commitments to spend (eg contingent liabilities) and to deal with special transactions (such
as some write-offs) without prior approval.
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ANNEX 2.3 TREASURY APPROVAL OF EXPENDITURE
80
AL35 Delegated authorities must 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.
A236 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.
Setting delegated authorities
A237 The standard items for inclusion in delegated authorities are set out in box A.2.3B. 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.
A238 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);
e 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 A.2.3B standard terms for delegated authorities
* aclear 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 part of the department's RIR
© any effective dates
© arrangements for review.
A239 In turn departments should agree delegated authorities with their arm’s length bodies.
In some cases express Treasury agreement may be required for some of their expenditure, eg
very large projects.
423.10 There are some areas of expenditure and resource commitments which the Treasury
cannot delegate: see box A.2.3C.
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ANNEX 2.3 TREASURY APPROVAL OF EXPENDITURE
box A.2.3C 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
A231 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
A23.12 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 RfRs or
Funds. Similarly, any resources committed or expenditure incurred in breach of a condition
attached to Treasury approval is irregular.
A23.13\ 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.
423.14 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.
A23.15 It is illegal 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.
A23.16 In cases of illegal expenditure, the responsible Accounting Officer must note the
department's resource account accordingly and notify the NAO. It will then be for the CkAG
to decide whether to report on the matter to Parliament with the relevant account and
whether to draw it to the attention of the PAC.
Al3.17 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;
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ANNEX 2.3 TREASURY APPROVAL OF EXPENDITURE
° is attempting to rely on a mistaken delegated authority, eg where the
delegation has been changed or where consent was given orally only;
° has committed resources or incurred expenditure which the Treasury might
not have approved had it been consulted.
423.18 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.
82 Managing Public Money
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ANNEX 2.4
THE SEVEN PRINCIPLES OF PUBLIC LIFE
These standards, known as the Nolan principles, should apply to all in the public service.
Selflessness
Holders of public office should act solely in terms of the public interest. They should not do so in order to gain
financial or other benefits for themselves, their family or their friends.
Integrity
Holders of public office should not place themselves under any financial or other obligation to outside
individuals or organisations that might seek to influence them in the performance of their official duties.
Objectivity
In carrying out public business, including making public appointments, awarding contracts, or recommending
individuals for rewards and benefits, holders of public office should make choices on merit,
Accountability
Holders of public office are accountable for their decisions and actions to the public and must submit
themselves to whatever scrutiny is appropriate to their office.
Openness
Holders of public office should be as open as possible about all the decisions and actions that they take. They
should give reasons for their decisions and restrict information only when the wider public interest clearly
demands.
Honesty
Holders of public office have a duty to declare any private interests relating to their public duties and to take
steps to resolve any conflicts arising in a way that protects the public interest.
Leadership
Holders of public office should promote and support these principles by leadership and example.
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ANNEX 2.5
NEW SERVICES
Chapter 2 outlines how public spending is authorised by Parliament, controlled by the Treasury,
and accounted for in public. This annex expands on how departments can, in certain
circumstances, undertake expenditure or commit resources in advance of the enactment of
specific legislation.
ADS. New services are activities or services which Parliament has not yet authorised,
either:
e specifically by way of enabling legislation;
* through the Supply procedure, in cases where it is legitimate to rest resource
consumption or expenditure on the sole authority of the Appropriation Act
(see chapter 2.3); or
e existing services which are to be carried out in a different way from that which
Parliament has approved, or where additional legislation is to be enacted. For
example, the union of the tax departments into HMRC was a new service until
completion of the passage of the Commissioners for Revenue and Customs
Act 2005.
In case of doubt, departments should always consult the Treasury for a definitive view.
425.2 Departments must only consume resources or incur expenditure on work that is
part of the new service once the specific legislation has been enacted and provision has
been made in Estimates for the new service.
When new services require specific statutory authority
AIS3 Normally departments do not seek provision for new services in Estimates until the
relevant enabling legislation has received royal assent. Departments should therefore take
account of the Parliamentary timetable in planning legislation; and particularly in planning
the start date of any new body created by it. They should also plan to meet the criteria for
public appointments in the Commissioner for Public Appointments’ Code of Practice
(www.ocpa.gov.uk/the code of _practice.aspx ) before making public commitments about
the timetable for implementation.
Expenditure that can be incurred before Royal Assent?
A254 Some preliminary steps are usually required before implementation of a new
service can begin. Use of resources or expenditure on preliminary work for a new service
need not depend on the enactment of legislation and may be met out of existing funds.
Such use must, however, have cover in the ambit of the Estimate ( see paragraph 3.9 of the
Estimates Manual www.hm-treasury.gov.uk/media/A/1/estimatesmanual_011007.pdf).
Some examples are given in box A.2.5A. The list is not exhaustive.
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box A.2.5A 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.
A155 However, if preliminary work might last more than two years, separate statutory
authority may be required. Departments should seek Treasury guidance in cases of doubt.
Expenditure that cannot be incurred before royal assent
AS.6 Expenditure which is likely to be nugatory or not cost-effective if the legislation for
the new service fails should not be incurred prior to royal assent. Examples are in box
A.2.5B. The touchstone is value for money. The process for authorising expenditure on
exceptional spending outside these rules is set out below.
box A.2.5B expenditure not normally incurred before royal assent
recruitment of chief executives and board members of a new body;
'* recruitment of staff for a new body;
© significant work associated with preparing for or implementing the new task eg renting offices or designing
or purchasing significant IT equipment.
How to fund preparatory work before royal assent
Paving bill
ADS.7 If, exceptionally, the preparatory work on a particular policy development is so
urgent that it cannot wait until royal assent, the department responsible should consider
taking a short paving bill.
A158 Depending on the context, a paving bill can provide powers to allow expenditure
which would be nugatory if the subsequent detailed legislation for the new service did not
proceed, eg employing consultants to design a significant IT or regulatory system. Such
bills are usually short, though they may be contentious (and time consuming) as they can
give rise to discussion of the underlying prin ciples. Departments’ parliamentary clerks can
help with guidance on the preparation of bills and the legislative process.
Access to the Contingencies Fund
ASI In exceptional cases, where expenditure is deemed to be urgent, it may be possible
to borrow from the Contingencies Fund to finance expenditure on a new service before
legislation comes into force (see section 2.4). The legislation must have passed second
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ANNEX 2.5 NEW SERVICES
reading in the House of Commons. Treasury agreement is essential and cannot be taken for
granted.
425.10 To obtain a Contingencies Fund advance, the proposal must pass the following
tests:
. genuine urgency in the public interest: where it is inappropriate to postpone
the expenditure until the necessary funds have been voted. Mere
convenience is not enough; and
. near certainty that the bill will become law: successful passage of the second
reading in the House of Commons is essential but may not be sufficient, eg if
there is doubt about the assent of the Lords or risk of an early general
election.
The department responsible must explain clearly to Parliament what is taking place, why,
and by when matters should be placed on a normal footing.
AQS.11 If a Contingencies Fund advance is sought to finance a new public sector body
being set up under new legislation, senior appointments should normally wait until the
legislation has received royal assent. However, in exceptional circumstances, and only with
the approval of the Treasury, such appointments may be made after completion of second
reading in the House of Commons. They will require a Contingencies Fund advance; and
the people appointed must be clear that if for any reason the legislation fails, the
appointments would have to be cancelled.
A25.12 Procedures for applying for a Contingencies Fund advance are in Section 5.B of the
the Estimates Manual
(www.hm-treasury.gov.uk/media/A/1/estimatesmanual_011007.pdf).
New services introduced through secondary legislation
A513. Where a service comes into final force through secondary legislation, the
department may not normally incur expenditure on that function until the secondary
legislation is passed. It may, however, include an appropriate form of words in the ambit of
its Estimate and so seek Estimate cover so that expenditure may be incurred immediately
the legislation is passed (see the Estimates Manual for further details).
A25.14 The remainder of this annex sets out some possible easements.
New services and the sole authority of the
Appropriation Act
A255 As outlined in sections 2.3 and 2.4, in certain limited circumstances departments
may obtain authorisation for their planned expenditure by relying entirely on the authority
of the Appropriation Act, rather than through specific empowering legislation. Parliament
is routinely prepared to authorise certain expenditure through an Appropriation Act alone,
subject to the conditions:
. the expenditure is no more than £1.5m a year; or
. it is expected to last for no more than two years, eg to finance a pilot study;
and
. any existing explicit statutory limits are respected;
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. no specific legislation on the matter in question is before Parliament.
Treasury approval is always required.
Using public resources ahead of royal assent
2.5.16 In exceptional circumstances, and with Treasury consent, the Appropriation Act
may be relied upon as the sole authority for expenditure or other use of resources before the
specific legislation has completed its passage in Parliament. The conditions are:
° the proposed expenditure must be genuinely urgent and in the public
interest;
. Parliament must have been made aware of the intended steps in
appropriate detail when relevant previous legislative steps were taken;
. the planned legislation must be certain, or virtually certain, to pass into law
in the near future, and usually within the financial year.
ALS.17 Subject to Treasury agreement, this procedure may be used, for instance, if:
. a bill has achieved second reading in the House of Commons and it would
be efficient to prepare steps to implement the main provisions;
. a bill has been enacted but activating secondary legislation is not yet
complete.
425.18 If this procedure is to be used, it is vital that the remaining steps to full specific
legislation are imminent, are not expected to be controversial, and that Parliament has
already been given at least an outline of the outstanding legislation in a way which allowed
meaningful opportunities for possible objections to be discussed. A Contingencies Fund
advance is normally required.
A5.19 If this device is used, it is essential to inform Parliament of what is intended, setting
out the reason(s) for the urgency, how quickly the position will be placed on a regular
footing, and which Estimate(s) will be used. The Estimate(s) themselves should be noted to
explain why, exceptionally, the authority of the Appropriation Act alone is proposed
pending full passage of the legislation.
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ANNEX 4.1
FINANCE DIRECTORS
It is government policy that all departments should have professional finance directors reporting
to the permanent secretary with a seat on the departmental board, at a level equivalent to other
board members. It is good practice for all other public sector organisations to do the same, and
to operate to the same standards. This annex sets out the main duties and responsibilities of
finance directors.
The finance function
A4LA In line with the Corporate Governance Code (www.hm-
treasury.gov.uk/public spending reporting/governance risk/psr governance corporate.cfm),
the finance director of a public sector organisation should:
° be a professional Finance Director'?;
° 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).
A412 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 A.4.1A. 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.
A413 The finance function should maintain a firm grasp of the organisation's financial
position and performance. 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.
'2 The term professional finance director in this context means both being a qualified member of one of the six 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 Chartered Institute of Management
Accountants, 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. Note these are the
‘same professional bodies that the local government sector recognises in the appointment of their finance directors as required
under the 1988 Local Government Finance Act.
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ANNEX 4.1 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 monthly management accounts
© 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, resource accounts and consolidation data for whole of government accounts
* liaison with the external auditor
» liaison with PAC and the relevant Select Committee(s)
Financial leadership
AALA 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 A.4.2B explains some specific
responsibilities of the role.
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box A.4.1B_ financial management 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
Internal financial discipline
AALS 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 A.4.1C.
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
A416 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.
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ANNEX 4.2
THE CivIL SERVICE CODE
The Civil Service Code sets out the framework within which all civil servants work, and the core
values and standards they are expected to uphold. The new Civil Service Code issued on 6 June
2006 forms part of the terms and conditions of employment of every civil servant.
Civil Service values
I The Civil Service is an integral and key part of the government of the United Kingdom". It
supports the Government of the day in developing and implementing its policies, and in
delivering public services. Civil servants are accountable to Ministers, who in turn are
accountable to Parliament'*.
2 Asa civil servant you are appointed on merit on the basis of fair and open competition and
are expected to carry out your role with dedication and a commitment to the Civil Service and its
core values: integrity, honesty, objectivity and impartiality. In this Code:
‘integrity’ is putting the obligations of public service above your own personal interests;
¢ ‘honesty’ is being truthful and open;
¢ ‘objectivity’ is basing your advice and decisions on rigorous analysis of the evidence; and
e ‘impartiality’ is acting solely according to the merits of the case and serving equally well
Governments of different political persuasions.
3 These core values support good government and ensure the achievement of the highest
possible standards in all that the Civil Service does. This in turn helps the Civil Service to gain and
retain the respect of Ministers, Parliament, the public and its customers.
4 This Code's sets out the standards of behaviour expected of you and all other civil servants.
These are based on the core values. Individual departments may also have their own separate
mission and values statements based on the core values, including the standards of behaviour
expected of you when you deal with your colleagues.
Standards of behaviour
Integrity
5 You must:
¢ fulfil your duties and obligations responsibly;
e always act in a way that is professional's and that deserves and retains the confidence of all
those with whom you have dealings;
'3 This Code applies to all Home civil servants. Those working in the Scottish Executive and the National Assembly for Wales, and their
‘Agencies, have their own versions of the Code. Similar Codes apply to the Northern Ireland Civil Service and the Diplomatic Service.
4 Constitutionally, civil servants are servants of the Crown. The Crown's executive powers are exercised by the Government.
'5 The respective responsibilities placed on Ministers and special advisers in relation to the Civil Service are set out in their Codes of Conduct:
weww.cabinetoffice.gov.uk/propriety and ethics
'6 Including taking account of ethical standards governing particular professions.
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ANNEX 4.2 THE CiviL SERVICE CODE
e make sure public money and other resources are used properly and efficiently;
¢ deal with the public and their affairs fairly, efficiently, promptly, effectively and sensitively,
to the best of your ability;
* handle information as openly as possible within the legal framework; and comply with the
law and uphold the administration of justice.
6 You must not:
¢ misuse your official position, for example by using information acquired in the course of
your official duties to further your private interests or those of others;
* accept gifts or hospitality or receive other benefits from anyone which might reasonably be
seen to compromise your personal judgement or integrity; or
¢ disclose official information without authority. This duty continues to apply after leaving the
Civil Service.
Honesty
7 You must:
© set out the facts and relevant issues truthfully, and correct any errors as soon as possible; and
* use resources only for the authorised public purposes for which they are provided.
8 You must not:
« deceive or knowingly mislead Ministers, Parliament or others; or
e be influenced by improper pressures from others or the prospect of personal gain.
Objectivity
9 You must:
* provide information and advice, including advice to Ministers, on the basis of the evidence,
and
¢ accurately present the options and facts; take decisions on the merits of the case; and
* take due account of expert and professional advice.
10 You must not:
¢ ignore inconvenient facts or relevant considerations when providing advice or making
decisions; or
¢ frustrate the implementation of policies once decisions are taken by declining to take, or
abstaining from, action which flows from those decisions.
Impartiality
Il You must:
© carry out your responsibilities in a way that is fair, just and equitable and reflects the Civil
Service commitment to equality and diversity.
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ANNEX 4.2 THE Civit SERVICE CODE
12 You must not:
e act in a way that unjustifiably favours or discriminates against particular individuals or
interests.
Political impartiality
13. You must:
« serve the Government, whatever its political persuasion, to the best of your ability in a way
which maintains political impartiality and is in line with the requirements of this Code, no
matter what your own political beliefs are;
* act in a way which deserves and retains the confidence of Ministers, while at the same time
ensuring that you will be able to establish the same relationship with those whom you may
be required to serve in some future Government; and
e comply with any restrictions that have been laid down on your political activities.
14 You must not:
¢ act ina way that is determined by party political considerations, or use official resources for
party political purposes; or
e allow your personal political views to determine any advice you give or your actions.
Rights and responsibilities
15 Your department or agency has a duty to make you aware of this Code and its values. If you
believe that you are being required to act in a way which conflicts with this Code, your
department or agency must consider your concern, and make sure that you are not penalised for
raising it.
16 If you have a concern, you should start by talking to your line manager or someone else in
your line management chain. If for any reason you would find this difficult, you should raise the
matter with your department's nominated officers who have been appointed to advise staff on
the Code.
\7 If you become aware of actions by others which you believe conflict with this Code you
should report this to your line manager or someone else in your line management chain;
alternatively you may wish to seek advice from your nominated officer. You should report
evidence of criminal or unlawful activity to the police or other appropriate authorities.
\8 If you have raised a matter covered in paragraphs 15 to 17, in accordance with the relevant
procedures'’, and do not receive what you consider to be a reasonable response, you may report
the matter to the Civil Service Commissioners'*, The Commissioners will also consider taking a
complaint direct.
17 The whistleblowing legislation (the Public Interest Disclosure Act 1998) may also apply in some circumstances. The Directory of Civil
Service Guidance gives more information: www.cabinetoffice.gov.uk/propriety and ethics
cover HR management issues.
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80
Their address is:
3rd Floor,
35 Great Smith Street,
London
SWIP 3BQ
9 If the matter cannot be resolved using the procedures set out above, and you feel you
cannot carry out the instructions you have been given, you will have to resign from the Civil
Service.
20 This Code is part of the contractual relationship between you and your employer. It sets out
the high standards of behaviour expected of you which follow from your position in public and
national life as a civil servant. Civil servants can take pride in living up to these values.
Further details on the Civil Service Code are available at
http://www.civilservice.gov.uk/publications/civilservicecode/index.asp .
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ANNEX 4.3
PRINCIPLES OF GOOD ADMINISTRATION
The Ombudsman’s Principles of Good Public Administration set out the standards against which
services may be judged in the event of failure of delivery or complaint.
Principles of Good Administration
Good administration by a public body means:
I Getting it right
e Acting in accordance with the law and with due regard for the rights of those concerned.
e Acting in accordance with the public body’s policy and guidance (published or internal).
¢ Taking proper account of established good practice.
e Providing effective services, using appropriately trained and competent staff.
e Taking reasonable decisions, based on all relevant considerations.
2 Being customer focused
« Ensuring people can access services easily.
¢ Informing customers what they can expect and what the public body expects of them.
e Keeping to its commitments, including any published service standards.
* Dealing with people helpfully, promptly and sensitively, bearing in mind their individual
circumstances.
e Responding to customers’ needs flexibly, including, where appropriate, co-ordinating a
response with other service providers.
3 Being open and accountable
¢ Being open and clear about policies and procedures and ensuring that information, and
any advice provided, is clear, accurate and complete.
Stating its criteria for decision making and giving reasons for decisions.
¢ Handling information properly and appropriately.
e Keeping proper and appropriate records.
* Taking responsibility for its actions.
4 Acting fairly and proportionately
e Treating people impartially, with respect and courtesy.
¢ Treating people without unlawful discrimination or prejudice, and ensuring no conflict of
interests.
¢ Dealing with people and issues objectively and consistently.
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ANNEX 4.3 PRINCIPLES OF GOOD ADMINISTRATION
82
e Ensuring that decisions and actions are proportionate, appropriate and fair.
5 Putting things right
* Acknowledging mistakes and apologising where appropriate.
¢ Putting mistakes right quickly and effectively.
¢ Providing clear and timely information on how and when to appeal or complain.
Operating an effective complaints procedure, which includes offering a fair and
appropriate remedy when a complaint is upheld.
6 Seeking continuous improvement
e Reviewing policies and procedures regularly to ensure they are effective.
* Asking for feedback and using it to improve services and performance.
¢ Ensuring that the public body learns lessons from complaints and uses these to improve
services and performance.
These Principles are not a checklist to be applied mechanically. Public bodies should use their
judgment in applying the Principles to produce reasonable, fair and proportionate results in the
circumstances. The Ombudsman will adopt a similar approach in deciding whether
maladministration or service failure has occurred.
Further details on the Principles of Good Administration are available at
www.ombudsman.org.uk/improving services/good_administration/principles.html
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ANNEX 4.4
PROCUREMENT
It is important to secure value for money in asset management through sound procurement.
Public sector organisations should normally acquire goods and services through fair and open
competition, acting on OGC advice. This annex provides an overview of the policy framework for
public procurement.
A441 The government's procurement policy is to buy the goods, works and services that it
needs under a fair and open procurement process, guarding against corruption and seeking to
secure value for public funds with due regard to propriety and regularity. EU law and World Trade
Organisation (WTO) agreements underpin these principles. The specific responsibilities of public
sector organisations are set out in box A.4.4A.
box A.4.4A checklist of key purchasing responsibilities
General
* value for money, normally through competition
‘© compliance with legal obligations under EU rules and other international agreements
‘* follow OGC policies and standards on public procurement.
Management 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 OGC
guidance.
Planning and engagement
* consider market structure so as to attract and sustain a diverse supply base;
© clarify objectives of procurement from the start;
© design procurement strategy and engage with the market early;
‘© consult OGC on any difficult legal issues.
Skills
© use procurement professionals throughout;
© ensure that there is sufficient skills capacity in undertaking procurements and projects.
Review
© apply the OGC GatewayTM review process;
© comply with the procurement capability review process;
© draw issues which may have wider implications to OGC's attention.
A442 — 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.
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Value for money
A443 Value for money is a key concept running through MPM (see paragraph 4.2.3). 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 upfront prices. Whether in conventional
procurement, market-testing, private finance or some other form of public private partnership,
value for money will involve an appropriate allocation of risk.
A444 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 OGC guidance, in order to secure economies of scale,
unless they can demonstrate that better value can be achieved in some other way.
Legal framework
A445 Public sector organisations are responsible for ensuring that they comply with the law on
procurement (see box A.4.4B). EC 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.
box A.4.4B the legal framework for public procurement
© EUprocurement rules (the Treaty and procurement directives)
international obligations, notably WTO agreements
* specific domestic legislation, including subordinate legislation implementing directives;
* contract and commercial law in general
relevant European Court of Justice case law
¢ domestic case law
A446 In the event of infraction proceedings by the European Commission, however, OGC will
coordinate the response under the arrangements set out in Cabinet Office guidance (United
Kingdom involvement in infraction proceedings and other EC litigation). There are separate
arrangements for cases involving devolved administrations.
The user's requirement
A447 Procurement should help deliver relevant departmental and government-wide strategies
and policies. It is appropriate to outsource when the goods or services required cannot be
provided in house or better value for money can be achieved through third party delivery. The
procuring organisation should establish that the supply sought is really needed, is likely to be cost
effective and affordable. And the published requirement should specify clearly what is required,
since this is crucial to obtaining the supply required.
The procurement process
A448 Competition promotes economy, efficiency and effectiveness in public expenditure.
Goods and services should be acquired through competition unless there are convincing reasons
to the contrary. The form of competition chosen should be appropriate to the value and
complexity of the goods or services to be acquired.
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AAAd
Public sector organisations should aim to treat suppliers responsibly (see box A.4.4C) to
maintain good reputations as purchasers.
box A.4.4C relationships with 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 (noting 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
AAALO
AAA
In seeking bids, purchasers should:
start with the user requirement;
specify it clearly, bearing in mind that it cannot be extended (though it can be
narrowed);
to leave room for innovation, consider describing the requirement in terms of what is
to be achieved rather than precisely how the outcome should be constituted;
avoid specifying any bias directly or indirectly in favour of UK suppliers;
set out how bids will be evaluated;
keep the costs of the bidding process to the minimum necessary for effective
competition;
design a competition which will work for the widest range of sizes and kinds of firms,
without discrimination;
publish procurement and project timetables and stick to them;
when advertising smaller value contracts that are below EU thresholds, consider
using the Government's opportunities portal: www.supply2.gov.uk.
During the evaluation process, it is important for procuring organisations to:
secure value for money (see box A.4.4D), using relevant and consistent criteria for
evaluating the key factors (cost, size, sustainability, design etc);
assess suppliers’ economic and financial standing to gain confidence of their
capacity to carry out what the purchaser requires and deliver value for money;
establish the propriety of candidate suppliers — taking account of the requirement to
exclude those convicted of eg fraud, theft, fraudulent trading or cheating HMRC.
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box A.4.4D securing value for money
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.
Quality: paying more for higher quality may be justified if the whole life cost is better, eg 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 strategies should seek to achieve the best value
‘outcome for the public sector as a whole, not just for the organisation itself. This should be designed in before
the invitation to tender is published.
Contracts
A44.12 In drawing up contracts, purchasers should, where possible:
e 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
e Include prompt payment clauses.
A44.13 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 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 the EU procurement rules, it is
usually wise to take legal advice when entering into them.
Central purchasing bodies and agencies
A44.14 Unless service level agreements exist, central government bodies are not tied to central
purchasing bodies or agencies. In seeking value for money, they may, however, choose to enter
into contracts under framework agreements put into place by a central purchasing body, such as
OGCbuying.solutions.
A44.15 If purchasers employ private sector agents to undertake procurement on their behalf
they should:
require compliance with EU rules
¢ ensure clear allocation of responsibilities; and
e 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
44.16 Central government bodies should:
* base procurement decisions independent of any tax advantages that may arise from a
particular bid;
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ANNEX 4.4 PROCUREMENT
e restrict contractors’ use of offshore jurisdictions, consistent with EU and other
international obligations and the government's stated objectives on tax transparency
and openness, to avoid harmful tax competition;
e 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.
A4AAT In the case of bids under the Private Finance Initiative (PFI), it is particularly
important to ensure that comparisons of competing bids take account of any tax planning by
bidders. The Green Book provides for a tax adjusted Public Sector Comparator to allow for the
(usually) material tax difference between PFI and the wholly public sector alternative. It would
be inappropriate to apply this to bids where tax planning has cancelled out this effect.
AALS 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
444.19 Central sources of guidance on procurement and related issues include:
« the OGC [ www.oge.gov.uk/procurement.asp ]
e the Treasury[ www.hm-treasury.gov.uk/
e the Green Book on appraisal and evaluation in central government www.hm-
treasury.gov.uk./Economic Data_and_Tools/greenbook/data_greenbook index.cf
ma
¢ Cabinet Office on market-testing, contracting-out and better government
[ www.cabinetoffice.gov.uk/ ];
e DTI on state aid rules I www.dti.gov.uk/bbf/state-aid/ ];
e Central Office of Information on media requirements www.coi.gov.uk/services.php;
* Office of Fair Trading on cartels and bid-rigging
© HMRC on tax avoidance issues [ www.hmre.gov.uk].
Guidance on the EU rules (available on the OGC website) is also published by the Commission,
but public sector organisations are advised not to seek advice from the Commission without first
consulting their own and their sponsor body’s procurement units, who may, in turn, consult
OGC.
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INSURANCE
Central government organisations should not generally take out commercial insurance because
it is better value for money for the taxpayer to cover its own risks. However, there are some
circumstances where commercial insurance is appropriate. This annex sets out the issues to be
considered. This guidance applies to departments and their arms-length bodies.
A451 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.
A452. 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. Some acceptable reasons for using
insurance are set out in box A.4.5A.
fied
box A.4.5A where commercial insurance may be jus:
* 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.
* Overall 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 the lease, and typically involves
periodic expert inspection designed to reduce the risk of loss or damage.
* Wider markets 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.
«Where commercial 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.
A453 Some NDPBs may be in a slightly different position to central government departments.
Box A.4.5B gives examples of some items they may choose to insure commercially.
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box A.4.5B items NDPBs may insure
* items the NDPB is required to insure, eg vehicles where the Road Traffic Acts require it.
* goods where a cost benefit analysis supports the case for insurance and the sponsor department agrees.
‘* goods owned by NDPBs 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 NDPB 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
A454 Decisions on whether to buy insurance should be based on objective cost-benefit
analysis, using guidance in the Green Book (www.hm-
treasury.gov.uk./Economic Data_and_Tools/greenbook/data_greenbook index.cfm). Box
A.4.5C outlines some factors which are often worth considering in such assessments.
box A.4.5C costs and benefits which could be included in assessments
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
A455 Ifa 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 6.2 for
further details.
Claims administration
A456 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.
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Reporting
445.7 Departments should inform their Treasury spending team of:
e any decision to use the services of commercial insurance companies
e any reviews of insurance, or alternatives to insurance, that might contain lessons of
wider application .
A458 In turn arm’s length bodies should consult their sponsor departments in similar
circumstances.
Dealing with losses
Uninsured losses (except traffic accidents)
445.9 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 damage 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.
e third-party claims: the justification for the claim should be carefully considered with
appropriate legal advice.
A45.10 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, arm’s length bodies should not normally expect
their sponsor departments to meet claims for reimbursement of loss.
Insured losses
A45.1I Public sector organisations should make insurance claims in accordance with the terms
of the policy.
A45.12. Arm’s length bodies 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
445.13. Iftwo 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. To avoid the cost
involved in preparing and settling small claims the rule is not to make interdepartmental
adjustments in the case of damage to fixed or movable property where the damage is less than
£10,000 in value in any one case. 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.
A454 Box A.4.5D shows how to proceed when one central government organisation makes a
larger claim against one or more others.
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box A.4.5D handling claims between public sector organisations
insurance status settlement of claims
All insured Insurers settle claims
All uninsured Organisation(s) at fault negotiate about whether to reimburse the
cother(s)
Organisation at fault uninsured, other Insured organisation claims on its insurance policy. Uninsured
organisation(s) insured 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 through the
organisation(s) uninsured insurers of the organisation(s) at fault
Vehicles
A4.5.15 Most NDPBs 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.
45.16 Many claims between public sector organisations involving damage to, or loss caused by,
vehicles, can be handled using the arrangements in paragraph A.4.5.13.
A4S.IT 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
A4S.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 borrowers is an
acceptable substitute if the lender is satisfied that the borrower could and would meet any
damage or other loss.
A45.19 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.
445.20 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 5.2).
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A451 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.
Employers’ liability
A45.22 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.
A45.23 Similarly, 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.
AAS24 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 A.4.5E below. 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.4.5E form of exemption certificate
In accordance with the provisions of paragraph I of Schedule 2 of the Employers’ Liability (Compulsory
Insurance) Regulations 1998 (SI 1998/2573), the Minister of
any claim established against [here specify the body or person] in respect of any liability to [here specify the
.ISecretary of State for...... hereby certifies that
employees involved] of the kind mentioned in section I(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.
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EXPENDITURE AND PAYMENTS
As part of the process of authorising and controlling commitments and expenditure of public
funds, public sector organisations should time their expenditure and payments to provide good
value for public money.
A461 — Public sector organisations should use good commercial practice in managing the flows
of expenditure and commitments they deal with. Box 4.4 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.
A462 In particular, public sector organisations should:
e explain payment procedures to suppliers;
° agree payment terms at the outset and sticking to them;
° pay bills in accordance with agreed terms, or as required by law;
* tell suppliers without delay when an invoice is contested; and
e settle quickly when a contested invoice gets a satisfactory response.
A463 In October 2008, the Government made a commitment to speed up the payments
process. Public Sector Organisations should aim to pay suppliers wherever possible within 10
days. The principles in Box 4.4 must still be applied to all payments. Further guidance is available
at www.berr.gov.uk,
A464 Public sector organisations are also bound by The Late Payment of Commercial Debts
(Interest) Act 1988 (as amended by The Late Payment of Commercial Debt Regulations 2002 (SI
1674). It provides a statutory right for suppliers to claim interest on late payments of commercial
debt. Payment is regarded as late if made outside the agreed terms, or 30 days after receipt of a
valid invoice where no terms are agreed. Public sector organisations should note any expenditure
made outside these terms should be exceptional and noted in resource accounts.
Payments outside the normal pattern
A465 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 be
exceptional, and should only be considered if a good value for money case can be made for them,
eg a price discount commensurate with the time value of the funds in question. Even then, as
advance payments lead to higher Exchequer financing costs, such payments are novel and
contentious and usually require specific Treasury approval.
A466 Exceptions to these guidelines include:
e 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;
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* payments for activities carried out by, or on behalf of a public sector funder, eg grant
in aid to NDPBs or 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
* minor services such as training courses, conference bookings or magazine
subscriptions, where local discretion is acceptable;
* prepayments up to a modest limit agreed with the Treasury, where a value for money
assessment demonstrates clear advantage in early payment.
A467 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:
e the contractor's reduced need for working capital should be reflected in reduced
prices;
e the contractor should provide a performance bond in the form of a bank guarantee to
deal with possible breach of contract.
A468 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.
A469 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 department or NDPB
considering deferred payments must thus seek Treasury approval before proceeding.
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FRAUD
Governance in public sector organisations includes arrangements for preventing, countering and
dealing with fraud. This annex provides further detail.
A47.1 Accounting Officers are responsible for managing public sector organisations’ risks,
including fraud. Each organisation faces a range of fraud risks specific to its busine:
internal and external sources. The risk of a given fraud is usually measured by the probability of it
occurring and its impact in monetary and reputational terms should it occur.
A472 Inbroad 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 the fraud risk;
° measuring the effectiveness of the fraud risk strategy; and
e reporting fraud to the Treasury.
A413 For guidance on all these areas, see Managing the Risk of Fraud ~ a Guide for Managers.
Assessing vulnerability to fraud
AATA Each organisation should identify, itemise and assess how it might be vulnerable
to fraud, covering the main risks in some detail.
Evaluating the scale of fraud risk
A475 Each public sector organisation should evaluate the possible impact and likelihood of
risks of the specific fraud risks it has identified. From this, each organisation should deduce a
priority order for managing its fraud risks. This will inform decisions about the action to be
taken to manage fraud risk effectively.
Responding to fraud risk
A4.7.6 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:.
e Developing a Fraud Policy Statement and Fraud Response Plan (two key
documents that every organisation should have).
e Developing and promoting an anti-fraud culture. It may be helpful to give all staff a
clear statement of commitment to ethical behaviour to promote awareness of fraud.
Recruitment screening and maintaining good staff morale can also be important.
* — Allocating responsibilities for the overall management of fraud risk and for the
management of specific fraud risks so that these processes are integrated into
management generally.
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Establishing cost-effective internal controls to detect and deter fraud, commensurate with
the identified risks.
* 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 their
suspicions of fraud.
Responding quickly and effectively to fraud when it arises using trained and experienced
personnel to investigate.
Establishing systems to monitor the progress of investigations.
Using Internal Audit to track all fraud cases and drawing on their experience to strengthen
control to prevent repetition.
Taking appropriate action (criminal, disciplinary) against fraudsters and seeking to recover
losses.
e Continuously evaluating the effectiveness of anti-fraud measures in reducing fraud.
¢ Working with stakeholders to tackle fraud through intelligence sharing, joint investigations,
etc.
Measuring the effectiveness of the fraud risk strategy
AATT It is important 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 against any relevant targets or from other review bodies.
Reporting internal fraud to the Treasury
A478 Public sector organisations are required to submit an annual fraud return to the
Treasury. The data supplied is used to produce the Government Annual Fraud report. The main
aim of the report is to share information about fraud across government to increase awareness of
fraud risk in certain areas.
AATS Public sector organisations should also provide the Assurance, Control and Risk (ACR)
team in the Treasury with details, as quickly as possible, of any novel or unusual frauds (or
attempted frauds) so that details can be shared more widely. Public sector organisations should
also consider reporting frauds and suspected fraud to the NAO.
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ASSET MANAGEMENT
Each public sector organisation should develop and operate an asset management strategy
(section 4.10). This important feature of the management of an organisation should be reviewed
annually as part of the corporate or business plan.
A481 Asset management is a key part of financial management and thus one of the
responsibilities of the Accounting Officer in a public sector organisation (box 3.1). Each
organisation should arrange for the efficient and effective use, maintenance, acquisition and
disposal of the public sector assets under their control. So each needs to have a clear and full
understanding of:
e the content of the current assets base;
e the assets needed to deliver efficient, cost effective public services; and
e what this means for acquisitions, disposals and maintenance.
A482 Normally these responsibilities will be dispersed through organisations through a system
of delegations with appropriate reporting arrangements. Similarly, departments should ensure
that each of their sponsored bodies has equivalent arrangements. Managers in all public sector
organisations should be fully aware of how their responsibilities fit within the organisation's
corporate plan.
Asset registers
A483 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 neded for preparation of its accounts. It is also a
good way of taking stock of the organisation's current position and planning change.
A484 — The assets on an organisation’s register should include both tangible and intangible
assets, covering both owned assets and assets under its legal control. The list in box A.4.7A gives
the main groups but is not exhaustive. Each organisation should decide on a meaningful
valuation threshold.
A485 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 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
e investments in the form of debentures and shares in commercial companies. These
should be checked at least annually. Except for NDPBs, details of all share holdings
should also be shown in section 2 of the Supplementary Statements to the
Consolidated Fund and National Loans Fund Accounts.
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box A.4.8A main categories of public sector assets
tangible assets intangible assets
© land © copyrights
© buildings © Crown copyright
* leased fixed assets (PFI and non-PFl) trademarks
© raw materials ¢ franchises
stocks and stores © patents
plant and machinery intellectual property rights
© equipment © goodwill
* tools e data and information,
‘* furniture and fittings * knowledge and know-how
© assets under construction * software licences
* donated physical assets * shares and debentures in companies
* infrastructure assets ‘© public dividend capital
© heritage assets ‘* loans and deposits
antiques and works of art * other investments
‘software developed in house
Asset management plans
4486 — Each public sector organisation should complement its business plan with a clear view of
the asset base needed to deliver its objectives. Their asset management strategies should then
aim to attain, maintain and where appropriate evolve this asset pattern, over a period if change is
envisaged. Box A.4.8B suggests some key steps. The estates manager, the finance director and
the organisation’s business planners should all be engaged in this process. The organisation’s
board should take stock of progress with delivering the plan from time to time, and at least
annually.
Management of assets
A487 Assets should be managed like other parts of organisations’ business, with information
systems to provide feedback on efficiency and value for money (box 4.2). Maintenance should be
cost effective, designed to achieve and retain assets at a good standard, and taking steps to
manage the risks of fraud and theft.
A488 Most public sector organisations should respect OGC initiatives for the coordination and
management of the assets of the civil estate:
e ePIMS (electronic Property Management Information System), which is a central
database recording information on the civil estate;
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e the Civil Estate Occupancy Agreement governing relationships among Crown
bodies sharing accommodation. Volume 1 covers leasehold agreements, Volume 2
covers freehold and long leaseholds and Volume 3 covers Private Finance Initiative
funded properties; 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.
A489 Loans of assets should specify the terms of each loan, with conditions for return, liability,
damage and charges for use.
box A4.8B 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, eg to extend, modify or replace the existing estate. Proposals to acquire land or
buildings in London and the South East require the approval of the Chief Secretary to the Treasury~ see
OGC's website (www.oge.gov.uk/documents/DAO0505SupplementaryGuidance.pdf).
* 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 if departments do not
have Estimate cover for spending receipts; if or sponsored bodies want to retain receipts from disposal of
assets purchased out of grants.)
© Consider whether any retained assets have potential to generate revenue through non-core activities using
the wider markets approach (see annex 7.6).
Asset transfers between public sector organisations
A4810 Public sector organisations may transfer assets among themselves without placing the
property on the open market, provided they do so at market prices. They should follow the
guidelines in box A.4.8C.
A481! 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. The organisations concerned should follow the guidance in the Estimates Manual
(www.hm-treasury.gov.uk/media/A/1/estimatesmanual_011007.pdf).
A48.12 To help public sector organisations identify assets for acquisition by others, they should
record their surplus assets on the Register of Public Sector Lands
(www.englishpartnerships.co.uk/rspsl.htm), maintained by English Partnerships. Leasehold
property with less than 99 years outstanding is excluded.
A48.13 Exceptionally, certain sales to the Homes and Communities Agency (HCA) (replacing
English Partnerships) may include overage. The only circumstances in which overage is
acceptable are where:
« HCA intends to sell the property to a private developer for housing development
within two years;
e there is a realistic prospect that selling through HCA will improve the outcome for
housing policy, eg by creating an aggregate site;
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102
e the Accounting Officers of both the selling public sector organisation and HCA are
convinced that, in this transaction, overage offers value for money for the public
sector as a whole;
e the development gains is to be split equally between the selling organisation and
HCA; and
e the Treasury agrees.
box A.4.8C protocol for transfers of assets
© Value assets at market prices using RICS’ Red Book
(www.rics.org/Property/Propertyappraisalandvaluation/red_book.htm ).
* The organisations should work collaboratively on the transfer 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 not always necessary because of the
indivisibility of the Crown.
© 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 A.4.8.13.
Disposals
A4814 Public sector organisations should take professional advice when disposing of land and
property assets. Some key guidelines are in box A4.8.8D. Further guidance is on the OGC
website.
box A.4.8D protocol for disposals of land, property and other assets
© Value assets at market prices using RICS’ Red Book
(www.rics.org/Property/Propertyappraisalandvaluation/red_book.htm ).
© 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.
© Ifan asset is sold or leased at a loss, the proceeds forgone (compared to market value) should be treated
asa gift, and the routine in annex 4.12 should be followed.
448.15 Sometimes PFI projects involve disposals. Each such case should be evaluated as part of
the PFI project, with due attention to the need to secure good value for money. Further
guidance is an annex 7.5.
A48.16 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
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448.17 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.
Central asset registers
448.18 From time to time the Treasury 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.
448.19 Under Crown copyright policy, certain public sector organisations are required to supply
details for the official bibliographic database. See annex 6.3 for further details.
Digest of guidance
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104
Box A4.8E guidance specific to asset management
mandatory
High Performing Property — a routemap to Asset Management Excellence (OGC)
www.ogc.gov.uk/better_asset_management efficiency in property asset_management.asp
© Common Minimum Standards - procurement of built environments in the public sector
www.oge.gov.uk/documents/Common Minimum Standards PDF.pdf
* guidance on the Register of Surplus Public Sector Assets www.englishpartnerships.co.uk/rspsl.htm
English Partnerships quality standards www.englishpartnerships.co.uk/qualitystandards htm
* recording property details on GC's ePIMS (electronic Property Information System)
www.oge.gov.uk/electronic property information mapping service.asp
© Treasury approval for substantial accommodation proposals in London and the South East;
supplementary guidance www.ogc.gov.uk/documents/DAOS05SupplementaryGuidance.pdf
* Sustainable Development on the Government Estate targets www.sustainable-
development gov.uk/govemment/estates/index.htm
* Civil Estate Occupancy Agreement (2006) - providing standard terms and conditions for terms of
‘occupation www.ogc.gov.uk/high performing property property coordination.asp
Civil Estate Coordination Protocol - coordinating property activities and events across the civil estate
www.ogc.gov.uk/better_asset_management property coordination.asp
© recording details of Crown copyright on departments’ Information Asset Registers (Annex 6.1)
* Crichel Down rules - offering land and property acquired by the public sector back to former owners —
www.communities.gov.uk/publications/planningandbuilding/circularcompulsorypurchase2
© Disposal of Historic Buildings: Guidance Note for Government Departments and NDPBs
hettp://www.culture.gov.ul/NR/rdonlyres/.../Disposal_Historic_report.pdf
recommended
© Towards Better Assets Management — A Report by Sir Michael Lyons (December 2004) www.hm-
treasury.gov.uk./media/6/A/pbr04_lyonspsas_complete_205.pdf;
* disposals in PFI projects: Public Private Partnerships www.hm-
treasuty.gov.uk/documents/public_private_partnerships/ppp guidance _index.cim
* Guide to the Disposal of Surplus Assets http://www.ogc.gov.uk/..._disposal_of surplus property.asp
* Better Measurement, Better Management — effective management of the government estate
www.oge.gov.uk/better_asset_management_property_performance_measurement.asp
¢ Working without Walls www.ogc.gov.uk/government_relocation_ transforming workspace.asp
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ANNEX 4.9
STATE AIDS
While a great deal of public expenditure is not classified as State Aid, any funding favouring a
particular company or sector could be subject to the EU rules and, in certain circumstances,
require notification to the Commission.
A491 Article 87 of the EU Treaty prohibits in principle any form of preferential government
assistance — state aid - to commercial undertakings. The underlying concern is to prevent
distortion of competition within the EU.
A492 There is no precise definition of state aid. Article 87(1) (box A.4.9A) 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 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.4.9A 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.
A493 However, a measure meeting all the tests in box A4.9A is not automatically illegal. Article
87 sets out circumstances when State aid can be considered permissible — eg to encourage
cultural and regional development. European Commission frameworks and guidelines 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.
A494 Before state aid can be given, the public organisation responsible should notify the
Commission and obtain approval. This process can take 4-6 months, sometimes longer.
A495 There is a range of cases where European block exemption regulations exempt member
states from the notification process. For these, aid may not have to be notified in advance. These
apply to aid to small firms, training aid and employment aid. 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.
A496 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.
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106
A497 When designing policies, it is wise to consider the question of whether the state aids rules
are engaged early. This allows time to work out whether any exemptions may apply; or if
necessary to seek Commission agreement. The sources in box A.4.9B are a good place to start.
Depending on the context, it may be useful to consult BERR. Defra or DfT.
box A.4.9B further guidance
The DTI State Aid Unit website — www.berr.gov.uk/bbf/state-aid/
State aid approval process flowchart — www.berr.gov.uk/files/file32882.pdf
European Commission State aid website — www.ec.europa.eu/comm/competition/index_en.html
Email enquiries on State aid to/gro @berr-gsi.gov.uk
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ANNEX 4.10
LOSSES AND WRITE OFFS
This annex sets out what is expected when departments and NDPBs make losses or write off
assets, including notifying Parliament. Some rules are specific to NDPBs.
A4.10.1 As Parliament does not include advance provision for losses when voting money or
passing specific legislation, such transactions are subject to greater control than other
payments. Public sector organisations should only consider writing off losses after careful
appraisal of the facts (including whether all reasonable action has been taken to effect recovery),
and should be satisfied that there is no feasible alternative. In dealing with individual cases,
departments must always consider the soundness of their control systems, the efficiency with
which they have been operated, and take any necessary steps to put failings right.
Levels of delegation
A4.I0.2 Box A.4.10A groups losses into categories to help decide how individual cases should be
handled and notified to Parliament. Departments have delegated authority to deal with all losses
falling into group 1. The Treasury retains control over losses falling into group 2, subject to any
specific delegation arrangements agreed bilaterally.
Consulting the Treasury
44.103 When departments identify losses and write-offs, they should consult the Treasury,
irrespective of any delegated authorities or 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;
e might create a precedent for other departments in similar circumstances;
e arise because of obscure or ambiguous instructions issued centrally.
44.104 Similarly, NDPBs should consult their sponsor departments about similar cases. In turn
departments may need to consult the Treasury.
A4.10.5 Where losses do not fall into these categories but exceed the relevant delegated limit,
departments also need to consult the Treasury, setting out the facts in box A.4.10B and seeking
permission to write them off. If the Treasury is not satisfied that a case has been appropriately
managed (including imposing financial penalties or disciplinary measures, as appropriate), it
may withhold approval. The Treasury brings any such refusal to sanction write-off to the notice
of the C&AG. The C&AG in turn notifies the PAC, who may call the Accounting Officer to justify
and defend the department's actions in the case.
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type
A
box A.4.10A Classification of losses
description
Losses
cash losses: physical losses of cash and its equivalents (e.g. bank
notes, credit cards, electronic transfers, payable orders)
bookkeeping losses:
* unvyouched or incompletely vouched payments, including
missing items
© charges to RfRs to clear inexplicable or erroneous debit
balances
exchange rate fluctuations: losses due to fluctuations in exchange
rates or revaluations of currencies
losses of pay, allowances and superannuation benefits paid to
civil servants, members of the armed forces and NDPB employees
© overpayments due to miscalculation, misinterpretation, or
missing information
* unauthorised issues, e.g. inadmissible payments
© losses arising from other causes, e.g. non-disclosure of full
facts by the beneficiary, short of proven fraud
losses arising from overpayments of social security benefits,
grants, subsidies, etc. arising from miscalculation, misinterpretation
or missing information
losses arising from failure to make adequate charges for the
use of public property or services
losses of accountable stores
Proven or suspected fraud, theft, arson or sabotage, or any other
deliberate act (including repairable damage caused maliciously to
buildings, stores, etc. even where a legal claim is not possible)
losses arising from other causes
fruitless payments and constructive losses
claims waived or abandoned
delegation group
Notification to Parliament
A4.10.6 Losses should be brought to Parliament's attention at the earliest opportunity, normally
by noting the department's resource account, 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.
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box A.4.10B Cases exceeding delegated limits
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;
‘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.
Losses and claims records
A4.10.7 Public sector organisations should maintain a record of losses, in which losses of all
kinds should be recorded as soon as possible. The record should show:
e the nature, gross amount (or estimate where an accurate value is unavailable), and
cause of each loss;
e the action taken, total recoveries and date of write-off where appropriate; and
e the resource account in which each loss is to be noted.
A4.10.8 A losses statement is required in resource accounts where total losses exceed £250,000.
Individual losses of more than £250,000 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
ina record of claims to ensure that recovery is not overlooked.
Accounting for cash losses
A4.10.10 Cash losses should initially be accounted for as debtors in resource accounts pending
recovery or write-off.
A4.10.11 Once cash losses are definitely identified, they should be charged to the appropriate RFR
subheads. Missing cash received as an appropriation in aid which was lost after receipt (but
before being brought to account), should be charged as incidental expenses with a contra credit
to appropriations in aid.
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A4.10.12. Where a cash loss is wholly or partly recovered by reducing the amounts of pay or
pension"? which would otherwise be due, or under statutory or other specific powers”. only the
resulting outstanding balance is treated as a loss for writing-off. The sum(s) are charged to the
relevant RfR as if they had been paid to the individual concerned who then used the money to pay
the claim.
4.10.13 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 resource account is
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 resource 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 resource 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
AA4.10.24) and noted accordingly.
A4.10.18 Any loss recoverable from a third party, but in respect of which recovery is waived
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 agreed?!
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 A.4.10C.
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.
'9 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.
20 For example, Queen's Regulations.
21 Stores held by the Ministry of Defence may be valued according to their estimated supply price.
110 I Managing Public Money
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ANNEX 4.10 LOSSES AND WRITE OFFS
box A.4.10C 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 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, 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.
44.10.23 Constructive losses need not be noted in the Losses Statement in the resource accounts
unless they are significant.
Claims waived or abandoned
44.10.24 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.
box A.4.10D 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 4.11.1) 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.
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44.10.25 The following should not be treated as claims waived or abandoned:
e 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 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. Other
departments should consult the Treasury about treatment when a case arises; or
e acclaim for a refund of an overpayment which fails or is waived. This should be
regarded as a cash loss.
A4.10.26 I Waivers should be noted in resource accounts in accordance with the FreM. In addition:
e — aclaim 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.
44.10.27 There is no need to note resource accounts if claims between departments are waived or
abandoned. These are domestic matters.
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ANNEX 4.11
OVERPAYMENTS
This annex discusses how, and how far, public sector organisations should seek to recover
overpayments — one case of special payments outside normal Parliamentary process (section
4,11). In difficult cases it is important to act on legal advice.
A411... Even good payment systems sometimes go wrong. Most organisations responsible for
making payments will sometimes discover that they have made overpayments in error.
A411. 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 A.4.11A.
box A.4.11A_ possible reasons for overpayment
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.
Grants 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, allowances, 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.
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AAAL3 When deciding on appropriate action, taking legal advice, organisations should consider:
e the type of overpayment;
e whether the recipient accepted the money in good or bad faith;
e the cost-effectiveness of recovery action;
* any relevant personal circumstances of the payee, including defences against
recovery;
e 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.
Payments made with Parliamentary authority
AAI 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
4.115 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:
e 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.
A4IL6 Recipients may be inferred to have acted in bad faith is 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 good faith.
A417 In forming a judgement about whether payments have been received in good faith, due
allowance should be made for:
e 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;
e the extent to which generic information was readily available to help recipients
understand what was likely to be due.
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Fraud
44.118 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
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
A419 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
A4.11.10 Defences which may be claimed against recovery include:
e the length of time since the overpayment was made;
e change of position;
° estoppel;
* good consideration;
* hardship.
Lapse of time
A4.ILI 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.
A4.11.12 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.
A4.11.13 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.
Change of position
A4.1L.14 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
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ANNEX 4.11 OVERPAYMENTS
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.
Estoppel
AAILIS. 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.
A411.16 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.
AAJLIT It is essential for public sector organisations to seek legal advice where change of
position or estoppel are offered as defence against recovery.
Good consideration
A4A1.18 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
AAILI9 Public sector organisations may waive recovery of overpayments if it would cause
hardship. But hardship should not be confused with inconvenience. Where the recipient has no
entitlement, repayment of itself 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.
Collective overpayments
A4.11.20 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, except that:
e it is not sensible to pursue recovery against any individuals who can claim one of
the legitimate defences discussed in paragraphs A.4.11.10 to A.4.11.19; and
* it may be disproportionately expensive to enforce recovery against some
individuals, for example if they are hard to trace or unable to pay.
A41121 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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A411.22 Ifa public sector organisation is minded to forgo recovery of the whole or any 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.
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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.
A412.1 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 A.4.12A.
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.
box A.4.12A 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
A423 Treasury approval is needed for all gifts valued at more than £250,000, and any other gifts
not covered by a department's delegated authorities.
4.124 As Parliament does not provide for gifts when voting Estimates or passing specific
legislation, Parliamentary approval for gifts worth more than £250,000 should be sought. Ideally
this should be through Estimates. Alternatively, where time does not permit, a Minute should be
laid in Parliament.
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Reporting
44.125 Ifthe Estimates timetable permits, departments planning to make a gift worth more than
£250,000 should notify Parliament in their Estimates (Main or Supplementary depending on
timing), providing details of the gift and its cost.
4412.6 Departments wishing to make a gift over £250,000, who have been unable to include it in
their Estimates, should notify Parliament by laying a 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 a departmental Minute is laid.
44.127 The Minute must then be laid before the House of Commons 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 in the Minute.
A4.128 The 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 A.4.12B standard paragraph for a departmental gift Minute
Opening paragraph:
It is the normal practice when a government department proposes to make a gift of a value exceeding £250,000, 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 of a Motion relating to the Minute, or by otherwise raising the matter in the
House, final approval of the gift will be withheld pending an examination of the objection.
A419 The 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, the Minute should
contain information about the cost and nature of the replacement, when it is expected to be
acquired, and the Estimate and subhead to which the expenditure will be charged. In the case of
non-voted expenditure, the Minute should quote the account to which the replacement cost will
be charged.
Parliamentary objections
A412.10 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.
AAAI 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.
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Noting resource accounts
A422 Resource accounts should include a note on gifts made by departments if their total
value exceeds £250,000. Gifts with a value of more than £250,000 should be noted individually,
with a reference to the appropriate departmental Minute. Exceptionally, where gifts are made
between government departments, the receiving department should notate its accounts, not the
donor.
Gifts received
AAADA3 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 resource accounts unless the Treasury or department concerned
considers there is a special need for them to be brought to Parliament's attention.
44.12.14 Donations, sponsorship or contributions, eg from developers should also be treated
as gifts.
AAAS Guidance on gifts made to individual civil servants is in the
Management Code.
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ANNEX 4.13
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 some cases, it is also important to notify Parliament.
44.3.1 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.
A4.13.2 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.
44.3.3 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 they arm’s length bodies observe the standards.
Dealing with special payments
A4.13.4 Departments should always consult the Treasury about special payments unless there
are specific agreed delegation arrangements. 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, NDPBs and many other arm’s length bodies should consult their sponsor
departments in comparable circumstances. In turn, the department may need to consult the
Treasury.
A4.13.5 The special payments on which the Treasury may need to be consulted are summarised
in box A.4.13A. The list is not exclusive. If a department is in doubt, it is usually better to consult
the Treasury.
4413.6 In particular, it is important to consult the Treasury about any cases, irrespective of
delegations, which:
e involve important questions of principle;
e raise doubts about the effectiveness of existing systems;
° contain lessons which might be of wider interest;
e might create a precedent for other departments;or
e arise because of obscure or ambiguous instructions issued centrally.
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ANNEX 4.13 SPECIAL PAYMENTS
box A.4.13A_ special payments
. extra-contractual payments: 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 payments are within the broad intention of the statute or
regulation, respectively, but go beyond a strict interpretation of its terms.
. compensation payments 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 contriacts.
. special severance payments are paid to employees, contractors and others beyond above 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 payments 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.
4.3.7 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 needs to be justified especially carefully since
confidentiality could appear to mask underhand dealing. 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.
A4.13.8 Departments should also consult the Treasury about proposals for special payments
above the relevant delegated limits. They should explain:
e the nature and circumstances of the case;
¢ the amount involved;
the legal advice, where appropriate;
e the management procedures followed;
* anassessment of the value for money of the case
e any non-financial aspects;
e whether the case in question could have wider impact.
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Severance Payments
A439 Special severance payments when staff leave public service employment should be
exceptional. They always require Treasury approval because they are usually novel, contentious
and potentially repercussive. So departments should always consult the Treasury in advance
when considering a special severance payment, whether or not the proposed amount falls within
its delegated limit. 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.
A4.13.10. The Treasury adopts a sceptical approach to proposals for special severance settlements.
Precedents from other parts of the public sector may not be a reliable guide in any given case.
And 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 proceedings. Winning such cases demonstrates that the government does not reward
failure and should enhance the employer's reputation for prudent use of public funds.
A4.13.11 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.
It is important to ensure that Treasury approval is sought before any offers, whether oral or in
writing, are made. Any proposals for retrospective approval should contain the same level of
detail as if the case had been brought to the Treasury in advance. A proforma for seeking
Treasury approval is at http://www.hm-treasury.gov.uk/psr_mpm_annexes.htm .
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
© 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
44.13.12. Particular care should be taken to:
e 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;
e 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.
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44.13.13. 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.
Reporting
A4.13.14 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 resource account. Any special severance payments for senior staff will
in any case be itemised in resource accounts.
A4.13.15 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.
A4.13.16 Special payments should be noted in resource accounts where total losses
exceed £250,000.
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ANNEX 4.14
COMPLAINTS AND REMEDY
Prompt and efficient complaint handling is an important way of ensuring customers receive the
service to which they are entitled and may save public sector organisations time and money by
preventing a complaint escalating unnecessarily.
If their services have been found deficient, public sector organisations should consider whether to
provide remedies to people or firms who complain. This is separate from administering
statutory rights or other legal obligations, eg to make payments to compensate. Remedies may
take several different forms and should be proportionate and appropriate.
Dealing with complaints
A4.I4.1 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 Handling to help public bodies when dealing with complaints (see
paragraph A.4.14.18).
A414. 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.
A4.143 Public sector organisations should seek to learn from what their complaints reveal. 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
A4.l44 As section 4.12 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
e whether their policies and procedures need change, to prevent the failure
reoccurring.
The remedies available
A4.145 Remedies can take a variety of forms, including (alone or in combination):
° anapology;
e anexplanation;
¢ correction of the error or other remedial action;
e anundertaking to improve procedures or systems; or
e financial payments, eg one off or as part of a structured settlement.
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ANNEX 4.14 COMPLAINTS AND REMEDY
A414.6 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 4.13). 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 2.3 and 2.4).
Designing remedies
A414.7 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.
A448 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.
A449 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.
A4.14.10 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 A.4.14A. The list
may not be exhaustive.
box A4.14A factors to consider in deciding financial compensation
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.
A441 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.
44.14.12. 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 Ombudsman’s Principles of Good Administration (see annex 4.3).
They must be well designed since costs can escalate if a problem turns out to be more extensive
than initially expected.
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A414.13 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.
A4.l4.14 Essentially, designing a compensation scheme is no different from designing other
services. Good management, efficiency, effectiveness and value for money are key goals. The
checklist in box 4.7 is therefore a sound general guide. Some specific issues which may require
special care for compensation schemes are outlined in box A.4.14.B.
box A.4.14b issues to consider in designing compensation schemes
* 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.
© Ifthe scheme sets a precedent, make sure that it is acceptable generally.
* Inform Parliament appropriately, eg through a written statement and/or in the resource 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
A4.14.15 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
e raise novel or contentious issues; or
e could set a potentially expensive precedent or cause repercussions for other public
sector organisations.
44.14.16 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
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
A4.14.17 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
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ANNEX 4.14 COMPLAINTS AND REMEDY
130
payments in departments’ resource accounts. Departments and agencies should include
summary information on compensation payments arising from maladministration in their
annual reports.
The PHSO’s principles
A414.18 The PHSO has published Principles of Good Complaint Handling to help public bodies
when dealing with complaints (box A.4.14c); and Principles for Remedy for use in deciding cases
(boxA.4.14d). These are of wider application. Fuller details are available at
www.ombudsman.org.uk complaints; and
www.ombudsman.org.uk/improving services/remedy/index.html)
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ANNEX 4.14 COMPLAINTS AND REMEDY
box A.4.14c: The PHSO’s Principles of Good Complaint Handling
Good complaint handling by a public body means:
1, Getting it right
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mg
-
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Acting in accordance with the law and relevant guidance, and with due regard for the rights of those
concerned.
Ensuring that those at the top of the public body provide leadership to support good complaint
management and develop an organisational culture that values complaints.
Having clear governance arrangements, which set out roles and responsibilities, and ensure lessons are
learnt from complaints.
Including complaint management as an integral part of service design.
Ensuring that staff are equipped and empowered to act decisively to resolve complaints.
Focusing on the outcomes for the complainant and the public body.
Signposting to the next stage of the complaints procedure clearly, in the right way and at the right
time.
Being customer focused
Having simple and clear procedures.
Ensuring that complainants can easily access the service dealing with complaints, and informing them
about advice and advocacy services where appropriate.
Dealing with complainants promptly and sensitively, bearing in mind their individual circumstances.
Listening to complainants to understand the complaint and the outcome they are seeking.
Responding flexibly, including, co-ordinating responses with any other bodies involved in the same
complaint, where appropriate.
Being open and accountable
Publishing clear, accurate and complete information about how to complain, and how and when to
take complaints further.
Publishing service standards for handling complaints.
Providing honest, evidence-based explanations and giving reasons for decisions.
Keeping full and accurate records.
Acting fairly and proportionately
Treating the complainant impartially, and without unlawful discrimination or prejudice.
Ensuring that complaints are investigated thoroughly and fairly to establish the facts of the case.
Ensuring that decisions and actions are proportionate, appropriate and fair.
Ensuring that complaints are reviewed by someone not involved in the events leading to the complaint.
Acting fairly towards staff complained about as well as towards complainants.
Putting things right
Acknowledging mistakes and apologising where appropriate.
Providing prompt, appropriate and proportionate remedies.
Considering all the relevant factors of the case when offering remedies.
Taking account of any injustice or hardship that results from pursuing the complaint as well as from the
original dispute.
6, Seeking continuous improvement
Using all feedback and the lessons learnt from complaints to improve service design and delivery.
Having systems in place to record, analyse and report on the learning from complaints.
Regularly reviewing the lessons to be learnt from complaints.
Where appropriate, telling the complainant about the lessons learnt and changes made to services,
guidance or policy.
These Principles are not a checklist to be applied mechanically. Public bodies should use their judgment in applying
them to produce reasonable, fair, and proportionate results in all the circumstances of the case, The Ombudsman
will adopt a similar approach when considering the standard of complaint handling by public bodies in her
jurisdiction.
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box A.4.14d: The PHSO’s Principles for Remedy
Good practice with regard to remedies means:
1. Getting it right
© Quickly acknowledging and putting right cases of maladministration or poor service that have led to
injustice or hardship.
‘* Considering all relevant factors when deciding the appropriate remedy, ensuring fairness for the
complainant and, where appropriate, for others who have suffered injustice or hardship as a result of
the same maladministration or poor service.
2. Being customer focused
* _ Apologising for and explaining the maladministration or poor service.
* Understanding and managing people's expectations and needs.
© Dealing with people professionally and sensitively.
* _ Providing remedies that take account of people’s individual circumstances.
3. Being open and accountable
* Being open and clear about how public bodies decide remedies.
© Operating a proper system of accountability and delegation in providing remedies.
* Keeping a clear record of what public bodies have decided on remedies and why.
4. Acting fairly and proportionately
© Offering remedies that are fair and proportionate to the complainant's injustice or hardship.
* Providing remedies to others who have suffered injustice or hardship as a result of the same
maladministration or poor service, where appropriate
‘Treating people without bias, unlawful discrimination or prejudice.
5. Putting things right
If possible returning the complainant and, where appropriate, others who have suffered similar injustice
or hardship, to the position they would have been in if the maladministration or poor service had not
occurred,
* If thatis not possible, compensating the complainant and such others appropriately.
* Considering fully and seriously all forms of remedy (such as an apology, an explanation, remedial action,
or financial compensation).
© Providing the appropriate remedy in each case
6. Seeking continuous improvement
Using the lessons learned from complaints to ensure that maladministration or poor service is not
repeated,
* Recording and using information on the outcome of complaints to improve services.
These Principles are not a checklist to be applied mechanically. Public bodies should use their judgment in applying the
Principles to produce reasonable, fair, and proportionate remedies in all the circumstances. The Ombudsman will adopt
a similar approach in recommending remedies.
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ANNEX 4.15
THE SIC
Each Accounting Officer makes a Statement on internal Control (SIC) in the resource accounts,
setting out the key challenges and opportunities facing the organisation.
A4.15.1 As chapter 3 explains, each Accounting Officer is responsible for maintaining a sound
system of internal control. Risk management is a key component of this. It should be integrated
into the organisation’s financial management.
A4.15.2 The Statement on internal Control (SIC) is the standard way of bringing risk
management within an organised structure for reporting and also for internal use. It should
support the organisation’s policies, aims and objectives whilst safeguarding its assets. The FReEM
has a proforma and guidance on completion.
A4.15.3 In drawing up the SIC, it is important to remember that an organisation's assets include
assets such as information which may have limited financial value on the balance sheet but which
should be handled accurately and securely. All information used for operational purposes and
financial reporting purposes needs to be captured and processed accurately and to an
appropriate quality standard, particularly where it is used by third parties or relied on by other
parts of government. Personal and other sensitive information requires additional safeguards.
The Accounting Officer and the board need comprehensive and reliable assurance from
managers, internal audit and other assurance providers that risks, including information risks are
being managed effectively.
A4154 Material changes to the system of internal control during the year should be reflected in
the SIC. If an element of the strategic risk management process has been absent for a material
period of time in the year it should be reflected.
Significant internal control issues
A4.15S The SIC should cover all the organisation’s significant control issues. The Accounting
Officer should use his or her judgement to distil the organisation’s key concerns. Some tests are
suggested in box A.4.15A, but the Accounting Officer’s assessment should be paramount. The SIC
should describe the action taken or proposed to correct weaknesses.
box A.4.15A factors to consider in assessing candidates for the SIC
* Might the issue seriously prejudice or prevent achievement of a PSA target?
* Cold the issue have a material impact on the accounts?
‘* Could the issue divert resources from another important aspect of the business?
© Does the Audit Committee advise it is significant?
* Does internal or external audit regard it as significant?
© Could the issue, or its impact, attract significant public interest, or seriously damage the reputation of
the organisation?
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ANNEX 4.15 THE SIC
A156 If there is a special investigation about a significant internal control issue, and disclosure
might prejudice its outcome, the SIC should record that full disclosure is not possible and explain
why. In such cases, the organisation should tell its external auditor what might have been
included.
External Audit
A4.15.7 The SIC is reviewed by external auditors as part of their financial statement audit to
ensure it is consistent with the financial statements and the evidence gathered during their work.
Where it is not, or where it is not compiled in accordance with the relevant guidance they will
report that fact.
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ANNEX 5.1
GRANTS TO THIRD PARTIES
This annex sets out how government departments should arrange and control grants to third
parties, including to arm’s length bodies such as NDPBs.
A5.1.1 Central government departments may 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.
Payment
A512 Grants should be paid on evidence of need or qualification, depending on the terms of
the grant scheme. For example:
e the recipient may need to submit a claim with evidence of eligibility;
e 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;
e there may be a timing condition;
e small third sector organisations may need to demonstrate a clear operational
requirement for project funding to be made before grant is paid (see Improving
financial Relationships with the Third Sector: Guidance to Funders and Purchasers
www.hm-treasury.gov.uk/spending review/spend_ccr/spend_ccr_guidance.cfm).
A513 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 (see section 5.8).
Control
A514 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 2.3).
A5.1.5 I The Accounting Officer of the funder 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
often convenient 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:
e ensuring prudent management of grant in aid funds;
e achieving value for money;
° assuring funders that grants are used as envisaged; while
e allowing recipients reasonable freedom to take their own decisions.
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Annex 5.1 GRANTS TO THIRD PARTIES
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.
AS.L6 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 7.4 for more.
ASAT Departments should ensure that the Comptroller and Auditor General has formal access
rights to all grant recipients.
Protecting the Exchequer
AS.18 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 (more in
annex 5.2).
Endowments
ASLO 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 one-off grant to
enable the recipient to set up a fund from which to draw down over several years. The recipient
may then be able to make a clean break with the need for support.
AS.1.10 Departments contemplating such funding arrangements should consult the relevant
Treasury spending team (and in turn arm’s length bodies should consult their sponsor
departments). The Treasury will need to consider the value for money case for this form of
funding, including:
e the opportunity cost of locking public funds into a particular endowment, using
investment appraisal techniques;
e 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 programmes
or projects from proper expenditure scrutiny;
e the sustainability of the funded body and whether such funding will decrease future
reliance on public funding;
© whether there are clear objectives, outputs and outcomes of the funding; and
e the risk of further call on public funds.
ASI Any such endowment should:
«reflect genuine need for capital funding;
° be made only to recipients with the competence to manage the endowment over
time; and
e avoid skewing public funding away from other projects that have genuine cash needs.
AS.1.12 The terms of an endowment should:
+ be clear that the funded body should not subsequently approach the donor for
annual funding;
e maintain clear boundaries between the funder and recipient.
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ANNEX 5.2
PROTECTING PUBLIC INVESTMENTS
This annex discusses how public sector organisations which provide grants to the private sector
and others should protect their investments where grants are used to buy or improve assets.
Clawback
A521 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.
A522 The 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:
e consult the funder;
e return the grant to the funder; or
e _ yield the proceeds of sale (or a specified proportion) to the funder.
A523 However, a charge over the asset is not always essential. Some ground rules are
suggested in box A.5.2A.
Box A.5.2A_ when to consider clawback
clawback 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
clawback not always 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
A524 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.
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ANNEX 5.2 PROTECTING PUBLIC INVESTMENTS
Designing clawback conditions
A525 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 A.5.2B. 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 clawback terms
* 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
A526 — Insetting 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
A527 — 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 A.5.2C. 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.
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ANNEX 5.2 PROTECTING PUBLIC INVESTMENTS
A528 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;
. 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 clawback 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
A529 — 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.
AS2.10 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 purposes.
Enforcing a claim on a funded asset
AS2I1 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.
AS2A2 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.
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ANNEX 5.2 PROTECTING PUBLIC INVESTMENTS
A5.2.13 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;
° 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.
AS.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.
A52.15 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.
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ANNEX 5.3
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.
A53.1 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.
A532 Most 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.
A533 Hereditary revenue is:
e virtually all non-statutory receipts;
¢ cash receipts received by virtue of statutory authority; and
e receipts where statute does not say.
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.
A534 The main categories of income and associated receipts are shown in Box A.5.3A.
box A.5.3A 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 appropriated in aid to finance Estimate provision.
A535 Specific legislation, with Treasury approval, is normally required to authorise use of
income directly to meet resource consumption, ie to appropriate it in aid. In effect this process
means that the department needs to seek less finance through Estimates because part of the cost
of the service is met from receipts. Parliament has an interest because otherwise resource
consumption would require specific approval through the Estimates process.
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ANNEX 5.3 INCOME AND RECEIPTS
A53.6 The Treasury may also direct that an income stream may be appropriated in aid by laying
a Treasury Minute before both Houses of Parliament (see Estimates Manual www.hm-
treasury. gov. uk/media/A/l/estimatesmanual_011007.pdf). This power of direction is only ever used
to allow departments to appropriate income in aid of resources or capital expenditure where there
is a direct relationship between the two. Where there is no such relationship, the income is
normally surrendered as Consolidated Fund extra receipts (CFERs).
A537 Sometimes departments have excess appropriations in aid, ie more income than the
expenditure stream it matches, or more income than was anticipated in the Estimate. When this
happens the surplus is treated as CFERs.
Controls over use of income as appropriations in aid
A538 Appropriation Acts limit the amounts of income which may be appropriated in aid
against each Request for Resources (RfR) of the underlying Estimate. Each RfR has limits on
operating appropriations in aid (income financing resource expenditure), but non-operating
appropriations in aid (income financing capital) are set as a single limit for the Estimate as a whole.
If income appropriated in aid is projected to be higher during the year, financing higher
expenditure, the responsible department should seek Treasury approval and then present a
Supplementary Estimate showing the revised figures. The relevant Appropriation Act will then
have increased limits.
A539 Pending approval of the Supplementary Estimate, departments may use excess operating
and non-operating income to finance excess resource or capital expenditure respectively. The
amounts and types should accord with the existing Estimate and should match.
53.10 Departments may generally offset excess appropriation in aid income on individual
subheads against shortfalls of income in other subheads. This is acceptable where the excess arises
as a result of reasonable estimating variations. Similarly, departments may use excess income to
offset excess resources or capital expenditure in the same year pending the approval by Parliament
of an Excess Vote. But income and receipts should match: eg excess non-operating appropriations
in aid cannot be used to offset shortfalls in operating appropriations in aid. Nor can excess
operating appropriations in aid in one RfR be used to offset shortfalls in other RfRs.
Net and gross subheads
A531 Net subheads are used in Estimates only in carefully defined circumstances, notably for
trading funds, which for example can obtain and repay short term voted loans several times during
a single financial year. Otherwise all subheads of Estimates should show amounts to be spent
gross, with appropriations in aid financing them specified where appropriate.
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ANNEX 5.4
ESTIMATES AND BUDGETS
RELATIONSHIPS
The annual expenditure which Parliament authorises in Estimates is not the same as the related
budgets. This annex shows how the two are related.
A541 The table below identifies the key differences between Estimates and Budgets.
box A.5.4A_ how Estimates provision is derived from departmental budgets
resource expenditure capital expenditure
DEL
AME
resource budget capital budget
gains or losses from >I non-operating a-in-a
j¢+— :
asset sales outside budgets
voted outside budget I
provision voted for i capital grants
earlier oe
years >I :
operating a-in-a outside
budgers ie slcamee oc Oe ee
resource consumption ae ae Lp} unallocated capital
(net of grants) in NDPBs [4-4 aa pudeee
and ALBs Ce)
unallocated resource <<
budget
non-voted expenditure
yv v
net resource requirement (Estimate) net voted capital
Notes
Budget provision for departments is composed of allowances for capital and resources, spanning several
years. Amounts requested from Parliament in Estimates for each year are the sums expected to be
consumed in the year. The adjustments displayed above show how
Estimate figures —_I for a given year in cash are derived from I budget plans for a run of
years.
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ANNEX 5.5
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.
ASS... As with expenditure, ministers may enter into liabilities - in effect, conditional
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.
A552. 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.
A553 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.
A554 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
A555 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.
A556 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.5.5.21 to A.5.5.35 of this annex.
A55.7 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 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).
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ANNEX 5.5 LIABILITIES
A558 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.5.5A, with some
common examples.
box A.5.5A liabilities 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 Appropriation Act.
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 4.5).
A559 — 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.
A55.10 PFI contracts are a special case of procurement and so can cause departments to take on
liabilities. For these, departments should use the standard terms in the Treasury Taskforce
publication Standardisation of PFI Contracts www.hm-
treasury.gov.uk/documents/public_private_partnerships/ppp_standardised_contracts.cfm.
Departments should report details of use of these standard terms to OGC so that it can provide an
annual consolidated report to Parliament. 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.
AS5.11 There are additional conditions for taking on non-statutory liabilities, 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
ASS.A2 Before accepting any liability, the organisation should appraise the proposal using the
Green Book www.hm-
treasury.gov.uk./Economic_Data_and_Tools/greenbook/data_greenbook index.cfm, to secure
value for money, just like a proposal to undertake any other project. The liability should be
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ANNEX 5.5 LiaBiities
designed to restrict exposure to the minimum, eg by imposing conditions about duration. Other
possible features to limit liabilities might include:
* acommitment fee from the beneficiary (though this does not remove the need for
appraisal of the proposition) and/or
e arrangements to lift the liability if the beneficiary no longer needs it.
A55.13 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.
A55.14 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 which should not exceed £1m for any single transaction.
Types of liability
A55.15 Public sector organisations may take on liablities by:
e _ issuing specific guarantees, usually of loans;
° writing a letter or statement of comfort; or
° providing indemnities.
A5.5.16 It is important to remember that any of these instruments issued by a minister may be
legally enforceable.
A55.17 Guarantees should normally arise using statutory powers. They typically involve
guarantees against non-payment of debts to third parties.
A5.5.18 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 normally
essential.
A5.5.19 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 company. The standard form is set out in box A.5.5B, in line with the Civil Service
Management Code www.civilservice.gov.uk/publications/doc/csmc_june06.doc . This cover is
comparable to what is obtainable on the commercial insurance market. So it excludes personal
criminal liablity, reckless acts or business done in bad faith.
A5.5.20 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.
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ANNEX 5.5 LIABILITIES
box A.5.5B 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 which is incurred in the
execution or the purported execution of his or her board functions, save where the board member has
acted recklessly.
A5521 The rules for notifying Parliament of liabilities are very similar to those for public
expenditure:
e _ there is no need to tell Parliament about:
- new liabilities arising under statutory powers unless the legislation calls for it;
- liablities taken on in the normal course of business, except for those not in
standard form and above £250,000;
e departments should notify Parliament of:
- statutory liablities, in the form expected by the legislation;
- any liability outside the normal course of business and above £250,000, or of a
non-standard kind undertaken in the normal course of business;
. any liability which is novel, controversial or significant in relation to the
organisation’s (or the particular programme) expenditure, which is large and
unquantifiable.
A552 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.
A55.23 I Non-statutory liabilities which need to be reported to Parliament should be notified
using a standard form of Minute (see box A.5.5C). Treasury approval is required before going
ahead. It is sometimes necessary, with Treasury agreement, to adapt the form of wording, eg if
the liablity arises immediately.
A55.24 Such Minutes should be laid in the House of Commons and should:
e 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 A5.5.25);
e use the standard wording for the opening and closing passages, which has been
agreed with the PAC (box A.5.5C);
¢ explain that authority for any expenditure required under the liability will be sought
through the normal Estimates procedure;
© be copied to the chairs of both the PAC and departmental committee;
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ANNEX 5.5 LIABILITIES
e in cases of particularly large or unusual liablities, be accompanied by a ministerial
statement.
A55.25 The indemnity should not go live until 14 Parliamentary sitting days, excluding
weekends, after the Minute has been laid. Every effort should be made to ensure that the full
waiting period falls while Parliament is in session.
A55.26 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.
A55.27 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 resource
accounts.
box A.5.5C standard text for departmental Minutes on liab
Opening passage
It is normal practice, when a government department proposes to undertake a contingent liability in excess of
£250,000 for which there is no specific statutory authority, for the department concerned to present to
Parliament a Minute 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
A55.28 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
committtee to provide the same details as those outlined in paragraph A5.5.24, 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.5.5.26).
A5.5.29 Sometimes departments want to report an urgent contingent liablity providing less than
the required 14 days notice. In such cases, the department should follow the procedure in
paragraph A.5.5.24 and explain the need for urgency.
A5.530 Departments may also want to report a contingent liablity at short notice, ie less than 14
days before the end of the session. In such cases the contingent liablity should only go live after
lying before Parliament during 14 sitting days, ie some days after the start of the next session. If
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ANNEX 5.5 LIABILITIES
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.5.5.24 and
explaining the need for urgency. As a matter of record, when Parliament reconvenes, a Minute
should be laid explaining what has happened, including any liablities undertaken.
5531 The same procedure as in paragraph A.5.5.29 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.
A5532 Similarly, it is possible that a department might want to undertake a non-statutory
contingent liabilty 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 liablity to be essential, it
should consult the Treasury.
Reporting liabilities publicly
5533 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 A5.5.28) can be reported transparently, the standard Minute
(paragraph A.5.5.24) should be laid.
A5534 Departments should report all outstanding single liabilities, or schemes of liabilities, in
their resource 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.
A5535 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
liablities should appear as provisions. The rubric should refer back to notification of Parliament.
A5.536 When the conditional features of contingent liablities 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 2.5 and the Estimates Manual www.hm-
treasury.gov.uk/media/A/1/estimatesmanual_011007.pdf) 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
A5.537 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).
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ANNEX 5.6
DEPARTMENTAL LENDING
Government departments may borrow from the NLF and then on-lend to third parties. There
are some key disciplines required to protect the Exchequer from loss. It is also important to
keep Parliament informed, especially about risk exposures.
A561 The government provides loan finance to public sector (and some private sector) bodies
through the National Loans Fund (NLF) and departmental Estimates. The broad principles of
this annex also apply to Public Dividend Capital (PDC) and government loan guarantees.
Statutory authority
A562 The NLF needs specific statutory authority to lend to each of its borrowers. Similarly,
departments must normally have specific statutory authority to make voted loans. Box A.5.6A
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 Treasury’s Exchequer Funds and
Accounts team (EFA).
box A.5.6A powers in legislation enabling lending
NLF loans voted loans
© that the Secretary of State or Minister may .
lend to relevant bodies;
the circumstances in which loans may be
made;
° that the Treasury may issue funds from the .
NLF to the Secretary of State;
conditionality associated with the loans;
* a borrowing limit, sometimes including a
power to raise this limit by order within a
further absolute ceiling specified in the
primary legislation;
. the purpose for which loans may be made;
. a limit on total lending outstanding;
(sometimes) a power to raise this limit by
order within a further absolute ceiling;
a requirement for interest and principal
repayments collected by departments to be
surrendered to the NLF;
a requirement to present an annual account
to Parliament, prepared by the sponsor
department, of loans made and repaid.
* the terms and conditions to be attached to
loans and how interest rates are to be
determined;
that repayment of principal and interest
should be made to the Consolidated Fund.
Loans from the NLF
A563
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.
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AS.64 The NLF cannot lend at a loss 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.
A565 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.
Interest on NLF loans
A5.6.6 Interest on temporary NLF loans of up to 6 months is fixed and repayable with the
principal on maturity.
ASOT 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, in full with interest at maturity.
A568 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 repayment is not
received on time.
A569 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 Board?
(PWLB - www.pwib.gov.uk),
A5.610 There are special arrangements for interest rates on new loans to commercial bodies in
the public sector competing against private sector companies operating in a similar commercial
environment. See DAO13/04.
Early repayment of NLF loans
A5.6.11 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, probably leaving the public
sector as a whole worse off.
A5.6.12 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 technological changes) make a different maturity period more
appropriate. Proposals for such changes should be discussed with EFA.
22 $5, NLF Act 1968.
23 The PWLB is an NDPB which lends NLF funds to local authorities and others.
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A5.6.13 Any proposals for early repayment must be agreed with the Treasury beforehand. If
agreement can be reached, the borrower pays:
* interest up to the day before the loan is prematurely repaid; plus
e 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 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 resource accounts.
Write off or repayment of NLF loans by grant
.6.14 Departments should consult the Treasury about 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.
A5.6.15 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.
A5.6.16 Capital reconstruction ahead of privatisation is different. Departments should consult
EFA.
Accounting for NLF loans
A5S.617 Legislation authorising a sponsored body 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 resource accounts in accordance with the FReM. As
principal and interest payments must be paid into the NLF, such sums are not treated as
appropriations in aid or CFERs.
Voted loans
A5.618 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 government of borrowing.
Otherwise the same disciplines apply to voted loans as to NLF loans (paras A.5.6.3-10).
A5.6.19 Voted loans are technically assets of the Consolidated Fund. So payments of interest and
principal should normally be surrendered to the Consolidated Fund as CFERs. However if there
is related expenditure within the same Request for Resources and same part of the budget as the
receipt, such payments may be appropriated in aid.
Repaying early and writing off voted loans
A5.6.20 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.5.6.11) normally apply.
A5.621 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.5.6B. If it is not possible for the Minute to be laid allowing fourteen days of
Parliamentary time, the Minute should explain why.
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A5.622 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.
A5.623 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.5.6B Treasury Minute on loan write-offs: standard paragraphs
Opening 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 giving particulars of the write-off. This minute explains the circumstances. 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.
External borrowing and government guarantees
A5.624 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.
A5.625 Guarantees should normally only be given with an explicit statutory power, which should
e the circumstances in which guarantees may be given and the terms and conditions
to be attached;
¢ — alimit 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;
¢ arequirement for Parliament to be notified once the guarantee has been given; and
e authority for any costs resulting from the guarantee to be met from Estimates.
A5.6.26 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 5.5).
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A5.6.27 In principle government guarantees may also be given for longer-term borrowing,
including in foreign currencies. But 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. Public 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.
A5.6.28 As foreign borrowing may also have implications for the credit standing on the
international money markets of the UK public sector as a whole, proposals for such borrowing
must be cleared with the Treasury in advance. This applies not just to department's sponsored
bodies, but also to their subsidiaries and associated any companies where sponsored bodies
have majority shareholdings.
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ANNEX 5.7
BANKING
Each public sector organisation should run its cash management and money transmission policies
to minimise the cost to the Exchequer as a whole. This usually means using the Government
Banking Service.
AS7.1 Together public sector organisations handle a very great deal of public money and carry
out many financial transactions every working day. It is essential that these are handled in a way
which is efficient and safe for the Exchequer as a whole. Accounting Officers are responsible for
the credit risk to which public funds are exposed when held in commercial banks. It is important
that they manage this risk actively, so that it is kept to a minimum.
A572 For most public sector organisations, this means in practice using the Government
Banking Service (GBS). It provides a ready way of sweeping any excess cash into the Exchequer
pyramid accounts at the Bank of England both during and at the end of each working day. This
enables the Debt Management Office (DMO) to manage the Exchequer’s cash position efficiently
by financing any net government overnight debt or investing any overnight balance. Any other
arrangement would expose the government to increased credit risk and mean greater
government borrowing, costing the Exchequer more overall.
Local banking policies
A513 Each public sector organisation should establish a banking policy for its transmission of
funds and deployment of its working balances. It should cover at least the features outlined in box
AS.7.A.
box A.5.7A An organisation’s banking policy
* Where the main account(s) are to be held and how they should be operated.
* How and where working overnight balances required for day to day operation are to be held, if
different.
* 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.
* When and how payment by cheque, credit card or direct debit is acceptable.
© Record keeping, including frequent bank statement reconciliations.
A514 Once established, this policy should be reviewed regularly to make sure that it remains
appropriate and up to date. Any public sector organisation which chooses not to use the GBS as
its primary banking service should justify that its policy offers value for money for the public
sector as a whole. This stringent test can rarely be satisfied in practice and always needs to be
cleared with the Treasury.
AS7.5 As part of its banking policy each public sector organisation may also need to operate
one or more commercial bank accounts. Some guidelines for setting up and operating them are
in box A.5.7B. For banking requirements in the UK, public sector organisations should use only
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members of the relevant UK clearing bodies. Current membership of these bodies can be
checked via the weblinks in box A.7.7C.
box A.5.7B Guidelines for using commercial bank accounts
© Select services which cannot be provided by the GBS or which offer better value for money for the
Exchequer overall.
© 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 since these increase Exchequer debt
and raise 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.
A5.7.6 When operating its bank accounts, each public sector organisation should minimise its
balances without going overdrawn. It should hold enough to meet its immediate known
requirements, normally in a GBS account.
box A.5.7C Members of relevant uk clearing bodies
° The following websites list the members:
http://www.bacs.co.uk/BACS/Corporate/Corporatetoverview/our+members/,
http://www.apacs.org.uk/uk payment schemes/cheque credit clearing. htm!
Money transmission
A577 Public sector organisations should generally use the cheapest, safest and quickest means
of moving public funds, depending on the context. Generally this means adopting the hierarchy
in box A.5.7D. Sometimes it is necessary to strike a balance among these desirable features to
achieve the best outcome. For inward payments, it may be appropriate to apply credit controls
or other safeguards. For outgoing payments where Bacs* is used public sector bodies should
wherever possible use the system known as Bacs Grade 3 (Government Grade) user status as it
guarantees that the funds are cleared on the third day.
24 Bacs (formerly the Bankers’ Automated Clearing Service) is the commonly used three-day electronic payments and receipts system
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box A.5.7D Money transmission services ranked in order of choice
Internal transfers (requests for fund transfers) within GBS. These are free of charge to GBS customers.
© Electronic methods (Bacs and CHAPS) in the commercial banking system including transfers to and
from GBS accounts and direct debits:
© where used for payments, with appropriate safeguards to prevent damage to the Exchequer;
© where used for receipts, with arrangements for prompt credit.
© Credit and other payment cards: only where accepting such payments represents value for money, eg
in terms of faster or more certain credit of funds, and usually with safeguards such as limits on value or
circumstances compared to the cost of commissions to the card user.
«Where these are not possible, payable orders and cheques.
but not usually
© Cash, uncrossed cheques, order books or other methods involving high security risks.
Borrowing
A578 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 would be considered irregular.
A5.7.9 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).
Foreign exchange transactions
A5.7.10 Some public sector organisations need to make foreign exchange transactions. Normally
they should deal through the GBS for spot trades. Although transactions over £2m are actioned
by the Bank of England, they should still be directed through GBS for authorisation.
A5.7.11 If foreign exchange transactions form a substantial part of the business there may be a
case for drawing up a forex management policy. This will need to be agreed with the Treasury if
it involves any transactions other than spot trades. A possible outline is at box A5.7E.
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box A.5.7E Forex policy
* An outline of the volumes and frequencies of forex transactions required by the organisation's business.
* Policy on dealing with receipts and payments: normally spot transactions.
© The case for holding any sums in forex accounts, identifying any seasonal or other macro factors
affecting amounts, preferably through the GBS where the facilities are available.
The case for any hedging transactions, designed to limit risk exposures (eg through forward purchases
‘or options) with appropriate exposure limits.
¢ Routine for reviews, eg annually.
but not
Letters of credit. These are essentially guarantees of the government's ability to pay and can be
provided cheaper by ECGD, where needed.
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ANNEX 6.1
SETTING UP NEW SERVICES: CHECK LIST
This checklist identifies the main issues that need to be considered when introducing a new or
updated charging service.
A611 Organisations setting up or refreshing services that charge a fee may find this checklist
helpful when deciding how to set the charge. It is not exhaustive; and some of the decisions are
interdependent.
box A.6.12A setting up a charge bearing service: issues to con:
e Define the service, and its rationale.
© Identify the users.
© Decide which organisation is to provide the service.
* How is the service to be provided ~ on line, telephone, personal or postal application, etc.
‘© Set the financial objective for the service.
‘Carry out any necessary investment appraisal of options for delivery.
* Decide how capital and other start up costs are to be met.
‘* Decide which on-going costs are to be recovered.
© Decide whether the provider should retain any of the income from charges.
* Decide how the service is to be delivered and charged for.
* — Clarify any public expenditure issues, eg providing start up costs.
* Check that the legal powers to provide the service are adequate.
* Decide the charging structure: eg a single service, or several sub-services.
. If the service licences or registers people or organisations for an activity, decide whether there should
be a single level of charge, or a scale of charges.
* Check that there are suitable costing processes in place, including tracking evolution of costs.
° Ensure that the performance of the service is monitored and reported to the leaders of the
organisation responsible, with scope for feedback to change processes as need be.
* For commercial services, consider any competition law implications.
© Agree any special arrangements with specific users within the organisation or elsewhere in the public
sector, eg service level agreements,
© Consult prospective users (or their proxies) as necessary
Decide the timetable for introducing the new or adjusted service.
* Make sure that the finance team is content with the intended package.
‘© Check that Treasury approval has been given, where necessary.
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ANNEX 6.2
How TO CALCULATE FEES
This annex discusses how to calculate the cost of public services for which fees are charged.
462.1 With some exceptions, it is government policy that 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 many fees for public services it is essential to calculate the cost
of providing them accurately.
A622 The main features to be taken into account in measuring the annual cost of a service are
set out in box A.6.2A. 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.
box A.6.2A_ elements to cost in measuring fees
* accommodation, including capital charges for freehold properties
© fixtures and fittings
© maintenance, including cleaning
© 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 (if they were not met separately when the service was established)
© notional or actual insurance premiums
* fees to sub-contractors
* distribution costs, including transport
© advertising
bad debts
© provisions
but not
* enforcement costs
© replacement costs of items notionally insured
© start up costs (those which can be capitalised in the accounts)
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A623 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 estimates, geared to estimated
consumption patterns. Start up costs and the cost of fixed capital items should be scored in
resource accounts (or their equivalent) in full, attributing to the cost of the service just the
depreciated value each year.
A614 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 by
its additional cost (eg where faster shipping is offered); or conversely any discount should be
justifiable by the 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.
Financial objectives
A625 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 a
3.5% real charge for the cost of capital. Some exceptions are noted in box 6.1.
A626 One such exception is commercial services, ie those sold into competitive markets.
These should aim to recover full costs plus 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.
A627 Great care should be taken in pricing competitive 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.
A628 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.
A629 It is also good practice to set fees to recover accumulated past deficits. This may require
statutory backing through a s102 order (see paragraph 6.2.3).
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CHARGING FOR INFORMATION
This annex discusses how public sector organisations should charge for information. There are
exceptions to the general policy of charging at full cost.
A63.1 It is government policy that much information about public services should be made
available either free or at low cost, in the public interest. Anything originating in Crown bodies,
including many public sector organisations, has the protection of Crown copyright. So people
may need to pay if they want to duplicate or process (reuse) such material for profit.
A632 Information products have an unusual combination of properties: typically, high cost of
production combined with low cost of reproduction. So information products 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.
Rights to access
4.6.33 Most public organisations freely post information about their activities and services on
the internet. It is good practice to make available recent legislation, public policy
announcements, consultation documents and supporting material sufficient to understand the
business of each public sector organisation. In addition, some of this information, eg about
benefits and taxes, may also be available in free leaflets.
A634 More extensive paper or IT (eg CD ROM) versions of information available on the
internet may carry a charge to cover the cost of production. This should also apply to printed
versions of material viewed for free in public offices. There should be no additional charge for
material made available to meet the needs of particular groups of people, eg in Braille or other
languages.
A635 Most public sector organisations choose, as a matter of policy, to make available on the
internet copies of information disclosed in response to requests under the Freedom of
Information Act 2000 and Environment Information Regulations 2004.
Information carrying charges
A636 Anumber of public sector organisations supply information for which charges are made.
These include:
* services commissioned in response to particular requests;
° services where there are statutory powers to charge;
e information sold or licensed by trading funds (trading funds are free to choose how
they allocate their fixed costs to their various products when pricing their
information services);
¢ publications processing publicly gathered data for the convenience of the public,
through editing, reclassification or other analysis;
* retrieval software, eg published as a key to using compiled data.
4.63.1 The terms on which this information are 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
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ANNEX 6.3 CHARGING FOR INFORMATION
sector material, and this should be borne in mind when deciding what charges should be levied.
For this reason many publications can be reused by others free of charge. However, public sector
organisations should take a careful policy view of the copyright issues, using legal advice as
necessary.
A638 However, public sector organisations can charge for supplying some information which
recipients intend to process, eg for publication in another format. The norm is:
° Raw data: license and charge at marginal cost;
. Value added data and information supplied by trading funds: charge at full cost
plus an appropriate rate of return (see paragraph A.6.2.6).
Licenses 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.
A639 Public sector organisations should maintain information asset registers as part of their
asset management strategy. For further information see www.opsi.gov.uk , which includes links
to public sector organisations’ information asset registers listing the databases in existence. OPSI
can also advise on compliance with the Re-use of Public Sector Information Regulations.
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COMPETITION LAW
Public sector organisations need to take care if they provide services which compete with private
sector suppliers of similar services, or may do so. It is important that they respect the
requirements of competition law.
A641 UK competition law is founded in 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 dominant position’ in a market.
A642 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;
e 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
e refusing to supply competitors without objective justification such as poor customer
credit worthiness.
Pricing in competitive markets
A643 Services should be costed in line with the normal rules for full cost recovery. Charges
should be set to achieve the appropriate financial objective, at least recovering full costs.
A644 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.
A645 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:
e _ if the service cannot be expanded, but customers are willing to pay more, there may
be a case for increasing the price;
e _ 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;
e incentive charging, ie charging below cost to encourage demand, or above cost to
discourage it.
25 A business is deemed to be in a dominant position if it can generally behave independently of competitive pressures in its field.
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ANNEX 6.4 COMPETITION LAW
A646 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 competitive 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
A6AT 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.
A648 Ifa 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
A6AD For further guidance please visit the OFT website, which has a number of useful
guidance documents, listed at
www.oft.gov.uk/advice_and_resources/publications/guidance/competition-act/ .
A64.10 I Among these references the following may be particularly useful:
. the Competition Act and public bodies at
www.oft.gov.uk/advice_and_resources/publications/guidance/competition-
act/oft443
° agreements and concerted practices at
www.oft.gov.uk/shared_oft/business_leaflets/ca98_guidelines/oft401.pdf
. abuse ofa dominant position at
www.oft.gov.uk/shared_oft/business _leaflets/ca98_guidelines/oft402.pdf.
A6ALI 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.
168 I Managing Public Money
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ANNEX 7.1
ARM'S LENGTH BODIES: GUIDANCE
This annex identifies the principal sources of guidance that departments should follow when
establishing new arm’s length bodies. It may also be useful when reviewing, reorganising or
abolishing such bodies.
A111 The principal guidance documents (see Box A.7.1A) cover:
background to the public sector classification system, and key characteristics of
different types of body;
considerations in deciding the most appropriate type of body to the task;
legislative and organisational requirements for setting up a new body;
appropriate governance and accountability issues to be addressed;
making and managing public appointments;
budgeting, accounting and financial reporting requirements;
review arrangements;
dissolution arrangements.
Managing Public Money 169
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ANNEX 7.1 ARM'S LENGTH BODIES:
GUIDANCE
170
box A.7.1A sources of guidance
Classification of Public Bodies: Guidance for Departments — public sector classification system and
purpose and key characteristics of different organisational categories
www.civilservice.gov.uk/other/agencies/publications/pdf/classification guidance _aug05.pdf
Executive Agencies: A Guide for Departments ~ identification of candidates for EA status, preparation
for and launch of EA, review, merger, transfer and dissolution of EAs, and advice on preparation of Framework
Documents
www.civilservice.gov.uk/other/agencies/publications/pdflexec agencies guidance _oct06.pdf
Setting Key targets for Executive Agencies: A Guide
http://www.civilservice.gov.uk/other/agendes/publications/pdf/setting-targets.pdf
Guide to the Establishment and Operation of Trading Funds
www.hm-treasury.gov.uk./media/2F7/DA/Guide to the Establishment_and Operation of Trading Funds.pdf
Public Bodies: A Guide for Departments — consideration of options for delivery, setting up, governance
and accountability of NDPBs and public corporations, their review and dissolution
www.civilservice.gov.uk/other/agencies/guidance_for_departments/pb_guidance/index.asp
Better Government Services in the 21st Century: The Alexander Report — the 2002 Agency Review,
setting out key principles to guide departments in their relationships with their agencies
www.civilservice.gov.uk/other/agencies/publications/pdf/opsr-agencies.pdf
Making and Managing Public Appointments
www.publicappointments.gov.uk/publications/
Corporate Governance in Central Government Departments: Code of Good Practice includes
references to NDPBs and Agencies
www.hm-treasury.gov.uk/media/5DF/7D/corpgovernancecode 280705.pdf
Financial Reporting Manual — includes guidance for NDPBs and Agencies, including form of Annual Reports
www.financial-reporting.gov.uk/2006-07%20FreM.pdf
Consolidated Budgeting Guidance — includes guidance in relation to NDPBs and public corporations
www.hm-treasury.gov.uk/documents/public_spending_and_services/consolidated budgeting guidance.cfm
Managing Public Money
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ANNEX 7.2
SETTING UP NEW ALBs
This annex is to help those setting up new arm’s length bodies (ALBs) decide which legal form is
likely to be suitable for a new organisation. The guidelines are flexible and may evolve.
A721 As chapter 7 explains, central government departments should maintain oversight of all
their arm’s length bodies, irrespective of their legal form. There are differences between the
rights and responsibilities of agencies, non-ministerial departments and non-departmental
government bodies (NDPBs). So it is sensible to choose a legal form that will best support the
duties of the new organisation when setting up a new ALB.
A712 In general terms, the main characteristics of the three main kinds of ALB are summarised
in box A.7.2A.
box A.7.2A core descriptions of different kinds of ALB
* Agencies (sometimes called executive agencies or next steps agencies): each is either part of a
government department, set up administratively, or, exceptionally, a department in its own right. An
agency carries out a well defined business activity, usually with specific objectives, sufficiently close to
the government's central direction that it is appropriate for a government minister to answer for its
business in Parliament directly.
- Examples: Jobcentre Plus, Driver and Vehicle Licensing Agency (DVLA), the Courts Service.
* Non-ministerial departments: are part of central government but do not require direct day to day
ministerial oversight, though a minister retains policy control and will answer for them in Parliament if
need be. They are normally established under bespoke legislation which may lay specific responsibility
on the permanent head of the department. This form is particularly appropriate for bodies where
ministers have responsibility for setting the framework for activities carried out in the public interest,
but prefer to delegate day to day responsibility to an expert or professional cadre.
- Examples: the Government Actuaries Department (GAD), Food Standards Agency, Serious Fraud Office.
© (Executive) NDPBs: carry out duties and functions in which central government has a legitimate public
interest, but in fields where ministers do not find it necessary, or sometimes appropriate, to intervene
directly. So they operate at some distance from central government, though perhaps funded largely or
exclusively by public funds, perhaps through grant from a sponsor department or by using charging
powers. Most are established under special purpose legislation (or its equivalent) and few are Crown
bodies. Nearly all are governed by boards run largely by ministerially appointed office holders. Some
may be charities, or operate with very little grant funding, or establish wholly owned trading
subsidiaries. Ministers usually intervene only if they find it desirable to change an NDPB's direction, or
in extremis to wind it up.
- Examples: the National Gallery, Arts Council England, Heritage Lottery Fund, Medical Research Council,
Natural England.
Managing Public Money II
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ANNEX 7.2 SETTING UP NEW ALBS
AT2.3 As the descriptions in box A.7.2A show, there are similarities as well as differences
between these three kinds of ALB. It is good practice:
* first to evaluate the choice between an agency and an NDPB to see which fits better;
* to consider whether the ALB might evolve, eg an agency could be set up
adminstratively as an embryonic NDPB in preparation for the passage of specific
framework legislation;
* to consider the NMD option only if neither agency nor NDPB status seems suitable;
e ifthe NMD form is chosen, to define its remit very carefully
AT Decisions on the form of any particular ALB must ultimately be for ministers. They will
depend in part on the public 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. For instance, NDPB status is often
found appropriate for activities where it makes sense for well informed people to take decisions on
matters of public interest where it is better for ministers not to intervene, or not to make the
detailed choices, directly.
ATS When an ALB is planned, it is essential to consult both the Treasury and the Cabinet
Office about its powers, status and funding. The comparative checklist of features in box A.7.2B
may help determine the choice among the different kinds of ALB.
AT2.6 Finally, it is worth remembering that the three kinds of ALB in box A.7.2A are only the
most common ones. Others are possible. They include public corporations and various kinds of
cooperative arrangements with the private sector or with third sector bodies, some fairly loose.
And there is scope to establish one-off arrangements for special bodies where circumstances
demand something different.
A217 Whatever the legal status of an ALB, the Treasury will expect its sponsor department to
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. And it is always right to
document how the relationship with the sponsor department should work in practice (see box 7.2),
with scope for periodic review to take account of experience and the changing context.
172 Managing Public Money
ANNEX 7.2
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SETTING UP NEW ALBS
box A.7.2B_ distinguishing characteristics of arms length bodies
type of ALB
feature
status
established by
ministerial
accountability
parent department
funding
employees
accounts etc
Parliamentary
accountabillity
business profile
agency
Part of department (or
departmentt in its own
right).
Part of central
government
Crown body
Adminsitrative action
(usually quick and easy)
A minister in the parent
department makes key
decisions on the agency's
affaurs
Has direct control
Estimates (usually own
RfR) and/or fee income
Civil servants
Publishes plans and
resource accounts as part
of parent department's
CEO is Additional
Accounting Officer
administration, typically
implementation of central
policy
non-ministerial
department (NMD)
Department in its own
right
Part of central
government
Remit usually in
legislation Crown body
Adminstrative action,
often supplemented by
primary legislation (if
needed, may take time)
Rarely needed, but when
necessary, a minister in
the parent department
decides
Remote and rarely
interferes
Estimates (usuallly own
RfR) and/or fee income
Civil servants
Publishes own plans and
resource accounts
Permanent Secretary is
Accounting Officer
advice or administration,
typically professional,
expert or regulatory
functions
non departmental
public body (NDPB)
Quasi-independent
organisation
Part of central
government
Not a Crown body (with
rare exceptions)
May be a company and/or
a charity
Usually bespoke primary
legislation (may need to
wait for a suitable
legislative slot for some
time)
A minister in the sponsor
department decides key
matters, eg whether to
adjust functions, whether
to wind it up.
Subject to formally agreed
memorandum, may be
light touch
Grant(s) from
department(s), and/or
income from fees or levies
Not usually civil servants
Publishes own plans and
resource accounts
CEO is normally the
Accounting Officer
Advice, administration or
regulatory role, especially
matters best not decided
by ministers
Managing Public Money
1B
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ANNEX 7.3
TRADING FUNDS
This annex discusses how sponsor departments should assess proposals for trading fund status,
control and monitor their trading funds, and deal with public dividend capital (PDC).
Proposals for trading fund status
A73.1 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 fund 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 A.7.2A.
A132 — Further guidance may be found in the Treasury's Guide to the Establishment and
Operation of Trading Funds
(www.hm-treasury.gov.uk/mediastore/otherfiles/guideto_tradingfunds.PDF )).
Public dividend capital
A133 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.
A134 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
A135 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.
A136 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.
A137 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.
Managing Public Money 175
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ANNEX 7.3 TRADING FUNDS
box A.7.3A_ main 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 departments 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
othe 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;
e issues a direction under the Government Trading Funds Act 1973 setting out how the assets and
fiabi
ies 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.
Managing Public Money
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ANNEX 7.4 FRAMEWORK DOCUMENT
FOR EXECUTIVE NDPBS
Departments need arrangements to monitor and understand their NDPBs’ strategy,
performance and delivery, usually built around a framework document. This annex offers an
outline of how this can be drawn up, with a possible specimen, though this is not the only way in
which a framework document can be drafted.
This annex contains an outline menu of terms suitable for inclusion in the framework document
for an executive non-departmental public body (NDPB). Each NDPB will need a bespoke
specification suited to its specific responsibilities. The document should focus clearly on its
relationship with the sponsor department, and with any other departments with interest(s) in the
NDPB’s business.
While the document is based on a typical executive NDPB, it could be adapted or used as a basis
for framework documents for other arms length bodies. 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 EXECUTIVE NDPB: outline
menu
Purpose of the NDPB
I. Statement of:
e the NDPB’s statutory (and/or other) duties
e _ its strategic aims
* any mission statement or equivalent.
Governance and accountability
2. Statement of the legal origin(s) of the NDPB’s powers and duties.
3. Statement of the aims for the NDPB set by the sponsor department’s minister and any other
ministers.
4. Statement of which minister will account for the NDPB’s business in Parliament.
5. Statement of the responsibilities of the Accounting Officer in the sponsor department,
especially :
e regular monitoring and general oversight over the NDPB’s business
e accounting for any disbursements of grant to the NDPB
* sponsorship of the NDPB’s aims in central government
e _ relationship with any other department(s) with an interest in the NDPB’s business.
Managing Public Money 111
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ANNEX 7.4 FRAMEWORK DOCUMENT FOR EXECUTIVE NDPBS
Statement of the responsibilities of the NDPB’s Accounting Officer (usually the chief
executive) to account to:
e Parliament
e the sponsor department
e the NDPB’s board
e — other stakeholders.
Statement of the responsibilities of the NDPB’s:
° board
e¢ — chairman
¢ — individual board members.
Specification of the essential publications of the NDPB, including
* annual report and resource accounts
° any statutory reports
statement of the NDPB’s corporate governance arrangements
* any bespoke requirements for the NDPB, eg related to its business sector.
Statement of internal audit arrangements, including access by sponsor department's
internal audit service.
10. Statement of the external audit arrangements for the NDPB, including:
178
e the auditor (usually the CRAG)
e 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
Il. Statement that the NDPB 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 NDPB’s corporate plan, with the expected
frequency, and arrangements for clearance with the sponsor department.
I5. Details of budgeting procedures.
16 Details of the terms and conditions of payment of the grant-in-aid and any ring-fenced
grants to the NDPB made by the sponsor or other departments.
Managing Public Money
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ANNEX 7.4 FRAMEWORK DOCUMENT FOR EXECUTIVE NDPBS
20.
2.
Details of reporting to the sponsor department, with the expected frequency, including:
° the NDPB’s main activities;
© its financial performance;
° its expenditure against its DEL and AME budget allocations;
° other monitoring information;
° working level liaison arrangements.
Specification of the activities of, and changes within, the NDPB which require clearance
from the sponsor department, including delegated limits for new activities and capital
projects.
NDPB staff.
Arrangements for review of the NDPB’s status.
Procedures for winding up.
Managing Public Money 179
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ANNEX 7.4 FRAMEWORK DOCUMENT FOR EXECUTIVE NDPBS
APPENDIX TO ANNEX 7.4
NDPB FRAMEWORK DOCUMENT: specimen
This framework document has been drawn up by [the department] in consultation with
[the named NDPB]. This document sets out the broad framework within which the [named
NDPB] will operate. The document does not convey any legal powers or responsibilities. It
is signed and dated by [the department] and [the NDPB]. 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 [NDPB] website.
Purpose of the [named NDPB]
1.1 Under the [Name] Act 2006, the [name of NDPB] has been set up in order to support
the strategic aims and current Public Service Agreement 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 [NDPB’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 [NDPB] legal origins of powers and duties
2.1 The [NDPB’s] powers and duties stem from sections [?] and [Schedule?] of the
[establishing legislation, include both primary and secondary legislation, as necessary].
3 Overall aims
3. The Secretary of State/responsible Minister(s) has agreed that, subject to 1.3, the
aims of [the NDPB] should be as follows:
i)
ii)
iii)
4 Ministerial responsibility
4.1 The {name or office of the responsible and successor minister] will account for the
NDPB's business in Parliament.
5 Sponsor department’s Accounting Officer’s specific accountabilities and
responsibilities
5.1 The sponsor department’s Accounting Officer (PAO) has designated the Chief
Executive as [the NDPB’s] Accounting Officer. (The respective responsibilities of the AO
and Accounting Officers for NDPBs and other arm’s length bodies are set out in Chapter 3
180 I Managing Public Money
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ANNEX 7.4 FRAMEWORK DOCUMENT FOR EXECUTIVE NDPBS
of Managing Public Money which is sent separately to the NDPB Accounting Officer on
appointment.)
5.2. The sponsor department's AO is accountable to Parliament for the issue of any grant-
in-aid to [the NDPB]. The AO is also responsible for advising the responsible minister:
. on an appropriate framework of objectives and targets for [the NDPB]
in the light of the department's wider strategic aims and current PSA;
° on an appropriate budget for the NDPB in the light of the sponsor
department's overall public expenditure priorities; and
° how well the NDPB is achieving its strategic objectives and whether it
is delivering value for money.
53 The sponsor department's AO is also responsible for ensuring arrangements are in
place in order to:
. monitor the NDPB’s activities on a continuous basis;
. address significant problems in the NDPB, making such interventions
as are judged necessary;
. periodically carry out an assessment of the risks both to the
department and NDPB objectives and activities;
. inform the NDPB of relevant government policy in a timely manner;
and
. bring concerns about the activities of the NDPB to the full (NDPB)
board, requiring explanations and assurances that appropriate action has been
taken.
54 [Named team] in the sponsor department is the primary contact for the NDPB. They
are the main source of advice to the responsible minister on the discharge of his or her
responsibilities in respect of the NDPB. They also support the sponsor department's
AO on his or her responsibilities toward the NDPB.
6 Responsibilities of the Chief Executive as NDPB Accounting Officer
General
61 The Chief Executive as Accounting Officer is personally responsible for safeguarding
the public funds for which he or she has charge; for ensuring propriety and regularity
in the handling of those public funds; and for the day-to-day operations and
management of the [mamed NDPB]. In addition, he or she should ensure that the
{named NDPB] 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 to
Managing Public Money.
Responsibilities for accounting to Parliament
62 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;
Managing Public Money _I81
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ANNEX 7.4 FRAMEWORK DOCUMENT FOR EXECUTIVE NDPBS
° signing a Statement of Accounting Officer's responsibilities, for
inclusion in the annual report and accounts;
. signing a Statement on Internal Control regarding the system of
internal control, for inclusion in the annual report and accounts;
° ensuring that effective procedures for handling complaints about the
NDPB are established and made widely known within the NDPB;
. 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 AO of the sponsor Department,
when summoned before the PAC on the NDPB’s stewardship of public funds.
Responsibilities to the [named sponsor department)
63 Particular responsibilities to [mamed sponsor department] include:
° establishing, in agreement with the department, the [yamed NDPB’s]
corporate and business plans in the light of the department's wider strategic
aims and current PSA(s);
. 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 syends 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
64 The chief executive is responsible for:
. advising the board on the discharge of the [named 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 NDPB’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 paragraphs 3.7.5 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, questionable feasibility,
or is unethical.
182 Managing Public Money
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ANNEX 7.4 FRAMEWORK DOCUMENT FOR EXECUTIVE NDPBS
7 The [named NDPB] Board
Tl 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. The board is expected to assure itself
of the effectiveness of the internal control and risk management systems.
72 The board is specifically responsible for:
° establishing and taking forward the strategic aims and objectives of the
NDPB 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 [aamed NDPB]
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 NDPB]}; is
informed in a timely manner about any concerns about the activities of
the [named NDPB]; 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;
e [where applicable] 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.
The chairman’s personal responsibilities
73 The chairman is responsible to the named minister. Communications between the
[named NDPB] 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
NDPB.
74 Inaddition, the chairman has the following leadership responsibilities:
. formulating the board’s strategy;
Managing Public Money 183
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ANNEX 7.4 FRAMEWORK DOCUMENT FOR EXECUTIVE NDPBS
° 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.
15 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
NDPB] business, as set out in the Government Code of Good Practice on
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 NDPB] needs when
board vacancies arise;
° he or she as:
sses the performance of individual board members when
being considered for re-appointment;
° there is a code of practice for board members in place consistent with
the Cabinet Office model Code.
Individual board members’ responsibilities
16 Individual board members should:
. comply at all times with the Board Members’ Code of Practice 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 [mamed NDPB].
8 Annual report and accounts
8.1 The [named NDPB] must publish an annual report of its activities together with its
audited accounts after the end of each financial year. The [named NDPB] shall
provide the department its finalised (audited) accounts by [30 June] each year.
82 The annual report must:
* cover any corporate, subsidiary or joint ventures under its control;
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¢ comply with the Treasury’s Financial reporting Manual (FreM);
e outline main activities and performance during the previous financial
year and set out in summary form forward plans.
83 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 [yamed NDPB'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
91 [Named NDPB] shall:
° establish and maintain arrangements for internal audit in accordance
with the Treasury's Government Internal Audit Standards (GIAS)
(http://www.hm-treasury.gov.uk/...gia_guidance.cfm);
. 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 GIAS 5.2;
. set up an audit committee of its board in accordance with the Cabinet
Office’s Guidance on Code of Practice for Public Bodies and the Audit
Committee Handbook;
. forward the audit strategy, periodic audit plans and annual audit
report, including the [tamed NDPB] 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 NDPB] and notify the
sponsor department of any unusual or major incidents as soon as possible.
92 The sponsor department’s internal audit service has a right of access to all
documents prepared by the NDPB internal auditor, including where the service is
contracted out.
10 External audit
10.1 The Comptroller & Auditor General (C&AG) audits the [named NDPB] annual
accounts and lays them before Parliament, together with his report.
In the event that the [named NDPB] has set up and controls subsidiary companies, the
{named NDPB] 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 NDPB shall discuss with the
sponsor department the procedures for appointing the C&AG as auditor of the companies.]
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10.2 The C&AG:
° will consult the department and the NDPB 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 [mamed NDPB];
° 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 [yamed NDPB];
. 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.
103 The C&AG may carry out examinations into the economy, efficiency and
effectiveness with which the NDPB 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 NDPB 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 NDPB records and personnel for any
purpose including, for example, sponsorship audits and operational investigations.
Management and financial responsibilities
it} Managing Public Money and other government-wide corporate guidance and
instructions
Il Unless agreed by the department and, as necessary, HM Treasury, [Named NDPB]
shall follow the principles, rules, guidance and advice in Managing Public Money,
referring any difficulties or potential bids for exceptions to [mamed team] in [department]
in the first instance. A list of guidance and instructions with which the NDPB should
comply is in Appendix [2].
112 Once the budget has been approved by the sponsor department [and subject to
any restrictions imposed by statute]{the responsible minister's instructions]Ithis
document), the NDPB shall have authority to incur expenditure approved in the budget
without further reference to the sponsor department, on the following conditions:
. the NDPB shall comply with the delegations set out in Appendix 2.
These delegations shall not be altered without the prior agreement of the
sponsor department;
. the NDPB shall comply with Managing Public Money regarding novel,
contentious or repercussive proposals;
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. 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 NDPB shall provide the sponsor department with such information
about its operations, performance individual projects or other expenditure as
the sponsor department may reasonably require.
iP Corporate governance
Board appointments - the chairman and board members
11 The NDPB chairman and board members are appointed for a period of [three]
years by the responsible minister. Such appointments will comply with the Code of
Practice of the Office of the Commissioner on Public Appointments
(www.ocpa.gov.uk/the code of _practice.aspx).
Board appointments — the chief executive
2 The chief executive is appointed by the responsible minister in consultation with
[with the agreement of] the chairman.
Composition of the board
123 In line with the government’s Code of Practice on Corporate Governance
(http://www.hm-treasury.gov.uk/...governance_corporate.cfm) , 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 NDPB’s business. For [named NDPB] 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 management
13.1 The [named NDPB] 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/...risk). It should adopt and implement policies and practices to safeguard
itself against fraud and theft, in line with the Treasury’s guide: Managing the Risk of Fraud
(http://www.hm-treasury.gov.uk/...fraud_guide for managers.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.
4 Corporate and business plans
141 [By date] the [named NDPB] 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 NDPB shall agree with the department the issues to be addressed in the plan
and the timetable for its preparation. The plan shall reflect the NDPB’s statutory 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
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decisions). The plan shall demonstrate how the NDPB contributes to the achievement of
the department's PSA targets.
142 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 NDPB on its website and separately be made available to staff.
143 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 NDPB.
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 NDPB [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 NDPB.
152 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 Grant-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 NDPB] 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 NDPB. Grant-in-aid not
drawn down by the end of the financial year shall lapse. Subject to approval by Parliament
of the relevant Estimates provision, where grant-in-aid is delayed to avoid excess cash
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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.
163 {In the event that the department provides the NDPB separate grants for specific
(ring-fenced) purposes, it would issue the grant as and when the NDPB needed it on the
basis of a written request. The NDPB would provide evidence that the grant was used for
the purposes authorised by the department. The NDPB shall not have uncommitted grant
funds in hand, nor carry grant funds over to another financial year.]
17 Reporting performance to the department
Al The NDPB 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 NDPB 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 on a regularly [specify]. The NDPB’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
7.2 As a minimum, the NDPB shall provide the department with information monthly
that will enable the department satisfactorily to monitor:
. the NDPB’s cash management;
. its draw-down of grant-in-aid;
. forecast outturn by resource headings;
° other data required for the Combined On-line Information System
(COINS).
NDPB/Department working level liaison arrangements
173 Officials of [named] team in the sponsor department will liaise regularly with
NDPB officials to review [NDPB] financial performance against plans, achievement against
NDPB targets and the NDPB 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 NDPB.
18 Delegated authorities
18.1 The NDPB's delegated authorities are set out in [appendix 2]. The NDPB 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 NDPB’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;
° making any significant change in the scale of operation or funding of
any initiative or particular scheme previously approved by the department;
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° 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 NDPB staff
Broad responsibilities for NDPB staff
19.1 Within the arrangements approved by the responsible minister [and the Treasury]
the NDPB 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 NDPB 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 NDPB 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
http://www.civilservice.gov.uk/modelcode .
Staff costs
19.2 Subject to its delegated authorities, the NDPB 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 Guide to
Public Bodies that provides guidance on_ staff issues in public bodies
(www. ervice.gov.uk/other/agencies/guidance_for_departments/pb_guidance/inde
sp).] NDPB staff are subject to levels of remuneration and terms and conditions of service
(including pensions) within the general pay structure approved by the sponsor department
[and the Treasury]. The NDPB has no delegated power to amend these terms and
conditions.
ivi
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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 (www.civilservice.gov.uk/publications/doc/csmc_jun06.doc)
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 NDPB 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 NDPB or departmental rates [whichever is applicable]. Reasonable actual costs
shall be reimbursed.
19.8 The NDPB 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 NDPB 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 NDPB, 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 NDPBs covered by the
PCSPS partnership arrangement, and for PCSPS by-analogy versions.]
19.10 Any proposal by the NDPB 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 NDPB status (and winding-up arrangements)
20.1 The NDPB will be reviewed every [5] years. The date of the next review will be in
20(2].
2 Arrangements in the event that the NDPB is wound up
21.1 The sponsor department shall put in place arrangements to ensure the orderly
winding up of the NDPB. In particular it should ensure that the assets and liabilities of the
NDPB 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 NDPB 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;
° specify the basis for the valuation and accounting treatment of the NDPB’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 funds are in place to pay for such audits. It shall
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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 NDPB takes on the role, responsibilities, assets and liabilities,
the succeeding NDPB 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.
22 The NDPB shall provide the department with full details of all agreements where
the NDPB 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
NDPB.
LIST OF APPENDICES TO THE SPECIMEN DOCUMENT
Appendix1 - List of delegated authorities (not attached)
Appendix2 - List of government-wide corporate guidance instructions (attached)
Signed......... Signed..........
Date......... Date..........
(On behalf of the department) (On behalf of the NDPB)
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APPENDIX 2 TO SPECIMEN DOCUMENT
Compliance with government-wide corporate guidance and
instructions
The NDPB 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 http://www.hm-
treasury.gov.uk/.../governance_risk/psr_governance_corporate.cfm;
* Managing Public Money (MPM);
. Government Internal Audit Standards, http://www.hm-
treasury.gov.uk/...gia_guidance.cfm;
* Management of _ Risk:
treasury.gov.uk/media/3/5/
Principles and Concepts: (www.hm-
035 B- BCDC-D4B3-11057A7707D2521F.pdf
. Managing the Risk of Fraud, (www.hm-.
treasury.gov.uk/media/C/3/managing the risk fraud guide for managers.pd
£
. Government Financial Reporting Manual (FReM), www. financial-
reporting.gov.uk/;
. Fees and Charges Guide, Chapter 6 of MPM;
. Departmental Banking: A Manual for Government Departments, annex 5.7 of
MPM;
° relevant Dear Accounting Officer letters;
. Regularity, Propriety and Value for Money, www.hm-
treasury.gov.uk/media/A/2/Reg_ Prop_and_VfM-November04.pdf;
° The Parliamentary Ombudsman’s Principles of Good Administration
www.ombudsman.org.uk/improving services/good_administration/index.ht
ml;
. Consolidation Officer Memorandum, and relevant DCO letters;
. relevant Freedom of Information Act guidance and instructions (Ministry of
Justice);
. Model Code for Staff of Executive Non-departmental Public Bodies (Cabinet
Office);
° 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;
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° recommendations made by the Public Accounts Committee, or by other
Parliamentary authority, that have been accepted by the Government and
relevant to the NDPB.
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ANNEX 7.5
PRIVATE FINANCE INITIATIVE
money.
Private Finance Initiative (PFI) deals offer public sector organisations a structured way of
contracting with a supplier to construct a facility and then purchase associated services of a
specified quality over a sustained period. Because the private sector contractor puts its own
funds at risk, it has powerful incentives to deliver to time and cost, and can thus offer value for
PFI procurement is a flexible, versatile and often effective technique. But it is not
appropriate for every project.
ATS.
PFI is a method of procuring capital infrastructure, although it is not suited to all types of
procurement. But used effectively, it can offer a number of strengths in delivering public
infrastructure (see box A.7.5A). These stem from:
sharing risk in delivering public projects within a structure in which the private
sector contractor puts its own capital at risk;
incentivising contractors through contractual penalties and bonuses, reinforced by
the due diligence requirements imposed by the lenders financing them.
box A.7.5A strengths of PFI
the desired service standards are maintained
new services are more likely to start on time
projects are more likely to be completed on budget
contractors are motivated to deliver the required service over the whole life of the asset
transfer of risk to the party best placed to manage it
ATS2
ATS3
PFI does not suit every project. It works best where:
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;
there is experience (or reasonable expectation) of PFI offering better value for
money for the public sector compared with other forms of procurement (see annex
4.6). For PFI contracts in the public sector there is a standardised form of VFM
analysis;
PFI projects should not be at the expense of staff terms and conditions. This is
covered by the standard PFI contract (see paragraph A.7.5.6)
Conversely, PFI is not usually suitable for:
individual projects too small to justify the transaction costs; or
large innovative IT projects, since it is rarely practical to specify the requirements
sufficiently firmly in advance.
Managing Public Money
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ANNEX 7.5 PRIVATE FINANCE INITIATIVE
AISA The main procurement principles continue to apply when developing PFI deals. 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.
A155 Using standard forms of contract can aid the negotiation process, giving confidence to
both parties and helping avoid mistakes. For public sector PFI contracts, the Treasury has
produced a standard set of terms and conditions known as the Standardisation of PFI contracts.
(www.hm-
treasury.gov.uk/documents/public_private_partnerships/ppp_standardised_contracts.cim) Any
departure from these must be approved by the Treasury.
ATS.6 The use of such contracts does not, however, suggest that PFI deals can be entered into
unthinkingly. Public sector organisations should strive to be intelligent customers, providing
incentives to stimulate enough competition to achieve good value in procurement costs. Public
sector organisations need to be conscious that their own reputations may be at risk when PFI
contracts are carried out.
AIST Once a major asset has been constructed, it may be possible for the private sector
partner to refinance the project more cheaply. The contract should specify how the financial
benefit should be shared with the public sector purchaser. The Treasury has a standard
refinancing protocol to achieve this.
ATSB Further information including the standard PFI contract can be found on the Treasury
Website www.hm-treasury.gov.uk/documents/public_private_partnerships/ppp_index.cfm).
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ANNEX 7.6 WIDER MARKET ACTIVITIES
Wider markets activity is part of good asset management in the public sector. 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.
A761 The Wider Markets Initiative encourages public sector organisations to adopt an
entrepreneurial approach to making the most effective and efficient use of public assets by
exploiting their commercial potential. Wider market activities are described in box A.7.6A.
box A.7.6A wider market activities
* not statutory except where the enabling power gives authority to charge commercially
«discretionary, using capacity not needed for statutory services
* charged commercially, with a financial objective to produce revenue, not to deliver public policy objectives
‘* sold into a competitive market
‘* must comply with general competition law, avoiding distortions
A162 — Exploiting the commercial potential of assets can take many forms including:
° selling existing goods and services;
. developing new goods and services from existing assets;
° licensing;
* leasing arrangements; or
° sponsorship activities.
A763 Public sector organisations should seek out and implement wider market opportunities.
However, the case for acquiring any new assets should not be pursued at the expense of
delivering the organisation’s core objectives. Nor should public bodies deliberately acquire or
retain more assets than they need with the aim of producing a future income stream.
Developing a wider markets opportunity
A764 The process and resources needed to develop and implement a wider market
opportunity will vary depending on the specifics of the opportunity. Partnerships UK has
produced a guidance note Assessment of Potential
(www.partnershipsuk.org.uk/newsAttachments/documents/WMAssessment_guidance3.pdf)
which outlines tools and techniques to help public bodies conduct an assessment of potential for
wider markets activity.
A765 Public sector organisations should subject all proposals to a thorough commercial
appraisal in developing any business case. Some of the factors to be addressed are identified in
box A.7.6B. Guidance on all aspects of developing wider market projects is available from
Partnerships UK (www.partnershipsuk.org.uk/).
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ANNEX 7.6 WIDER MARKET ACTIVITIES
box A.7.6B factors to consider in the development of wider market projects
© should the project be accommodated within the existing structure; a new unit or body within the public
sector; or a public private partnership
¢ how will the activity be managed and staffed to ensure public services are not adversely affected
e the costs involved in start up and the ongoing costs, including any investment constraints
* pricing and revenue assumptions, within the appropriate pricing constraints, and targets to ensure they can
expect to secure an adequate return
© the degree and nature of the risks involved (including financial, legal and reputational risks) and how they
can be managed
© appropriateness, propriety and legality
‘© the financial return the project could deliver
* compliance with competition law (see annex 6.4)
A166 All wider market projects where the full annual cost is £1m or more, or where the
income is projected above 5% of the body’s total, require Treasury approval. So do any projects
that have the potential to be contentious or repercussive.
47.6.7 Public sector organisations undertaking wider market activities should agree their
budgeting and accounting treatment with the Treasury.
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ANNEX 7.7
WORKING WITH THE THIRD SECTOR
This annex discusses the working relationships between central government organisations and
third sector bodies, with pointers to further guidance.
A771 The third sector encompasses a diverse community of voluntary and community
organisations, charities, social enterprises, mutuals and co-operatives. The 1998 Compact on
Relations Between the Government and Voluntary and Community Sector in England and its
associated Codes of Good Practice aims to improve their working relationship.
A712 The Compact is a framework for partnership working between government and the third
sector. It provides a template for designing or reviewing working relationships and understanding
their impact on both sectors. It applies to all the public sector.
A173 Supporting the Compact is a series of codes, including the Funding and Procurement
Code. The Compact and its supporting Codes should be read with this document as it is important
that public resources are not misused, and that good value for money is delivered. At the same
time it is important to recognise that restrictive terms can frustrate the ability of funded bodies to
deliver the objectives in the round. So some flexibility is called for in designing the terms of
working relationships between public sector and third sector organisations in the delivery of
public and community services, provided that good value for public money can be secured. Box
A.7.7A identifies some key factors to consider.
box A.7.7A_ partnerships with third sector organisations: considerations
* Proportionality: controls over payments, information requirements, monitoring, evaluation, reporting
arrangements, external inspection and audit should always be proportional to the level of, and risk to, the
funds involved.
* Risk management: public sector funders should be aware of the dangers of excessive caution in making
funding decisions. They should assess prospective partners’ risk profiles and adjust the framework of
control accordingly to share risk fairly.
* Attention to outcomes: public sector funders need to seek assurance through appropriate appraisal,
evaluation and audit, but without damaging the value for money of projects.
A114 Improving financial relationships with the third sector: Guidance to funders and
purchasers sets out best practice and guidance on effective and efficient use of public funds
provided to the third sector consistent with proper public accountability. All public bodies should
seek to follow this guidance, including where they are acting as agents for EU funding.
A715 Box A.7.7B provides links to other useful sources of information in dealing with third
sector bodies.
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box A.7.7B sources of guidance
Compact - www.thecompact.org.uk
The Compact Funding and Procurement Code, March 2005
www.thecompact.org.uk/information/100023/00219/publications/
Working with the Third Sector, National Audit Office, 2005
www.nao.org.uk/publications/nao_reports/05-06/050675.pdf
Improving Financial Relationships with the Third Sector; Guidance to Funders and Purchasers www.hm=
treasury gov.uk/spending reviewspend _ccr/spend_ccr_guidance.cfm
Financial relationships with third sector organisations: a decision support tool for public bodies in
England, NAO, 2006 www.nao.org.uk/better%Sfunding/
The Role of the Voluntary and Community Sector in Service Delivery: A Cross Cutting Review, HM
Treasury, 2002 www.hm-treasury.gov.uk/spending review/spend_ccr/spend_ccr_voluntary.cfm
Exploring the role of the third sector in public service delivery and reform: A discussion document, HM
Treasury, 2005 www.hm-treasury.gov.uk/media/34C/ID/ves_thirdsector210205.pdf
Independent Review of Public Sector Efficiency: Releasing resources to the front line, Sir Peter Gershon
OBE, July 2004 www.hm-
treasury.gov.ul/spending review/spend sr04/associated documents/spending sr04_efficiency.cfm
Think Smart, think voluntary sector, OGC and Home Office, June 2004
www.cabinetoffice gov.uk/third sector/documants/voluntary and _community/funding guidance/think_s
mart.pdf
Partnership in Public Services: An action plan for third sector involvement, Office of the Third Sector,
December 2006
www.cabinetoffice.gov.uk/third sector/documents/public_service_delivery/psd_action_plan.pdf
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