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HM Treasury Departmental Investment Strategy 2004

Section 1: Strategic overview

1.1. This is the Departmental Investment Strategy (DIS) of the Treasury which comprise the core Treasury and its agency, the Debt Management Office (DMO). The Office of Government Commerce (OGC) is a separate office of the Treasury. The nature and scale of OGC’s asset base and capital programme differ significantly from those of the core Treasury. Its strategy is therefore presented separately. Further details relating to OGC, including its DIS, can be found on the OGC website..

1.2. This DIS sets out in broad terms how the Treasury manages and invests its capital. It incorporates details of existing assets and demonstrates how the Department is planning to invest its capital allocation for 2005-06 to 2007-08 the period covered by the Spending Review 2004 (SR04).

1.3 The Treasury’s aim is to raise the rate of sustainable growth and achieve rising prosperity and a better quality of life, with economic and employment opportunities for all. This aim is underpinned by a number of high-level objectives and Public Service Agreement (PSA) targets, which have been set in order to measure progress towards the aim. Our core activities are primarily focused around: policy development and legislation; setting and monitoring of budgets; and providing advice and guidance to Ministers.

1.4. The Treasury spends capital in order to help ensure effective delivery of its objectives and PSA targets. Capital is allocated to the Treasury as a result of the Spending Review process and delegated to accountable managers. Delivery is reviewed in the course of the Treasury’s annual business planning and normal management reporting processes.

1.5. The Treasury’s capital expenditure is relatively small both in absolute terms and as a percentage of the Department’s overall expenditure. In the first year of the SR2004 period, 2005-06, the Department’s capital Departmental Expenditure Limit (DEL) will be only £4.78 million, which is equivalent to around 2.9 per cent of the Department’s 2005-06 total DEL expenditure of £166.86 million.

1.6. The total value of the Treasury’s assets at 31 March 2004 was £1,690 million. These assets are described in Section 2.

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Section 2: Asset Management

2.1. The Department’s asset base comprises:

Core Treasury

Office accommodation

2.2.1 The Treasury’s headquarters are located at 1 Horse Guards Road (1HGR), SW1. This building is the subject of an on-balance sheet PFI scheme, which ensures that the asset is maintained to its immediate post refurbishment condition without additional cost other than the existing unitary (inflation linked) payment. There is no maintenance backlog. No further public investment in the building is expected until the end of the PFI agreement in 2037.

2.2.3 The land and building are professionally revalued every five years. In the interim their values are adjusted in line with an index issued by the Treasury to all Departments. The indices issued in March 2004 indicated a medium-term decline of up to 19% in the value of the land and building. This would imply a charge to Treasury’s administration costs over the same period of £18.8 million consisting of downward revaluation (£15.5 million) and depreciation (£3.3 million). Since no revaluation reserve exists in respect of this building any downward revaluation has a direct impact on the operating cost statement.

2.2.4 In line with standard practice for on-balance sheet PFI deals the Treasury has established a creditor representing the value of its stream of payments to its private sector partner (other than payments for services delivered in-year) over the remaining life of the deal.

2.2.5 The neighbouring building, 1 Parliament Street (1PS), will be occupied in November 2004 by HM Revenue and Customs (HMRC). HMT’s SR04 submission and this DIS assume that the Treasury will not be responsible for accounting for any aspect of the east end.

2.2.6 1PS land and building assets were recognised on the Treasury’s balance sheet at 31 March 2004. The land was valued at £15.1 million. The building (like 1HGR) was valued at nil immediately prior to its refurbishment. The expectation is that when HMRC occupy 1PS, the land and building will be transferred to them. This is not reflected in the table at paragraph 3.2.

2.3.1 The Treasury has a £5,000 capitalisation threshold. As a result capitalised IT equipment largely consists of servers and network equipment. These are replaced at appropriate intervals – typically five to seven years. There is no maintenance backlog. Software and other assets are updated or enhanced as business needs require and as technological opportunities arise.

2.3.2 As part of the Treasury’s refreshment strategy, these assets are re-examined as to whether they can be usefully employed in future years, in which case they are retained. The assets are disposed of if no further economic benefit can be derived from them. All retained assets are subject to depreciation and periodic revaluations using appropriate indices.

Antiques

2.4.1 The Treasury holds a small number [369] of antiques, including several valuable silver items. A policy decision has been taken not to dispose of the silver because of its historical significance or because it was a gift whose donor we do not wish to offend. Some of these antiques are on loan to other Departments. These assets are subject to periodic revaluations but are not depreciated.

Strategic fixed financial investments

2.5.1 The Treasury holds strategic investments in three organisations in support of the economic policy agenda.

2.5.2 Under the Bank of England Act 1946 the Treasury is the sole shareholder in the Bank of England (BoE). This shareholding is valued in line with the Bank’s net asset value – currently some £1.5 billion. The cost of capital charge on this investment is therefore of the order of £100 million. The Bank’s balance sheet is managed in the interests of its policy objectives, rather than being driven by the impact on the Treasury’s resource budget. It was therefore agreed in the 2002 Spending Review that the cost of capital charge should score in Annually Managed Expenditure. As this DIS deals with matters of relevance to the Departmental Expenditure Limit, further discussion on the BoE is outside the scope of this paper. However further details relating to the BoE can be found on its website (www.bankofengland.co.uk).

2.5.3 The Treasury is also the sole shareholder, by way of public dividend capital, in the Royal Mint. For similar reasons to the BoE the cost of capital associated with this investment scores in Annually Managed Expenditure.

2.5.4 The Treasury holds 44.56% of the equity and subordinated debt issued by Partnerships UK (PUK). The Scottish Executive holds 4.44%, whilst private investors hold the remaining 51%. PUK is a public-private partnership (PPP) whose mission is to promote other PPPs.

2.5.5 The Treasury intends to maintain these investments over the period to 2008, to support the policy objectives outlined above. No acquisitions or disposals are planned. However fluctuations in valuations may impact upon the operating cost statement.

Current financial investments

2.6.1 In addition the Treasury also holds shares in a small number of former nationalised industries. The value of these at 31 March 2004 was £1.53 million. The policy case for holding most of these shares is now at an end and so the Chancellor has announced plans for their disposal. The plan is to dispose of most of these investments in 2004-05.

Debt Management Office

2.7.1 The DMO owns no land or buildings and instead has a 20-year commercial lease in the City of London for its office accommodation. Some improvements have been made to the leased accommodation to improve security, office layout and to promote effective working. Where significant these have been capitalised and are depreciated over 10 years, to correspond to the first contractual opportunity to terminate the lease.

2.7.2 The DMO’s fixed assets are largely IT hardware and software. The largest class of fixed asset is IT software, and is also expected to be the principal area of capital expenditure over the SR04 period. DMO has a £5,000 capitalisation threshold.

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Section 3: Budgetary implications of all assets and new investment plans

3.1.1 The Treasury’s capital budget relates to the costs of procuring new assets or enhancing existing assets. Its resource budget includes charges for depreciation (representing the amount of capital consumed), downward revaluations (where a revaluation reserve has not been built up) and for the cost of capital (representing the opportunity cost of holding that capital).

3.2 Core Treasury : DEL assets and associated charges

3.2.1 Two themes underlie the core Treasury’s balance sheet and investment strategy:

• ensuring that information systems and office accommodation make the greatest possible contribution to maximising the effectiveness of Treasury’s policy functions; and
• maintaining the strategic financial investments necessary for effective economic policy.

Information systems and office accommodation

3.2.2 As planned in its 2002 Investment Strategy, over the [SR02] period to 2005-06 the Treasury:

• is refreshing and reinforcing its internal and external information and communication systems through a programme of continuous development. The most significant single project is the introduction during 2005 of a new Electronic Document and Record Management System, which will strengthen the Department’s capacity to share and retrieve policy and other information;
• is increasing the proportion of its business undertaken electronically. For example the Single Data System project, now entering the system build phase, will integrate the Whole of Government Accounts (WGA) data collection system with existing inter-departmental financial information systems, for public expenditure and forecasting;
• has occupied its newly refurbished headquarters. The vision underlying the design of the new building – a more open environment, which promotes effective interaction between staff and facilitates the use of modern technology – has been carried into practice and is delivering tangible business benefits. The Treasury is optimising its use of the new building by investing in IT and other assets which support better communications; and
• has strengthened its Business Continuity arrangements in the light of its move to a single site and of the events of 11 September 2001, by procuring and equipping back-up accommodation outside Whitehall.

3.2.3 In the SR04 period to 2008 the Treasury investment plans build on this strategy. Current priorities for investment include improvements to:

• management of Treasury’s records;
• use of information and IT to achieve specific business objectives and to improve common business processes;
• e-communication with customers and external stakeholders;
• tools and connectivity for staff;
• reliability, robustness, resilience and security of information systems; and
• knowledge management.

3.2.4 These improvements will be delivered through a portfolio of projects. Most of these are fairly small by Government standards – few involve expenditure exceeding £1 million, and the aggregate annual expenditure is around £3.3 million. The planning time horizon is therefore relatively short – projects are often completed within two or three years of being added to the programme. For this reason, and because of the rapid pace of development in both the Treasury’s policy environment and the possibilities offered by information technology, it is not possible to identify a detailed portfolio of projects beyond 2006.

New plans

3.2.5 The only planned additions to the core Treasury’s asset base are those required to maintain and enhance the capability of the Treasury’s IT systems, as described above. These costs will be contained within our £3.3 million baseline.

3.2.6 There are no plans to dispose of any of these assets during the 2004 Spending Review period (other than life-expired IT equipment, which is donated to charity). Except as set out in paragraph 2.2.3 above, no major changes are expected in depreciation or the cost of capital charge, and the only material uncertainty relates to possible impairment of the values of the Treasury’s investments in the BoE (where the risk is cushioned by a revaluation reserve of some £0.2 billion against the total value of £1.5 billion) and shares in PUK (where no revaluation reserve exists against a value of £3.3 million).

3.2.7 The Treasury is not responsible for any capital grants or local authority capital support.

3.2.8 Some 96% of the core Treasury’s non-financial asset base is already covered by PFI arrangements. We do not presently foresee opportunities to extend this to the remaining £4 million of assets, but will take up such opportunities if they present themselves.

Strategic financial investments

3.2.9 Other than plans to dispose of the current investments there are no plans to add or dispose of the three fixed investments i.e. the BoE, the Royal Mint and PUK.
3.3 Debt Management Office: DEL assets and associated charges.

3.3.1 The DMO’s capital expenditure between 2005-06 and 2007-08 is expected to be in the region of £1.4m per year.

3.3.2 The main themes of DMO’s capital expenditure in the SR04 period reflect its role in providing daily operational outputs rather than policy and will be:

• further development of disaster recovery procedures and systems;
• overhaul or replacement of the DMO’s main IT operating systems;
• further development of HM Government’s product portfolio reflecting changing investor preferences and market innovations and also market structure.

3.3.3 The cost of depreciation of fixed assets has been projected and was factored into administration cost planning for SR04. The DMO anticipates no other material changes to its Balance Sheet composition or pattern of capital expenditure which require special recognition in its administration budget.

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Section 4: Systems and procedures

4.1. The Treasury’s only significant capital projects and programmes across the spending review period relate to information systems. In the course of the Treasury’s annual business planning process the Finance Committee, consisting of senior managers from across the Department, ensures there is a strong link between all such projects and the department’s objectives, operates as a central board to ensure consistency of appraisal and evaluation, and determines whether approval should be given. Resources are delegated to accountable managers. As part of the management reporting process the Operations Committee, which also consists of senior managers, ensure appropriate project management is in place and reviews delivery against plans.

4.2 The department seeks to use best procurement practice and techniques in order to secure best VFM. It aims to

• assess the total cost of acquisition, to ensure quality and economy over time, not just short term lowest price;
• carefully draw, assess and manage business cases, risk and contracts;
• clearly define procurement responsibilities for each project;
• use project managers and cross-functional teams where appropriate;
• employ project management methodology;
• undertake “gateway” reviews wherever appropriate;
• take advice from skilled professional procurement staff;
• collaborate with other government departments on procurement; and
• promote good relations with suppliers.

H M Treasury
November 2004 (Date agreed by HMT Finance Committee)

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