The NAO recognizes that the Treasury was given a difficult challenge in setting up the payment Scheme. It had to set up a complex operation in a short period of time so that the first payments could be made by June 2011.But not enough preparation work was done before the Scheme went live. Once the Government announced the decision to launch the Scheme, the Treasury had to design the Scheme’s policy in parallel with delivering the service within a tight timetable. Also, systems had to be developed in the Treasury’s partner in operating the scheme, National Savings and Investments (NS&I), which was a significant departure from normal operations.

The Government’s target of making the first payment by June 2011 was met, but further payments to former policyholders have been severely delayed. It was initially planned that £500 million should have been paid out by the end of 2011-12. This target was not met. By March 2013, the Scheme had made 407,000 payments, totalling £577 million. The Scheme has made only 35 per cent of its total payments and spent 72 per cent of its original administration budget.

The Scheme’s objective of paying all traced former policyholders by the end of March 2014 is at risk. The Treasury plans to close the Scheme in April 2014 having made all the payments to Investors and Groups, and the first two annual payments to those who held an annuity. However, a large number of payments remains to be made in the final year of the scheme.

Previous NAO reports have highlighted significant potential for financial savings and service improvements. For example, more efficient and better coordinated use of office space could reduce central government property costs by £650 million a year by 2020. Each of the areas in the Whole-Place Community Budgets scheme has identified potential benefits from taking a more integrated approach to frontline services, focusing on outcomes like preventing avoidable hospital admissions or reducing reoffending. Greater Manchester, which covers ten local authorities, has estimated net savings of some £270 million over five years, while in West Cheshire savings of £56 million are estimated for the same period.

In general, government has only limited information for identifying opportunities for integration or making an assessment of costs and benefits, which is needed to support the case for integration. In some instances where government has identified integration opportunities, benefits have not been achieved because of implementation difficulties, for example where government has underestimated the challenges integration has posed or there has been a lack of incentives for bodies to work together.

In the 17 departmental business plans published in May 2012, 24 per cent of departments’ 444 ‘actions’ referred to joint working with other departments. NAO analysis suggests there are varying degrees of collaborative working across departments. While the centre of government has recognized the importance of integration, it does not have clearly defined responsibilities to support or encourage frontline integration initiatives across government.

While it is early days for Whole-Place Community Budgets, central government and the four local areas have worked together effectively to assess the case for local service reforms.

The true scale of potential benefits will become clear only if projects are implemented and evaluated robustly. Foundations have been laid but continuing collaboration – including sharing of data – between local and central government and delivery partners is essential to maximize the potential of Whole-Place Community Budgets. There is some room for improvement. For example, local areas recognized that in some cases they needed better information on the costs and effectiveness of current services, to mitigate the risk of over or under-estimating the benefits of change.

The government expects £310 billion to be spent by 2015 and beyond on new infrastructure projects in sectors such as energy, rail, roads, water, waste, flood defences and digital communications. Such large-scale infrastructure projects pose significant challenges. With limited funds available, the government is looking to private companies to wholly own and finance around 64 per cent of the £310 billion, with the burden of funding likely to shift towards the public as consumers rather than taxpayers.

The first of the risks to achieving value for money is that forecasters might get wrong the need for infrastructure in the long term (demand forecasting for many years ahead is an inexact science). Secondly, uncertainty over government policy might lead project sponsors, lenders and contractors to defer or abandon projects in the UK for opportunities elsewhere.

Thirdly, there is the possibility of a failure to take into account the cumulative impact on consumers of funding those infrastructure projects where the costs are recovered by charging users. Increasing the burden on consumers may increase the risk of financial hardship, or the need for unplanned taxpayer support. The full impact of spending on economic infrastructure in the years ahead is unclear. While there is information on individual sectors, no overall assessment has been undertaken by government.

Taxpayers may be exposed to substantial losses as a result of government guarantees to bear some project risks (such as cost overruns) should they materialize. The government has taken steps to attract new sources of finance. One of these steps has been its offer to give guarantees to attract construction finance which, while it may help to source new finance, may also expose government to increased financing risk. The Treasury is seeking to address the final risk, that delivery costs might turn out to be higher than they should be, with a cost reduction programme aimed at reducing costs by 15 per cent.

The NAO has made a series of recommendations to help ensure value for money is achieved. It calls for the Treasury to work with departments and regulators to provide greater clarity for consumers regarding the financial impact of planned infrastructure investment. Where there are limits on affordability and availability of finance, the NAO notes that the Treasury and departments may need to refine their prioritization of infrastructure programmes and projects.

The National Audit Office has welcomed the publication by the Treasury of the second Whole of Government Accounts (WGA) – a set of accounts showing in one document the financial position of the whole public sector. While describing the accounts as a key means through which Parliament and other stakeholders can scrutinize public finances and hold government to account, the Comptroller and Auditor General has raised some concerns.

The WGA shows government’s overall financial position and performance and how it is affected by past decisions. Over 2010-11, the government significantly reduced its annual deficit (the difference between expenditure and revenue) from £163 billion to £94 billion. But government’s overall net liability (the difference between what government owes and owns) remained at some £1.2 trillion. This is due to a reduction in the public sector pension liability being offset by a rise in government borrowing.

Despite the limited opportunities to make significant changes, the 2010-11 WGA is improved compared with the previous year. More bodies (such as the Bank of England) are included, the accounting standards used by local government have been brought into line with those used by central government and comparative data has been added.

However, the Comptroller and Auditor General has raised a number of concerns about the WGA. For the WGA to be used more, it needs to be produced faster. These accounts were completed 19 months after the end of the financial year to which they relate. While the Treasury did publish an unaudited summary in July 2012, there were subsequent changes to the data. This was to correct significant errors identified both by the Treasury and the NAO as part of its audit.

The audit also revealed significant issues with the quality and consistency of the data provided by the health and education sectors. Some bodies, such as Network Rail, are still excluded from the WGA even though accounting standards require their inclusion. In addition, the Comptroller and Auditor General has raised concerns over the completeness and valuation of school assets.

Since 2007, the Treasury has made a series of large financial interventions to support the financial stability of UK banking. These interventions supported three broad aims: to protect depositors; to maintain liquidity and capital for UK banks through the period of market closures; and to encourage banks to lend to creditworthy borrowers.

To remove the support, the guarantees will be withdrawn, the loans repaid and, eventually, the shares returned to private ownership. As at March 2012, the total outstanding support stood at £228 billion (down from the total a year before of £456 billion and a peak of £1.2 trillion). Of the £228 billion, £109 billion constitutes outstanding guarantee commitments and £119 billion was provided as cash.

In return for providing the support, the Treasury has charged fees and interest of £14 billion to 31 March 2012. Most of the income has been from fees charged on the financial guarantee schemes and has included large one-off payments such as the fee paid by Lloyd’s for the Asset Protection Scheme. Unless the shares in RBS and Lloyd’s Banking Group start paying substantial dividends, the Government as a whole will start to make annual cash losses on the support once the cost of borrowing the money used to purchase the shares and provide the loans is taken into account.

Today’s report, which is published as part of HM Treasury’s departmental financial statements, notes that the income provided by fees and interest is less than would be expected from a normal market investment and has not compensated the taxpayer for the degree of risk accepted by taxpayers in providing the support. Once the opportunity cost and risks are factored in, the schemes have represented a transfer of at least £5 billion from taxpayers to the financial sector. This can be regarded as part of the cost of preserving financial stability in the crisis and, as the NAO reported in 2009, had the support not been provided, the potential costs would have been difficult to envision.

The Treasury has invested £66 billion in shares in RBS and Lloyds to provide the banks with sufficient capital. The shares are held in the accounts at their market value, which has fallen by more than £18 billion over the year, and by more than £32 billion since the government’s original investment. Although the Government remains committed to returning the banks to private ownership, UK Financial Investments Ltd has warned that, until economic and regulatory uncertainties subside, it will be difficult to deliver value for money from a sale of the shares.

16 July 2012

The National Audit Office has today reported on the creation of Northern Rock plc, its financial performance while in public ownership, whether the sale of Northern Rock plc was the best available option and whether its sale was well handled.

The spending watchdog found that the Treasury’s decision in early 2009 to support mortgage lending by splitting Northern Rock in two was reasonable but based on a business plan prepared by Northern Rock management which events quickly showed to have been optimistic. The Treasury went ahead with the split without further detailed analysis of the consequences for the taxpayer. The alternative of selling the deposits and closing down the business was, however, unlikely to have been significantly better in financial terms and would not have delivered mortgage lending.

Although targets were not met, lending by Northern Rock plc was over 20% of all mortgage lending during 2010 and 2011. The financial performance of the business was worse than planned, principally owing to low interest rates continuing for longer than had been expected. In 2011, UK Financial Investments (UKFI), a body owned by the Treasury, reviewed a full range of options for the future of Northern Rock plc, including turning it into a building society or selling shares on the stock exchange. The NAO considers that UKFI’s recommendation for an early sale was the best way to minimise the losses.

According to today’s report, UKFI ran the sales process well. Bidders were positive about the process, describing it as transparent and fair. Competitive tension was maintained and, in the final negotiations, UKFI improved the overall offer from Virgin Money. The NAO expects the taxpayer to lose £480 million of its original £1.4 billion investment in Northern Rock plc.

If account is taken of the likely value of Northern Rock assets remaining in public ownership, UKFI expects that the taxpayer will recover all of the cash provided, including the loss on the sale of Northern Rock plc and the cost of financing the gilts issued to raise the cash. However, the current estimate is that there could be a net present cost for the taxpayer of some £2 billion by the time the assets are fully wound down. This net present cost should, however, be seen as part of the overall cost of securing the benefits of financial stability during the financial crisis.

The National Audit Office has welcomed the publication by the Treasury of the very first audited set of accounts showing in one document the financial position of the whole public sector. The accounts, the Whole of Government Accounts (WGA), are described as an important milestone for the Treasury in its improvement of the transparency with which the Government manages public finances and its accountability. However, the NAO highlights some limitations in the information provided.

The WGA constitutes the first and most comprehensive account of what the UK Government spends and earns and what it owns and owes. It is broader than similar accounts published by other countries, for it consolidates the financial positions of central government, the devolved administrations, local government, the health service and public corporations.

The WGA shows that, in 2009-10, the public sector owned assets to the value of £1.2 trillion and liabilities totaling £2.4 trillion, giving a net liability of £1.2 trillion. The shortfall between operating revenues and expenses (including finance costs) during the year was £165 billion.

The NAO does, however, highlight important limitations in this first WGA. Among these are that the financial position it presents is some 20 months old, a consequence of the amount of preparation that has to be undertaken. Of particular concern is that the WGA significantly understates the true value of public assets and liabilities by excluding the publicly owned banks, the Bank of England and Network Rail which, in the opinion of the Comptroller and Auditor General, are owned and controlled by government. It also gives limited analysis of spending across the main functions of government, such as defence and education, or on services such as consultancy, which would make the account more useful to the reader.

The Comptroller and Auditor General has qualified his audit opinion. Among the reasons for his qualification are the exclusion of the government-controlled bodies that, in the C&AG’s view, should have been included to comply with the International Financial Reporting Standards.

In line with international good practice, the Treasury and the National Audit Office (NAO) have worked to ensure transparency of the scale and costs of the various Government interventions. The NAO set out a summary of the support in our December 2009 report Maintaining financial stability across the United Kingdom’s banking system. We updated this in December 2010 with Maintaining the financial stability of UK banks: update on the support schemes.

This Report on HM Treasury’s Resource Accounts for 2010-11 sets out the scale and costs of the Government’s financial interventions as at 31 March 2011, on the same basis of disclosure as our previous reports to Parliament. It shows how these numbers reconcile to the Treasury’s Resource Accounts and highlights certain additional disclosures in the notes to the Resource Accounts on the financial stability interventions.

July 2011

The buy-back by taxpayer-owned banks, Northern Rock (Asset Management) and Bradford & Bingley, of £2.4 billion of their subordinated debt over the course of 2010 saved the taxpayer an estimated £1.5 billion at present value, according to the National Audit Office. Subordinated debt is debt that ranks after other loans in terms of pay-out in the event of liquidation.

These buy-backs have taken place against the background of the Treasury’s approach, designed to maximize value for money for the taxpayer, of ensuring the banks are able to wind down in an orderly way, perhaps over 15 years. To achieve this, the Treasury has had to provide subsidized loans to the banks and various guarantees and assurances. So long as Treasury follows its current approach, it protects all the creditors of the banks including the holders of subordinated debt who in the event of insolvency might lose everything.

It was originally assumed subordinated debt holders would absorb losses in times of difficulty, and they were paid a correspondingly high interest rate. In the event, taxpayers are actually paying to support the banks and are taking on the risk that should have fallen to investors.

The NAO, therefore, concludes that the subordinated debt holders were being paid an excessive interest rate for risk that was being, in practice, adopted by taxpayers, and that buying back that debt was value for money.

The buy-backs of debt were opportunistic, although many other banks had undertaken similar transactions. UK Financial Investments, the arm’s-length body of the Treasury, helped to ensure the buy-backs were well-executed and the pricing, between 25 and 57 pence to the pound, maximized value for the taxpayer while encouraging the holders to sell.

However, the holders of £619 million of subordinated debt did not accept the offer to buy back the debt and a further £825 million was not included in the offer. This debt remains expensive and is of limited value to taxpayers. The Treasury should continue to explore ways of eliminating this debt at minimal cost.

More could be done to manage the risk of a reduction in the value of EU funds to the UK in the event of a depreciation in the euro, the National Audit Office said today.

The UK Government receives around £5 billion from the European Union each year to fund EU programmes in the UK. However, the relative value of the pound and the euro varies significantly, with the exchange rate fluctuating by up to 14 per cent in a single month. A 14 per cent change can lead to an increase or decrease of £700 million in the sterling value of funds provided by the EU if the exchange rate holds at that level.

The use of forward contracts (a form of hedging where the department and a commercial bank agree an exchange rate in advance) has helped reduce the potential funds exposed to a fall in value from £8.5 billion to £2.4 billion in 2009-10. However wider use of hedging could reduce still further the amount of taxpayer funds at risk. The Department for Work and Pensions and the Department for Communities and Local Government, which do not hedge, need to review their foreign exchange management policies and learn from the Department for Environment, Food and Rural Affairs which does. CLG and DWP are exposed to losses of around £150 million per ten per cent incremental depreciation of the euro, but the UK can benefit by only around £20 million from each equivalent appreciation.

Each department managing EU funds works in isolation on developing its policy. Such an arrangement is not cost effective. These departments would benefit from more detailed guidance from HM Treasury in this area, and from developing more pooled expertise to reduce duplication of effort.

Today’s report points out that government bodies require considerable expertise and support to ensure the most appropriate and cost-effective hedging arrangements are put in place. While the Rural Payments Agency has protected the UK exchequer from volatility in the value of EU funds available to reimburse UK payments, the arrangements have cost some £69 million more than they might. Some £29 million arose from administrative error with the remainder the result of forecasting hedging requirements being out by around 3 per cent.