Transcript created by WordWave

Event: Public Accounts Commission Meeting

Date: 28 February 2006

Chairman: Rt Hon Alan Williams MP

Members present: Richard Bacon MP Edward Leigh MP John McFall MP Austin Mitchell MP Andrew Tyrie MP

Witnesses: Sir John Bourn KCB Comptroller and Auditor General

Mr Michael Whitehouse Assistant Auditor General - National Audit Office

Mr Phil Woodward Director of Finance - National Audit Office

Mr Jim Rickelton Assistant Auditor General - National Audit Office

Comptroller and Auditor Mr John Dowdall CB General for Northern Ireland

Assistant Auditor General for Mr Ciaran Moore Northern Ireland

020 7404 1400 [email protected] www.wordwave.co.uk WordWave International, 190 Fleet Street, London EC4A 2AG NATIONAL AUDIT OFFICE

CHAIRMAN: Can I, as usual, remind witnesses that the proceedings are only

covered by qualified privilege? Before we start, may I on behalf of the

Commission express our regrets at the tragic accident to Mary

Radford, one of your directors, and I hope you will pass our thoughts

on to her family.

SIR JOHN BOURN I will. Thank you.

CHAIRMAN: Thank you very much. Sir John. We approved the 6% increase at an

earlier meeting in October and we’ve got the works-based project,

which you’ve undertaken to do at our request, an estimate of another

£500,000. Are you now at the stage where you’re able to give us any

details of how you expect that £500,000 to be disbursed? Do you

expect it to be enough or too much, too little?

SIR JOHN BOURN: I expect, Chairman, it to be exactly right and we made the

commitment to you that we would do the planning and bring it to the

Commission for the Corporate Plan discussion. Perhaps I could ask

Mr Rickleton, as the Assistant Auditor General who will be the project

manager for it, to give further details.

CHAIRMAN: Exactly. There’s a degree of precision that’s almost

incomprehensible in that sort of context. Yes, please explain to us.

JIM RICKLETON: Well, perhaps exact is too precise but certainly in terms of taking it

forward following the Commission’s approval to go to the next stage, www.wordwave.co.uk 1 we reappointed King Sturge, our advisers on the project, to act as our

project managers for the detailed planning and primary contractors for

this stage. They’ve put together, in discussion with us, a team of

experts, including structural engineers, mechanical engineers,

surveyors, architects and the like, to cover all aspects of the next

stage of detailed planning for the proposal, with the aim of coming

back to you in July with a detailed proposal. The work that we’ve

procured from King Sturge will be done in accordance with the Royal

Institute of British Architects’ quality assurance processes. It’s what

they term in the technical jargon a “stage C”, an outline proposal for

the refurbishment project. Although called “outline”, it will be quite

detailed by nature.

We got approval for £500,000 from the Commission to take this work

forward. The initial proposal from King Sturge was somewhat over

that - not too far over but slightly over - and we’ve now negotiated that

we will get all the information we require within the £500,000

envelope.

CHAIRMAN: Again, without any scepticism about the precision of the estimate,

how are you going to ensure value for money on this expenditure? Is

there any chance -- no chance at all you may be able to economise

on it?

JIM RICKLETON: Well, certainly the first stage was to negotiate with King Sturge on

their initial budget proposals, which we’ve already done and we’ve

secured savings from that.

The other way we’re securing value for money is that we have set up

a Project Steering Board in line with best practice, which, as senior www.wordwave.co.uk 2 responsible owner appointed by Sir John, I chair and we meet at least

once a month to review progress on the work of our contractors. All

our contractors - either those directly employed by us, i.e. King

Sturge, or subcontractors on the project employed by King Sturge on

our behalf - are all on fixed price contracts, so any additional work or

any additional effort that they’ve not priced, they will have to bear the

cost. They fully understand that and that’s the basis on which we are

going forward.

We are also applying GOGC Gateway process, which helps to ensure

the quality of what we’re doing, the completeness of the assessment

and that the risks are correctly identified and they are properly

managed throughout this stage of the project. And we are applying

that process as we go through the project.

CHAIRMAN: Sir John, because of the unusual expenditure we’re about to incur,

when we have our July meeting would it be possible to give us

projections for your Estimates considerably beyond the three years?

Is that a practicable thing for us to ask for?

SIR JOHN BOURN: Chairman, I will certainly see what I can do there but, of course, the

most important piece of information one needs to do that is some

indication of what public expenditure is likely to be. If one doesn’t

have that, one can make various forecasts of assumptions about

growth rates in public expenditure. One could do two or three

scenarios with different and feasible growth rates and, if it would help

the Commission, I will do that.

CHAIRMAN: But would they be meaningful? www.wordwave.co.uk 3

SIR JOHN BOURN: Well, of course the growth rates in government expenditure in the last

two or three years have been 6%, 7%, 8% higher. Ministers have

said that can’t continue at that level but they haven’t said what that

would actually mean. But it may be that the Budget on 22 March will

give us some further clues.

CHAIRMAN: Sorry, it was my fault for not putting it into context. I was still talking

in the context of the accommodation. It’s more a matter of the longer-

term impact of that on the Estimate. We understand you can’t

anticipate the Chancellor’s future projections. Would it be possible to

cover the whole period of construction, for example?

SIR JOHN BOURN: Yes, we could certainly do that.

CHAIRMAN: Okay, thanks.

EDWARD LEIGH: Sir John, just leaving accommodation for one second, there was

something you said yesterday, which slightly worried me. Just

because the Government is increasing spending so markedly on, say,

health and education, there’s no particular that that should lead you to

increase your spending, is there, just because you’re the Auditor?

There isn’t a direct link, is there? There’s some sort of link but a lot of

that spending shouldn’t necessarily result in the same increase in

spending as far as you’re concerned, should it?

SIR JOHN BOURN: The particular feature is the nature of the increase of spending and

the complex schemes into which the extra expenditure is invested. www.wordwave.co.uk 4 It’s not clear exactly how the reorganisation of the National Health

Service - the amalgamation of some bodies and the separation of

others - will actually develop. Similarly with education. So it isn’t just

the fact that more money will be spent on these things. It is the way

in which it is spent. So if everything stayed in a static state and you

just did more of the same things, then your point has great force. It’s

the difference. It’s the change. It’s the volatility. It’s the

unpredictable factors.

CHAIRMAN: The £60 million you are going to spend on refurbishing will obviously

appear in the balance sheet as substantially less than that figure.

Now, how far is this affected by the possibility of an impairment

charge or how far is this likely to lead to the imposition of an

impairment charge under Financial Reporting Standard 15 and what

would that mean for you in practice?

JIM RICKLETON: As I explained, or tried to explain, to the Commission when we met

the last time, a key part of this next stage in the project will be to

determine what expenditure will constitute capital expenditure for

accounting purposes and what will be revenue expenditure. In so

doing, we would apply closely FRS 15 in terms of classifying

expenditure as to whether it is restoration of the building to its desired

state or whether it is in terms of enhancement to the capital asset.

That will determine how much will actually be borne on the balance

sheet as an increase in the capital value of the asset.

So we will determine the capital element of the investment. We will

then need, with our valuers, to determine what impact that has

actually got on the value of the asset on the balance sheet. The www.wordwave.co.uk 5 difference will be required to be written down as we actually carry our

assets according to existing use market value. So we would need to

adjust for that.

At this point in time, as to the impact of any write-down or impairment

of that nature, we can’t really say until we’ve been through the next

stage of the process.

SIR JOHN BOURN: Chairman, I would also make the point that these matters will be

reviewed by our external auditor, who will look at the accounting

treatment of the programme for extended works in due course.

CHAIRMAN: Explain to someone who’s ignorant in accounting terms like myself.

What precisely is an impairment charge? What does it do?

JIM RICKLETON: Basically, if we invest £10 million into the building, for example, and

the current value was £20 million, so the revised value of the capital

investment, if you like, is £30 million. But if our valuers were to say

that the actual existing use market value had not changed, then we

would have, potentially, to write-down some of the £10 million

investment. The first port of call would be to see whether it was

covered by our revaluation reserve -in other words, we could account

for that through the reserves that we’re already holding on the

balance sheet. But if that’s not available, then it would be a charge to

the operating cost statement. So it would, in that sense, be a call on

resources.

CHAIRMAN: Would we be in any better position in July when you come to us to get

those -- www.wordwave.co.uk 6

JIM RICKLETON: Definitely. It’s a major stream of the work we’re doing to identify what

will be capital expenditure and what will be revenue.

CHAIRMAN: Thanks very much. Most helpful to someone like myself.

Again, before submitting your proposals in July, are you going to be --

will it be possible for you to check with the Treasury that the appraisal

is compliant with the 2003 Green Book? I assume you would do that

automatically, would you?

JIM RICKLETON: Yes. Most definitely.

JOHN MCFALL: Annex A to the estimate shows strong expenditure growth between

2002-2003 and the 2007-2008 plans. In fact, it’s an increase in the

total resource budget over five years of 47.3% in nominal terms and

30.5% in real terms.

Can you remind us what Parliament is getting from this additional

expenditure?

SIR JOHN BOURN: Yes, I can, Mr McFall. What Parliament is getting is the proper

professional audit of a range of government departments, agencies,

non-departmental public bodies and an annual certificate indicating

the extent to which the expenditure’s regular and gives a true and fair

view. It’s also getting each year 60 Value For Money reports.

Putting these two things together, what it is getting every year is a

savings figure of eight times the cost of running the Office. So what

Parliament gets each year is eight times the money that it puts into

the NAO, together with other improvements in services to citizens, www.wordwave.co.uk 7 which it’s unrealistic to put a money figure on but which are

substantial in terms of the quality of service provided in hospitals and

in the work of government departments.

JOHN MCFALL: Isn’t it important to put a money figure to it, Sir John?

SIR JOHN BOURN: I beg your pardon?

JOHN MCFALL: You said you can’t put a money figure to it. It’s important that you put

a money figure to that because I’m looking through some of these

issues and you say that you’ll be allocating additional resources to

addressing the increasing complexity of Value for Money work,

support select committees, responding to the request for support from

Parliament and the Government, accommodation developments, etc.

Shouldn’t you have the additional expenditure tagged to these

particular issues?

SIR JOHN BOURN: Well, they are tagged to the particular issues.

JOHN MCFALL: Could you tell me what the monies are then? For example, support

for select committees. How much more are you going to spend on

select committees to support them?

SIR JOHN BOURN: Well, on the support of the select committees, we reckon that we

would be spending another £200,000 in the next financial year.

That’s working on the increasing number of requests we get from

select committees for assistance, such as from the Environmental

Audit Committee and the Public Administration Committee. We do, of www.wordwave.co.uk 8 course, get a very large amount of correspondence, which members

of the House - and the other House as well - refer to us for advice.

So all those things are where you can say you put money in and

you’ve got an effect out.

When I talked about things which were not capable of putting money

to them, I was talking about such things as improved levels of service

in the National Health Service, so that people, as it were, return to

health quicker. We haven’t tried to put a money figure on that,

although welfare economists do. But in relation to all the other things

that we do, as I say, the money goes down and it produces the

results which are summed up in that overall figure.

JOHN MCFALL: Could you provide the Commission then just with details of each

section that the extra expenditure of money’s been allocated to? I

think that would be helpful.

SIR JOHN BOURN: Yes, certainly.

EDWARD LEIGH: You mentioned, as you always do on these occasions, the fact that

for every £1 you spend you save £8 and we’re doing 60 VfM inquiries

a year. Has anybody done a study as to what would happen if you

did 70 Value for Money inquiries a year or 90 Value for Money

inquiries a year or 100? I mean would we still go on saving £8 for

every pound we spend?

Of course, that leads obviously to the question, if we would,

presumably we could save even more money should we do some

more. Is there some optimum limit? Is this number of 60 just an

www.wordwave.co.uk 9 arbitrary figure or is it worked out according to some objective

criteria? I wonder why it is 60. Why isn’t it 50 or 70?

CHAIRMAN: It’s 60 because that’s what I proposed when I began.

EDWARD LEIGH: That’s what I wanted.

CHAIRMAN: I felt that 50 weren’t enough. I’ve been asking exactly the same

question as you. Is there any indication of an optimal figure?

EDWARD LEIGH: If we’re spending £400 billion plus a year of taxpayers’ money, it

would be very sad if we were limiting you just to an arbitrary figure,

perhaps because there -- and we’re already the hardest-working

committee in Parliament. We probably meet twice as often we do

twice as many reports as anybody else. But that’s of no importance.

If there’s an optimum figure, we shouldn’t stand in your way if it would

be better. If it would save even more money by doing 80 reports,

perhaps we should … well, I’m not saying that I’d necessarily

welcome it, but I’m interested in your view.

SIR JOHN BOURN: I think it would certainly increase the number beyond the 60 and you

could certainly, I think, take it up to 80 and possibly 100. Of course,

you would reach a point in the end where diminishing marginal

returns -

EDWARD LEIGH: Has somebody got a graph on that? Has anybody -- or is it possible

to work it out?

www.wordwave.co.uk 10 SIR JOHN BOURN: We did some years ago do some work of that kind for Mr Williams1.

CHAIRMAN: But we actually are getting increasing returns. This is the important

thing. We are going up from eightfold to ninefold in 2007 in the rate

of return. So, for extra expenditure of a few million pounds with you,

we’re getting £70 million a year extra return. It’s a fantastic bargain.

AUSTIN MITCHELL: Why don’t we do a few more then?

CHAIRMAN: Because we have to authorise it.

EDWARD LEIGH: What is your view on it, as a matter of interest?

SIR JOHN BOURN: As I say, I think you could go up to certainly 80, possibly 100.

EDWARD LEIGH: As long as I don’t have to chair them all, I don’t mind.

CHAIRMAN: Sorry, Sir John. You go on.

SIR JOHN BOURN: The reason why it is possible to make these surprising economies

really comes out of the volatility of government. It’s not the case that

government consists of a static set of institutions moving on from one

year to another. There are constantly institutions being closed down

or amalgamated, constantly new ones coming into effect, constantly

new programmes of government being put forward. It’s out of that

volatility that so much of the opportunity for the savings comes,

1 Note: Twelfth Report of the Public Accounts Commission (HC216, 2004-05) pages 40-42

www.wordwave.co.uk 11 especially because something new is set up and - members of the

Commission will know from our work - it’s often set up without being

thought out properly at the beginning. It runs into trouble after a

couple of years. You look at it and it isn’t difficult to find ways in

which savings could be generated from it.

CHAIRMAN: Could I ask you, Sir John, how do we progress this? It’s interesting.

Independently, we’ve both come to the same conclusion, so how do

we progress? Could you update an assessment of possible rates of

return? It’s unbelievable value for money from a taxpayer’s point of

view and it’s very good value for money, even if the rate falls. So can

you prepare -- is it practicable for you to provide any meaningful

estimates for us? Then we will have to decide what we want to do,

but I think it’s time we broke out of traditional ideas of what is and isn’t

acceptable.

SIR JOHN BOURN: Yes, I’d be glad to look at that and give an assessment of rates of

return and look at what might be reasonable for the future via an

expansion of the VfM work.

CHAIRMAN: You may be able to pay for your building and say to the Treasury you

don’t need any extra money.

SIR JOHN BOURN: We’ve already done that. If you look at the savings that we had in the

last few years, it’s already been paid for.

RICHARD BACON: Chairman, can I ask Sir John about this issue from the opposite

perspective? Presumably it’s also the case, first, that there may be a www.wordwave.co.uk 12 law of diminishing returns as you do more. Even if there isn't a law of

diminishing returns, you must, in order that there not be, either sweat

your staff assets more, so to speak, or have more staff. That in turn

will have space implications on top of the space that you’re planning

for now.

So, in your comments to the Commission which Mr Williams has

asked you for, could you allude to those factors as well? Presumably

it isn’t only one side of the coin. There must be a down side as well

and I am conscious, and we’ll come on to in a minute, that there’s

been some criticism of the quality of some of the Value for Money

studies, particularly where external consultants have been involved.

So, while I’m interested in the notion of increasing the number of

reports if it’s going to help save more money, I’m also concerned

about quality.

SIR JOHN BOURN: Yes. I’ll certainly cover those points.

AUSTIN MITCHELL: I can’t see why it should be increasing rather than diminishing returns

if you pick the easy objects first. I mean, surely you pick the ones

that are going to yield the best findings or are the easiest to tackle or

produce obvious examples of loss of value for money. Don’t you pick

the most attractive ones first?

SIR JOHN BOURN: You certainly do, but the field is so extensive. We haven’t yet got up

against the running out of possibilities.

Just looking at one area which is very fertile, and we’ve done a lot of

work on it, it’s reduction in sickness rates in many departments, in

prisons, in hospitals. Now, just by attending to sickness rates - which www.wordwave.co.uk 13 is not a difficult thing to do but does require some attention - you can

make important and significant savings across a range of institutions.

We’ve not, as it were, tilled all the ground for that sort of area. It’s still

the case that you find in well tilled areas that some adjustment, for

example, is made in Social Security and it leads to duplicate

payments of some kind and you can discover that and come up with

quite substantial savings figures.

For example, we saved recently £32 million, agreed with the

Department of Work and Pensions, by recommending stronger

checks on the eligibility for paying pensions overseas. This turns

around the issue of when people live overseas and they die. The

pension continues to be drawn. But who tells the department these

people have died? And it doesn’t always happen. So just saying to

the department “Check this out more. Pay more attention to it”

produced a surprisingly large amount of money.

JOHN MCFALL: Sir John, my committee at the moment is looking into administration

of tax credits. Now, just last week, one constituent mentioned to me

that the department sent out two forms every time to people for that.

Now, it seems to us that that leads to extra expenditure and extra

complexity.

Have you looked into the administration of tax credits?

SIR JOHN BOURN: We’ve done a lot of work on tax credits

JOHN MCFALL: Is there any information you could pass on to my Committee on that?

www.wordwave.co.uk 14 SIR JOHN BOURN: Certainly. Perhaps it would be helpful if we could consolidate the

work that we’ve done and let you have a memorandum about it.

EDWARD LEIGH: Something slightly worried me about what Austin said. I wouldn’t want

you to just look for how you can get the most savings because if you

did that you’d spend all your time looking at the Department of Work

and Pensions.

I’m also anxious that you should also try to get the most impact in

terms of publicity. That’s a very important point.

And the same goes for recommendations. You have this thing that

you like to try and get 93% or whatever it is of the PAC

recommendations passed. We could just pile up motherhood and

apple pie recommendations and try and keep our 93%, couldn’t we?

So it’s very important there’s a balance here.

SIR JOHN BOURN: I agree.

EDWARD LEIGH: I don’t know how you do it. When you’re having your discussions,

your Board meetings or whatever, I don’t know how you allocate it

because there must constantly be pressure to try and do the ones

that get the most money, which may not be of acute public interest.

SIR JOHN BOURN: Having said that I will save eight times the cost of the Office, I know

how much money I’ve got to get. But that doesn’t mean that it crowds

out other studies.

For example, the attention we’ve paid to infection in hospitals, where

we did two reports on an important public issue of interest to

members of the Commission. We did that without looking at any www.wordwave.co.uk 15 money payoff from doing that work. It wasn’t about that. It was about

helping people to survive rather than die.

We’ve got one coming up on urban green spaces. There’s a lot of

money in that but it’s not done to save money. What it’s about is the

way in which urban areas green spaces have been neglected and

how the quality of life of people in towns and cities has been reduced.

So I take your point entirely and I’ll be glad to reassure you it’s not

simply money.

RICHARD BACON: Sir John, there’s been some criticism at recent meetings of the PAC

about the methodology used in Value for Money reports and also

about possible conflicts of interest in the choice of some consultants

employed in Value for Money studies and their external evaluation

process. Could you describe those concerns and, for the benefit of

the Commission, list the steps that you’ve taken to address them?

SIR JOHN BOURN: I am glad to do that, Mr Bacon. Concerns that some members of the

Public Accounts Committee had came out of the fact that we had

instituted procedures for surveying Value for Money studies. We

have a contract with the London School of Economics, awarded

following a competition, and with the policy group at Oxford

University, who also won it in competition, to look at the Value for

Money studies and say whether they thought they were of good

value. The results of doing this for a number of years was an

improvement in the standards.

Well, there’s no secret about the reports provided by the evaluators

and some members of the Public Accounts Committee asked to see

what the evaluators had said about the studies. Of course, as you’d www.wordwave.co.uk 16 expect, the evaluators did point out ways in which they could be

better. That’s the whole point of having the evaluators in the first

place.

But what we have done as a consequence of recent comments is to

bring the evaluators into the study before they’re completed. So,

instead of evaluating the study after it’s finished and then you find out

it could have been better, you bring the evaluators in towards the end

of it - which we’ve done to a degree before but now this will be for all

studies - and so the evaluators’ insights will be incorporated in the

final report. In that sense, they will be an improvement in the quality

because the ideas for improvement will come earlier rather than later.

RICHARD BACON: Which, of course, makes much more sense.

SIR JOHN BOURN: Yes.

RICHARD BACON: There was some criticism, and I remember Mr Williams, as a member

of the PAC, engaging in this discussion in relation to the report on

Local Improvement Finance Trust, the NHS LIFT. He asked the

question: did the money for this Value for Money work come out of

the Value for Money budget - to which the answer is yes - and then

asked the question: why haven’t we got a Value for Money report?

And I remember at that particular hearing a GP who was involved in

the LIFT came out with a quite short, very pithy little metric, which

showed in effect the cost per patient served in that particular Primary

Care Trust area, which was shorter, simpler to understand and

clearer than anything contained in the report itself, which, by the

Office’s own admission, wasn’t really a Value for Money report; at www.wordwave.co.uk 17 least it couldn’t say whether the LIFT actually was value for money or

not.

SIR JOHN BOURN: We don’t claim that we hit the bull’s eye every time. It was a very

good witness that came and we would hope to learn from what he

said and to, in those kinds of works, pay greater attention to particular

costs.

RICHARD BACON: Just for the record, from now on, you are expecting that the

evaluators’ opinions will be incorporated in your Value for Money

studies, as a matter of routine, before the NAO report is published?

SIR JOHN BOURN: Yes.

AUSTIN MITCHELL: One of the six areas you want to devote extra resources to is early

closing, as opposed to the government policy of later closing. Sorry.

Just a joke. That’s to say the laying of department resource accounts

before we all go away in July.

Now, can you tell us what the position is in respect of early closing in

2006 compared to 2005?

SIR JOHN BOURN: Well, there are about 55 of these resource accounts and in 2005 25

were delivered by July, which meant that 30 weren’t. So there is still

a hill to climb for departments if they’re going to get all 55 done before

July 2006. I don’t think they’re all going to make it, with the best will

in the world, and we are doing everything that we can to assist them

in this. The very important aspect – in a Treasury initiative of financial

management improvement – is that you need to have in the www.wordwave.co.uk 18 departments systems of financial management which enable the

accounts to be produced as a matter of course, instead of some

desperate last-minute action as it comes to the end of the financial

year, which has too often been the case. Earlier closing had made

the production of the accounts an even more frenetic activity than it

was before.

I think that when the Treasury initiative is finally completed the

accounts will be produced as a matter of course and will not require

so much effort on the part of the external auditor, not to do them

himself but to point out, “This is wrong. That is wrong. You need to

be clearer on this.” This is where the money goes, on facilitating

faster closing.

So progress is being made but, as the example of the Home Office

showed, ten months after the end of the financial year they still hadn’t

got a set of accounts. It’s an unbelievable result. I have to carry on

helping them and the others to do better. They will do better. There’ll

be a better figure for the 2005-06 accounts than before. But I don’t

think they’ll all get done by July.

AUSTIN MITCHELL: What’s the problem? Was it that these departments had a settled

routine, which was suddenly thrown into fast forward by the

Treasury’s desire for early closure or is it the introduction of new IT

technology disturbing the settled systems, or what?

SIR JOHN BOURN: Sometimes it’s problems associated with new technology. It doesn’t

always have to be IT. It can just be a new way of handling the

money.

www.wordwave.co.uk 19 But the real difficulty has been that the production of the accounts of

government departments is … at one level everybody recognises it’s

important but at another level it doesn’t seem core business. It’s not

like a plc, where if you don’t produce the accounts your share price

goes down and the company may be out of business. That’s not how

--

AUSTIN MITCHELL: The reputation of the Department and its financial officers goes down.

SIR JOHN BOURN: As we’ve seen with the DWP. So, in many cases, the production of

the accounts and the systems for recording expenditure have not

been that accurate, have been riddled with errors and mistakes. To

some extent, if you had longer to do it, then you had longer to rectify

the mistakes, so the end result didn’t look so bad. But when you

have faster closing, it reduces the time you’ve got to remedy the

mistake. So if you’re failing, the evidence comes out quicker and our

requirements to help have to be manifest more directly.

AUSTIN MITCHELL: Is that just a one-off produced by a laggard department or is that

indicative of a wider problem?

SIR JOHN BOURN: I think the Home Office case was to a large degree through a new

accounting system. But what was -- it was a failure to --

AUSTIN MITCHELL: A new accounting system, not new technology?

SIR JOHN BOURN: A new accounting system of which new technology was a part. But

what was really wrong was that months before I finally disclaimed, we www.wordwave.co.uk 20 pointed out to the department the accounts were in a muddle. “What

you’re providing are not accounts. They’re pieces of paper. They’re

just printouts. They don’t constitute accounts. If you can’t get this

right, then there will be a qualification and we will work with you to

avoid that.” Now, they didn’t take that seriously enough. They

thought that they would be able to get it fixed, but they didn’t take it

seriously enough and they didn’t get it fixed, which is why I had to

issue a disclaimer. When I told them that I was going to do that, they

said, “Do you have to do this? We’re nearly there.” But they’d said

they were nearly there six weeks ago. So, in the end, time ran out

and I had to do it.

AUSTIN MITCHELL: Just explain to us. From the report there is a £3 million discrepancy

discovered, that that forced adjustments of £948 million. I don’t get

why £3 million should force adjustments of £948 million.

SIR JOHN BOURN: We couldn’t follow it either.

JOHN MCFALL: Sir John, did you get reassurance from the Permanent Secretary of

the Home Office, who’s going on to be Deputy Governor of the Bank

of England?

SIR JOHN BOURN: Difficult question for me to answer, Mr McFall.

RICHARD BACON: Actually, that was going to be one of my questions, precisely. But

also, do you think there’s a case for the National Audit Office

informing the Public Accounts Committee of these problems earlier?

When we had Sir John Grieve for his final - what was in effect a www.wordwave.co.uk 21 valedictory - session on the PAC, the committee members weren’t

aware of these difficulties that were still ongoing. Obviously, at that

time, the business of trying to get the thing closed was still ongoing,

but do you think it’s a case for letting the PAC know earlier about

these problems?

In effect, the Accounting Officer - and this is the wider point I wanted

to make about these problems - the Accounting Officer is responsible

for accounting to Parliament for how the money how the money is

spent. The situation is plainly not the same as in a plc, yet the

Resource Accounting Green Paper came out in 1994 and the

department has had many years forewarning that this is going to

happen and is going to be thrust upon them.

When we took evidence from Sir Andrew Likierman, he was very

clear that the methods to which they are having to move have been

around in accounting terms for around 500 years and it’s nothing new

and they’ve had plenty of time - actually, 12 years - to get used to it.

It ought to be a source of ongoing concern, just as in the same way

as it’s now entered the lexicon as far as even taxi drivers are

concerned that the accounts of a European Union have a qualified

opinion against them. It’s not, I think, at all widely understood that

this is the case for a number of central government departments and

it should be, shouldn’t it?

SIR JOHN BOURN: What we could look at doing, perhaps, is something like the Gateway

reviews with the red lights and we could perhaps draw to the

Committee’s attention those departments where we were focusing

with them on the need. That wouldn’t mean to say they will all fail,

but the fact that we draw to your attention those which are having www.wordwave.co.uk 22 difficulty in achieving the July date. We could certainly look at how

we might do that.

CHAIRMAN: Could you tell us by July about how you might manage to do this?

SIR JOHN BOURN: Yes. I think that would be very helpful.

RICHARD BACON: For example, the Foreign Office accounts were, as you know, closed

or published on 19 December and the Finance Director of the Foreign

Office at that PAC hearing mentioned that, although on page 8 of the

report it referred to huge difficulties in reconciliation involving

significant sums, actually in the end – I asked what had been those

sums. He said, “In the end there wasn’t a problem because we were

able to reconcile and we didn’t issue a qualified opinion,” although it

was obviously five months later than it should have been.

I think it would have been interesting to have known in July last year

that they were behind. I think we as a Committee – obviously this is

for the Public Accounts Committee – would welcome that.

CHAIRMAN: I think that’s helpful and Sir John will bear it in mind when he brings

his report.

EDWARD LEIGH: Let me take the example of the Home Office. You’ve got the

Permanent Secretary, who presides over this chaotic situation, who

goes on to get an even better job. You do a report. It gets publicity in

the papers. We have a hearing with the Permanent Secretary and it’s

a very smooth performance and he gives apologies. It’s all very

general and all the rest of it. www.wordwave.co.uk 23 Why don’t we just go for these people? This wouldn’t be tolerated in

the private sector. You couldn’t preside over a large public company

and allow your accounts to be in complete chaos, then not affect your

career at all. When you produce these reports, why don’t we have

these hearings? Why don’t we just go after named top officials so

that the word goes out in Whitehall that, if you don’t get things right in

this area, your career will be seriously compromised. We never do

that, do we?

CHAIRMAN: Which is the whole point about my pressing to have past officials

when they fled the service and we call them back.

SIR JOHN BOURN: Well, in a way, the accounting officer is shown to have been in

dereliction of his duty. The whole question of what happens to him

then turns around what ministers are prepared to do because all the

evidence for them to take action in relation to the officials is there

from the reports of the Committee.

EDWARD LEIGH: For you, it seems to me, having read so many of these NAO reports

and having looked at these and presided over these committees, we

don’t actually pursue individuals, do we? It’s all done on a very

general basis.

SIR JOHN BOURN: We don’t usually

EDWARD LEIGH: I’m a kindly chap. I don’t really want to ruin somebody’s career. But

it seems that if these people are wasting tens of millions of public

money, maybe we should pursue them. www.wordwave.co.uk 24

SIR JOHN BOURN: There are a number of aspects to this, of course. If you take

something like individual learning accounts where you could say that

the Permanent Secretary of the department presided over a system

that failed, his reply – perhaps I’ll put words in his mouth - would be

along the lines of, “The Secretary of State wanted me to do this as

quickly as possible, so I tried to get on with it and do my best. It didn’t

work out.”

CHAIRMAN: That would have been a perfectly -- if it had been legitimate, it would

have been appropriate to say it. All you’re doing is now you’re

covering one person to protect two people. It seems to me illogical

that we do this. If ministers have made a policy decision or made an

administrative decision that leads to such a situation, they too should

be accountable. We can’t call them before us but at least the facts

should be made available.

Therefore, what we’ve done, if that were the case - and I’m not saying

it is - but in such a case as you have described, we would be

complicit in covering up effectively for two people, both of whom have

been party to a significant financial loss.

SIR JOHN BOURN: It would certainly be possible to do that. Of course, in many cases,

you have to recognise that it’s a group of people who share a

collective responsibility for a programme that has gone into trouble.

But if the Committee would like to do that, it would certainly be

possible to do it, perhaps in our reports. But certainly the reports of

the PAC itself could draw more specific attention to the individuals

concerned. www.wordwave.co.uk 25

CHAIRMAN: In a way, what we need is - coming back to Richard’s earlier question

we need early warning because we’re often well into a hearing before

we find out that we’ve got the wrong man or woman in front of us. I

think it was Gus O’Donnell who came to see you and myself when

was insisting on one particular official coming back and he then, in

the end, accepted that it was a legitimate request for us to make. But

if the Committee is to be fully effective, we’ve got to know these

things.

SIR JOHN BOURN: I think we do and we pay further attention to it in suggesting the

witnesses who should be called. We do also mention --

CHAIRMAN: Yes, but we had the wrong witness then.

SIR JOHN BOURN: Well, I can’t recall the case concerned, and if we got the wrong

witness on that occasion, that was an error on our part.

But we do seek and will pay further attention to suggesting to the

Committee that not only the accounting officer attend but he should

be accompanied by X and Y and Z, who are the officials who have

the detailed responsibility for the programme concerned.

CHAIRMAN: Including people who have retired.

SIR JOHN BOURN: I can certainly.

CHAIRMAN: The Civil Service tries to shield those who have taken retirement and

even a change of department in the past. I can think of one – who www.wordwave.co.uk 26 will remain nameless – who moved from department to department

and we seemed to be one department behind him all the time before

he eventually retired in glory, if I remember correctly. But I must not

say more.

AUSTIN MITCHELL: We need a new honour. It should be a GCBSUD: Good chap but

screwed up the department.

.

RICHARD BACON: Sir John, we were talking earlier about faster closing and the aim of

government is – the aim of the Treasury in having faster closing of

resource accounts is to enable it to produce Whole of Government

Accounts. The Treasury’s timetable calls for a Whole of Central

Government Account to be produced and audited for 2004-2005. But

this is eleven months now after the year end and that’s not been

published yet.

Has the NAO completed its audit of the 2004-2005 Whole of Central

Government Accounts and, if so, when did you sign the audit

certificate?

SIR JOHN BOURN: We haven’t because they’re not accounts. They’re just a dry run.

They’re not the real thing, and the Treasury has decided not to

publish central government accounts. But the first definitive set of

accounts will be the Whole of Government Accounts for 2006-2007

and that will have my certificate on them.

RICHARD BACON: Whose responsibility is it to present the Whole of Central Government

Accounts? Is it the responsibility of the Treasury or the National Audit

Office? www.wordwave.co.uk 27

SIR JOHN BOURN: The accounts are presented by the auditee, so it’s the Treasury.

RICHARD BACON: Don’t you think it damages public confidence when there is a series of

delays? The complete Whole of Government Accounts for local

government is scheduled to be prepared and audited for 2006-2007,

which means that it will be ready at a politically sensitive time, in

Spring 2008.

Would you agree that not publishing the Whole of Central

Government account for 2004-2005 gives a bad signal when fiscal

transparency is a fundamental tenet of the Statutory Code for Fiscal

Stability?

SIR JOHN BOURN: Having said that they would do it and then deciding not to do it

certainly has the result that you say.

AUSTIN MITCHELL: I’ve been bemused – we all have – by the on-balance sheet and off-

balance sheet treatment of PFI assets. You’ve brought to our

attention the fact that 97% of health and local government projects

are off-balance sheet. Just in passing, what’s the 3% of those that

are not off-balance sheet? Are they early ones or what?

SIR JOHN BOURN: That’s right and the reason behind that is the feeling in many local

authorities that you will not be able to get the money to do it out of a

capital allocation and that the only way you will be able to engage in

the project is if you have it as a PFI project. That then has led to what

in our view have been incorrect attributions

www.wordwave.co.uk 28 AUSTIN MITCHELL: Would you like them all to be on-balance sheet?

SIR JOHN BOURN: Yes, because the --

AUSTIN MITCHELL: All of them?

SIR JOHN BOURN: There are too many which are off the balance sheet because they

relate to projects where the risk still lies with the local authority or the

National Health Service Trust and that’s the essential feature. Where

does the risk lie? And if the majority of it still lies with the local

authority, it should be recognised on the balance sheet.

AUSTIN MITCHELL: What happens - I’m just curious – with housing? Are ALMOs off-

balance sheet or on-balance sheet?

MICHAEL WHITEHOUSE: would need to clarify, but my impression was that they were off

Balance Sheet

AUSTIN MITCHELL: Say it again.

MICHAEL WHITEHOUSE: Sorry. I’ve got a quiet voice. I’d need to clarify that but I think they’re

off-balance sheet.

AUSTIN MITCHELL: Off?

MICHAEL WHITEHOUSE: Yes.

www.wordwave.co.uk 29 AUSTIN MITCHELL: Right, okay. Why is this pressure to put things off-balance sheet --

why does it exist? Is it Europe or is it just a desire to minimise

borrowing totals or what?

SIR JOHN BOURN: I think it is very largely directed to minimise borrowing totals, so that,

having set a limit to the total of public expenditure, if you were able to

obtain the use of assets without counting it against your own

expenditure, you were able to enlarge your programme without

increasing your overall expenditure. So it was the desire to get the

use of more assets than you had money to buy yourself.

AUSTIN MITCHELL: But it creates a problem now. It’s like a version of Enron, really.

SIR JOHN BOURN: It would perhaps be too dangerous to say that’s the same exoticism

that as was found in the special purpose vehicles. But you’re right to

say that what was the fundamental fault of Enron was off the balance

sheet and the devising of ways to apparently justify activities and

assets that the company had responsibility for but disclaim that in the

accounts.

AUSTIN MITCHELL: Just going back to the PFI and the Whole of Government Accounts,

what conclusions have you reached about the acceptability of this

divergent accounting practice in respect of PFIs across the whole of

the public sector, and what should we do about it?

SIR JOHN BOURN: Well, I think we continue, and the further recommendation from the

Commission as to the importance that they attach to FRS5 being

properly applied would be helpful here. What we will have to do, and www.wordwave.co.uk 30 we are doing it now, is say that as we put together the Whole of

Government Accounts that if the failure to follow FRS5 has a material

effect on the accounts, then unless that is altered and redressed I

would have to qualify them.

AUSTIN MITCHELL: What bearing does the National Statistics Office have on this?

SIR JOHN BOURN: Well, the Statistics Office has no bearing on it at all because what the

Statistics Office is concerned with is examining how to classify the

flows of national income and one aspect of this that they are

concerned with the public sector and the private sector. Now, they

are concerned with economic statistics and classifying flows of

expenditures and incomes. What accountants are concerned with is

where risk lies and these are different aspects so they engage in

different activities.

RICHARD BACON: You mentioned that unless they made steps to alter the situation you

could be obliged to put a qualified opinion on it. Is it sufficient for the

department concerned to have a note to its accounts that says there

is a contingent liability of “X”? For example, in the case of the Norfolk

and Norwich hospital your report showed that the refinancing had

increased by £257 million - the risk to the hospital. If in the

Department of Health section of the Whole of Government Accounts

there is a reference to that somewhere in the notes, would that be

sufficient? Or does it need to be in the main body of the report?

I ask because when I first left university my first job was in a merchant

bank and one of my first jobs was in the off-balance sheet finance

department and we used to finance a lot of property construction www.wordwave.co.uk 31 where the developer would have it off the balance sheet because at

least supposedly it was non-recourse debt and the lender would look

to the houses or the office development or whatever it was itself

rather than to the corporate entity of the PLC to whom the money had

been lent for the recovery of the monies. But presumably in the case

of the public sector this risk isn’t quite the same. In the case of a

large flagship hospital the risk must always, in the end, fall back on

the public sector, mustn’t it?

SIR JOHN BOURN: Yes, it does, but in terms of accounting the question of whether it’s on

the balance sheet or not is a separate one from contingent liability.

You can have a contingent liability whether it’s PFI or not PFI so

these are separate matters and it wouldn’t be possible, as it were, to

skate around whether it should be on the balance sheet by saying

that it’s a contingent liability, because these are separate concepts.

EDWARD LEIGH: Just going on about PFI. I am reading about Barts. There has been

coverage about Barts. This is in a Guardian article:

“… there is growing concern about the ability of Trusts to bear these large annual costs. ‘They are either going to cut whole schemes or tell us to cut the size of our developments’ said a project director at a large trust. ‘Developers are getting very nervous. Whereas in the past we have had 10 or 12 developers bidding for a project you now get just two, and then at the last minute one pulls out. We are at a fork in the road in terms of PFI financing in the health service.’”

Do you think that’s right?

SIR JOHN BOURN: There certainly has been a reduction in the number of firms

competing for National Health Service business, yes.

www.wordwave.co.uk 32

EDWARD LEIGH: But this whole Barts business where apparently you’ve got workers

hanging around waiting on the site, and I quote:

“As each hour of inactivity passes, the trust and developers say another £25,000 (£600,000 a day) is added to the overall cost”

waiting for the Secretary of State to give the go ahead. This is quite

alarming what’s happening because if this is going to continue --

shouldn’t you be doing some work on this?

SIR JOHN BOURN: We will certainly be covering that, among other things, in our report

on the summarised accounts of the 2005-2006 National Health

Service, certainly.

EDWARD LEIGH: There is talk now of patients not being treated because they are trying

to save money.

SIR JOHN BOURN: I think that this is a consequence of the particular system of financial

management and accountancy that the National Health Service has

adopted and it is indeed the case that this view has been attributed to

various chief executives. In order to try and live within their budget

they have reduced the services to patients and yet of course exactly

as you say, Mr Leigh, to the extent that that takes place it is an

absurdity because here you have got the assets which exist, you’ve

got the people that you have to pay, the marginal cost of actually

operating on them is relatively small. So, it is the consequence of

adopting a system which we will be analysing in detail in our report on

www.wordwave.co.uk 33 the summarised accounts but I think in a way you can almost

summarise it.

You are in a sense pretending that the Trusts are PLCs, that they are

trading entities – but they are not trading entities. So, you are using

all the wrong indicators of what you are about. That’s not to say that

Trusts shouldn’t have budgets and not to say that Trusts shouldn’t

have management accounts, they should have, but to put them into a

system where the only way that some of them find they can live is by

reducing services to patients, when it’s their whole purpose to

increase them, shows a defect in the way that the system has been

set up and is operating now.

RICHARD BACON: I have two questions. One is specifically about this issue and one is

slightly broader but about the same issue of PFI. We had an instance

like this just the other day in Norfolk which led to a front page

headline, “Ambushed”, because there was a confrontation between a

consultant radiologist and the Minister who was visiting, who was

being told by the radiologist that wards were sitting there idle. Now, it

beggars belief that whatever system is in use that this can represent

an economic effective and efficient use of public funds that have been

voted by parliament to spend on health. So, I hope you do look at

that specific issue.

But the wider issue, which is about PFI generally and the growing

costs, I know that there are concerns across the sector about the

growing costs. Barts is said to have £100 million of sunk costs that

will be lost already. I have no idea whether this is the correct figure or

not. This is what I read in the newspapers. St Mary’s Paddington

had a round of bidding that cost £50 million and was then scrapped www.wordwave.co.uk 34 and they have now hired and architect to hand-hold with them as they

go about the process again.

The bidding process looks suspiciously like very high cost entry

oligopoly in which a small number of players essentially divide up the

work between them; and even for those players when it’s £10 million

or £11 million, which is now the average cost of bidding for a PFI

hospital, and they don’t win one or two and it’s just a hit, never mind

that one actually is in many respects getting a sub-optimal outcome

because of all kinds of design-led problems that result.

We have seen raw sewage flowing into pathology labs, we’ve seen

air conditioning that didn’t work so the wards had to be closed, and

various corridors that were not wide enough for two beds to pass and

things like this that are inherent in the design. We are talking in each

case about brand new PFI hospitals. Are there generic problems

about PFI in relation to hospitals that are resulting in sub-optimal

outcomes for the taxpayer that might merit a broader study than

simply looking at one hospital followed by another hospital, followed

by another?

SIR JOHN BOURN: Well, we have begun to consider the extent to which the work we’ve

done on PFI, which has been largely around the setting up of PFI

projects, now increasingly covers a whole range of sectors. We have

experience of them and we are looking to do some work and produce

a report on those areas. Of course some of the difficulties that you

describe were also true of conventionally procured assets in the past

but according to the experience of PFI, certainly the bidding costs are

extraordinarily high, certainly in some areas the number of

www.wordwave.co.uk 35 competitors has gone down to create the situation that you describe.

So, we are looking at it and we will do some work on that.

CHAIRMAN: I hope this will be your final question. Do you have any observations

that you would like to share with the Commission on the Treasury

letter that has been received? I must admit I’ve read it and wondered

if whoever wrote it had ever been aware that the Chief Secretary had

already written to us in a somewhat different tone.

SIR JOHN BOURN: Well, there are some things in the letter with which I agree. Of course

we should be concerned with minimising our drawing on resources

and setting out clearly for the Commission our plans for the future

which we already do in the corporate plan. So, a large part of the

letter is I think repeating admonitions which we would accept and

which we feel action is taken on.

I think that we did feel that references to the figures where it’s claimed

that - the way the paragraph comes out it makes it look as if the result

of our work in terms of efficiency is only a 2.5% saving on corporate

services, as if that were all, whereas of course, while that is certainly

true, it’s also very important to notice – and we have referred to it

many times – that the efficiency gains of eight times the cost of the

Office counts as an efficiency gain. There is also a very important

benchmark, which we have referred to but they don’t recognise, that

is the comparative costs of financial audit because the cost of

auditing £1 million of central government expenditure by the NAO is

£30. £30 to audit £1 million of expenditure and the cost of auditing £1

million worth of FTSE 100 company expenditure is £325. So, as

regards the comparative costs benchmarking, the costs of audit, our www.wordwave.co.uk 36 costs against the private sector audit costs of the FTSE 100

companies, we have, I think, a very good record of efficiency and it

would have been encouraging to see that recognised in the Treasury

letter.

AUSTIN MITCHELL: Just a question on the hospitals and PFI. This kind of hierarchy of

hospitals in debt and the scale of that debt, do we know if there’s any

correlation between being in debt and having a PFI contract on which

they’re presumably paying more than the cost of those who haven’t

got any new build at all, or those that have built in the orthodox

fashion? Is there a correlation?

SIR JOHN BOURN: Well, actually we are engaged in a study on exactly that point. We

are looking at all the trusts which have got a deficit and I’ve asked my

people to discuss with the chief executives of the trusts what the

cause of the deficit is and to what extent the cause of the deficit lies in

the fixed costs of a PFI scheme and I shall be reporting to the PAC on

that.

AUSTIN MITCHELL: Given the fact that we’ve had a big splurge on hospital building – and

very welcome it is too, I make much use of it at election time about

how many hospitals we’ve built – and given the fact now that medical

opinion is moving against hospitals, urging public health through GPs

are we, thanks to PFI, becoming over-hospitaled?

SIR JOHN BOURN: Well, if medical opinion moves against large hospitals you’d be in

trouble whether they were PFI or conventionally procured ones. So,

that would come up of course if there is a move to smaller medical www.wordwave.co.uk 37 arrangements like intermediate treatment centres. I know it’s the idea

of the Department for Health to use PFI for many of those. It is still

the department’s policy to use PFI in spite of the difficulties that they

have had.

CHAIRMAN: Thank you, Sir John. Can I put it to the Commission, do we approve

the Estimate of the NAO for 2006 - 2007?

CHAIRMAN: That’s agreed. Small majority of only four, but you’re there.

SIR JOHN BOURN: Thank you very much.

CHAIRMAN: Thank you.

www.wordwave.co.uk 38 NORTHERN IRELAND AUDIT OFFICE

CHAIRMAN: Welcome, Mr Dowdall. I am sorry you have had to wait so long.

JOHN DOWDALL: No problem.

CHAIRMAN: We will go straight in. Your provision is 6.6% higher than the

estimated outturn for the previous year. Could you give the

Commission an outline of the reasons for that?

JOHN DOWDALL: That is higher than the Corporate Plan figure that we discussed last

October which was 4.9, built up from the same sort of workload

issues that Sir John has been discussing with you. The extra

element, Chairman, because we are not really taking on any workload

changes to those we discussed at the corporate plan, is entirely from

the accommodation project that we are bringing forward for your

agreement. So, the difference between the 4.9 and the 6.6 is the

in-year costs of the depreciation, capital charges of the

accommodation changes we want to make.

CHAIRMAN: If we look at the resource budget related to 2000, 2002, 2003 the

resource budget for 2007 - 2008 is 69% higher which becomes 50%

in real terms. How much of this is attributable to the audit

responsibility you have gained in relation to health and local

government?

JOHN DOWDALL: Yes. Well, that was the really big change over that period. As we

took those in beginning in 2003, a really big impact of it in 2004-2005, www.wordwave.co.uk 39 that added about 20%, one-fifth, to the bulk of the Office in terms of

our total resources and as you know that was just an amalgamation

from elsewhere in the public sector. So, it wasn’t adding to total

public expenditure. That fifth just transferred into our Office from the

departments where it --

CHAIRMAN: In a way the costs that were being incurred elsewhere. Did it work

out cheaper moving it to you?

JOHN DOWDALL: I don’t think it did, Chairman, because although we were very

committed to trying to do this as an exercise which didn’t incur extra

public expenditure, I must say when we looked at it we weren’t

entirely happy with the way the audit had been done previously and

we have tried to resource them rather better over the last couple of

years. It might have happened anyway because as you know in the

health sector, which was a very big chunk of this, there has been so

much extra expenditure there one has had to submit it to much more

scrutiny anyway. But certainly once it came into the Office we had to

bring that up to the same standard as our other central government

audit work.

CHAIRMAN: Thank you. Then switching to the capital side, which is again much

higher, most of which I assume is related to the centralisation

programme, why did you feel this was an appropriate cost to have

incurred?

JOHN DOWDALL: I now have the equivalent of a single public sector audit office in

Northern Ireland and I really want to get the benefits of that. The staff www.wordwave.co.uk 40 who are in local government audit and health audit are dispersed

from the main office and I want culturally to get all of my staff thinking

of themselves as professional public sector auditors, not local

government auditors in their little silo or health government auditors in

their silo. I think I will be enormously facilitated in that if I can bring

them into a single central headquarters.

The additional point which is probably the initial driver for this is that

the outlying accommodation is of very poor quality. My local

government staff are in a very small office in Belfast City Hall. We

call it the black hole of Calcutta. It isn’t anywhere near the standard

of the rest of the Office and it’s hard to say I value those staff to the

same extent as my central government staff if I allow them to

continue in those kind of office conditions. Similarly with the health

audit staff although their accommodation isn’t quite so bad.

So, it’s partly to bring all of our accommodation up to a consistent

standard but in the long run the cultural benefit is really demonstrating

physically that we are a single profession now in Northern Ireland

doing public sector audit across the board not three different groups.

CHAIRMAN: Thank you. Incidentally, Dr McCrea can’t be here today. He wanted

us to make it clear that, as a member of this Commission, he fully

supports what you are planning to do.

JOHN DOWDALL: He has been good enough to come and look around.

RICHARD BACON: Are the advantages of the centralisation option which you have been

describing sufficient to justify centralisation in the heart of Belfast?

www.wordwave.co.uk 41 After all it’s much more expensive and presumably it would be

possible to go outside the city and find somewhere cheaper.

JOHN DOWDALL: I think you could find a cheaper building outside Belfast but when you

look at the two proportions, Mr Bacon, that the staff we have to bring

in are 25 in number, we’ve got a good modern building which actually

the TPAC effectively bought for us only 12 years ago, which happens

to be located on the fringe of the centre of Belfast and not taking up

prime centre of town property as you will see yourself when you come

over, it makes eminent sense just to make better use of the building

that we have.

To be honest with you, once we were advised by the architect that

there shouldn’t be any difficulty fitting the extra 25 into our main

building, although we did an elaborate investment appraisal because

we had to set ourselves the same criteria as we expect everybody

else to do, it was absolutely common sense making use of the

existing building was going to be far the most low cost outcome over

the period of the appraisal.

RICHARD BACON: Paragraph 13 of the summary of economic appraisal shows the total

project costs as £810,000, of which £750,000 will fall into 2006 -

2007. Is there still time for £60,000 to be spent efficiently in 2005 -

2006 on initial IT infrastructure work?

JOHN DOWDALL: Well, I believe so and I will show you the physical effects when you

are over because we should be near to completing it by then. But the

reason is that an element of the project, which is fairly distinct, is

recabling all of our IT network to cope with our expanding IT capacity. www.wordwave.co.uk 42 In a modern office, although that can be quite expensive, it isn’t an

enormously time-consuming task to do. So, we have planned it very

carefully. We are ready to press the button immediately and we are

very confident that we can get that recabling done before the end of

the financial year.

RICHARD BACON: The Deloitte and Touche appraisal report indicates that the £810,000

project costs don’t include an allowance for optimism bias. We have

looked in the PAC at optimism bias in relation to PFI produced

appraisal. Can you say why there isn’t an allowance for optimism

bias and are you confident that the project can be brought in on

budget?

JOHN DOWDALL: Yes, the report did actually discuss optimism bias and I think rightly

looked at the project we are doing and said really there’s nothing

either unusual or very demanding in this project or that is physically

outside of our ability to control it. The key thing is to think of this

really almost as a refurbishment rather than a rebuild; and to be

honest with you if we can’t manage to do that within a 12 month

period then I would have some considerable embarrassment on my

face at the end of the period. So, rather than putting in a formal

allowance of optimism bias which I think is about 20% if you follow

the Green Book for a project like that, we have built in what we think

is a reasonable, considerably smaller, contingency of about £16,000

that you can see in the paragraph 13 figures. Honestly, I will say from

my long experience of overseeing public expenditure capital projects

which don’t meet their targets, I will be amazed if we can’t meet our

targets on this small one. www.wordwave.co.uk 43

AUSTIN MITCHELL: The local government people and the rest of the public sector, are

they two different breeds of accountant? So people transfer in and

out. I can see there’ll be a natural boost to morale from all being in

the same building but is there any greater economic efficiency in

being in the same building?

JOHN DOWDALL: Well, I think there would be greater economic efficiency as well. I

mean, there’s a balance sheet saving, Mr Mitchell, because we save

on the rents of the other areas.

AUSTIN MITCHELL: Oh, yes, I see that.

JOHN DOWDALL: But there is also, I call it a dynamic economic efficiency, of all being in

the same building. Communication will be so much easier. Staff will

be more flexible. It is very difficult for me to employ some of my good

staff in order to go to local government audit at the moment when

they --

AUSTIN MITCHELL: But they do transfer in and out?

JOHN DOWDALL: They do, but traditionally they hadn’t very much and I think it is worth

saying that one of the interesting things when we did proceed with the

amalgamation a couple of years ago was to find there were actually

very different cultures in the groups. Local government audit, as I

think you probably know, is much more legally driven than central

government audit. We are very interested in regularity and ensuring

that money voted by parliament is spent for the purposes intended, www.wordwave.co.uk 44 but within the local government framework the auditor has to look

much more carefully at the letter of the law and is frequently

challenged on the letter of the law.

I have never had to deal as C and AG with a legal challenge in the

12 years I have been in the job but my local government audit staff

are dealing with this year in, year out. So there is a different culture.

That just enriches it and I want all of my staff to get the benefits of

moving through those different cultures.

AUSTIN MITCHELL: I just saw in passing that the Deloitte report on the £810,000

establishment costs doesn’t include any allowance for an optimism

bias. What the hell is an optimism bias?

JOHN DOWDALL: Well, I think, as Mr Bacon said, PAC have come across this problem

in the past that the investment appraisal that government

departments have traditionally done has been refined a lot over the

20 years and more it’s been the practice with any major capital

project, any capital project in government, to do an appraisal. And

the penny dropped after a fairly long period of time but there was

nearly always an optimism bias inside the appraisal that they thought

they were going to do it better, quicker, faster or with more significant

impact than they ever managed to achieve. So, eventually I think the

Treasury guidance decided, perhaps steered by PAC, I can’t

remember the background, that we really should just introduce an

optimism bias into this.

RICHARD BACON: It’s not because of PAC. It’s because of a leading Danish academic

who studied this area whose first name is Bent and the Treasury has www.wordwave.co.uk 45 taken his advice and others that they need to build this into their

model, I think.

EDWARD LEIGH: The Conservative Party suffers from a pessimism bias, I think.

AUSTIN MITCHELL: Is there a figure set for it?

JOHN DOWDALL: Yes, there are figures for it. I mean, on a smaller refurbishment like

mine it would’ve been 20% that you might’ve built on just for the

optimism bias. On more elaborate projects it could be 30% to 50%.

AUSTIN MITCHELL: Now, you’ve obviously valued the building at an existing use value. Is

there going to be any impairment if the financial reporting’s done on

FRS15 as a result of the existing use value not going up by as much

as the capital expenditure?

JOHN DOWDALL: Yes, that was the issue that you discussed with Sir John of course,

and it seems to be quite a large issue with the NAO. But I think

having explained the nature of our project to Mr Bacon it is more like

a refurbishment and we are not influencing the shell of our building. It

is more to do with the way we are reconfiguring it inside to get the

extra numbers in. So, there shouldn’t be any effect on the valuation

of the shell of the modern building that we have. So, our expenditure

will go into a higher value on our books of fixtures and fittings and

there will be an impairment, but a small one, in writing off our old

fixtures and fittings. So, that’s how it will come into the picture but not

on the same scale as you discussed previously.

www.wordwave.co.uk 46 CHAIRMAN: The switch to resource accounting has led to timeliness problems in

our experience. The Treasury is laying great emphasis on it.

Certainly last year, 2004 - 2005, we were way behind. What was

your experience then and what are you anticipating for 2005 - 2006?

JOHN DOWDALL: We moved into resource accounts slightly later than the rest of the

UK and I must say by last year the immediate timeliness problems

really have been dealt with quite well. We got reasonably good

accounts in from departments at the end of the summer in time for us

to lay all the accounts by our statutory deadline, which was 31

October, and one department consciously decided to beat that

deadline and move its accounts forward. So, with the latest set of

accounts we were in a good position in terms of timeliness. We now

move, as Sir John was discussing with you, into the period of further

early closure but Northern Ireland is taking rather slower steps

towards that than the rest of the UK. Over the next three years we

have to bring down by one month each year the date from that 31

October last year that I mentioned to you, so our target will be 31

September this year, 31 August the following year and then finally

getting to the final point.

CHAIRMAN: Is that across the whole of the public sector or is it --

JOHN DOWDALL: The whole of the public sector in Northern Ireland. Although we are

in quite a good position at the moment I do think there will be very

similar pressures to those that Sir John has outlined here because

people tend to work to the target that they are given, and so even

though we have a longer period I still think it’s quite a substantial www.wordwave.co.uk 47 challenge for departments to meet. Like Sir John, we’ll try and work

closely with them to help them do it and at the end of the day I do

think we’ll be there at the target date at the end of the three-year

period.

CHAIRMAN: In the recent past you’ve encountered problems with financial

management in Northern Ireland. Do you feel those problems are

now largely behind you?

JOHN DOWDALL: No, I don’t think I would ever say unexpected financial problems are

behind us. We did have the shock and it was a shock. Two of our

largest and most significant education NDPBs going into unexpected

deficit and that ran on into a second year, and it’s not entirely clear

that they’re out of the woods yet. That does make you think about

financial control and governance and certainly one of the reasons

why we indicated in our Corporate Plan we wanted to put a lot more

effort over the coming two or three years into governance was to try

and get more on top of the financial control systems in Northern

Ireland’s public sector to try and ensure that those problems were

less likely. We now face big problems of reorganisation coming up

within the Northern Ireland public sector as well and past experience

tends to suggest that financial control tends to weaken during periods

like that; so I’m not sitting here saying that we have these problems

licked by any means. I think things will need to be watched very

closely, and what we have learnt from the Education and Library

Boards we have now got to be alert to see if we can spot early signs

elsewhere.

www.wordwave.co.uk 48 RICHARD BACON: Do you have adequate resources to do that?

JOHN DOWDALL: That was part of the 4.9% that I asked for in the last Corporate Plan

because by the middle of last year we knew we had really to put more

effort into our governance work and as part of the agreement to the

Corporate Plan I have actually appointed a director who is going to be

spending most of her time working alongside NDPBs and other

bodies assisting them in improving their governance and financial

controls.

CHAIRMAN: How has the Treasury’s Whole of Government Accounts project

impacted on you, and you on it?

JOHN DOWDALL: Well, I would say we are a small player in the Treasury’s Whole of

Government Accounts project. Very much in support of the NAO on

that one. As central government accounts have been progressed we

have been sitting on a working group that the NAO chair ensuring that

the Northern Ireland account material comes forward in a way which

fits with GB material and we are doing that over the next year now

with the NAO to ensure that the full Whole of Government Accounts

material fits.

CHAIRMAN: Will you be producing a separate whole of Northern Ireland account?

JOHN DOWDALL: Well, I understand that the Government’s decision at this stage isn’t

actually to produce a separate Whole of Government Account for

Northern Ireland. That isn’t a matter for me. It’s really a matter for

the Government to -- www.wordwave.co.uk 49

CHAIRMAN: Do you know why?

JOHN DOWDALL: I think they might take the view that they want to be absolutely

confident that they’ve got the Whole of Government Accounts for the

UK right, then it might be sensible after that to think about breaking it

down regionally, but I must admit I don’t know the position in

Scotland, nor in Wales and a perfectly respectable alternative view

would be to say it’s probably a matter for the regional assemblies to

decide whether they want Whole of Government Accounts for their

own territories.

CHAIRMAN: It’s difficult to see how you really disaggregate them.

JOHN DOWDALL: I think you could prepare a Whole of Government Account for

Northern Ireland; but you’re quite right, there would be some difficult,

and perhaps even illuminating, areas where central government

expenditure applies in Northern Ireland and has to be attributed in

some way to Northern Ireland activities.

AUSTIN MITCHELL: You mentioned the use of PFI and PPP. Is there common practice in

respect of whether it’s off balance sheet or on balance sheet?

JOHN DOWDALL: Yes. PFI took off rather later in Northern Ireland than the rest of the

UK and it is becoming really quite a major element in our forward

capital programme.

AUSTIN MITCHELL: You’re very grateful for that in the sense that it was de-bugged? www.wordwave.co.uk 50

JOHN DOWDALL: Oh, absolutely. I think it’s an enormous benefit to us in handling PFI

to be able to say, “Look at the lessons in GB and learn those first.” In

the early years, as in GB, there was a bit of a mish-mash clearly of on

- and off-balance sheet treatment. We feel we have a reasonably

good grip on that now for a number of reasons. I think Sir John would

say that the position in GB is being tightened up, largely as a result of

a better and clearer Treasury guidance on - and off-balance sheet

treatment, but the other element now is of course that I am the single

auditor for any public PFI project in Northern Ireland and I can say, as

he can say, it’s either going to be given the balance sheet treatment

that I think it should be given or I will qualify the accounts too. I think

that will produce consistency but I must say in recent projects coming

forward we find we are having to fight less on that. There is an

acceptance on all of the projects that we have seen recently that the

most likely outcome is to be an on-balance sheet treatment and off-

balance sheet has to be significantly justified.

RICHARD BACON: It’s one thing to say that in Northern Ireland you can learn the lessons

of GB’s mistakes, which plainly is true, at least in theory, although

one of my experiences in the last four years on the Public Accounts

Committee is the lessons very often are not learnt and indeed the

Committee published a report about how lessons are not spread

across government within different departments of state. You, as the

NIAO, may know about those lessons and have learnt them but what

is there to say that the Strategic Investment Board or the people who

are running individual projects will also have learnt those lessons, and

what mechanism is in place to ensure that they do? www.wordwave.co.uk 51

JOHN DOWDALL: The primary mechanism is the one that you are aware of – that you

obviously haven’t been very impressed with – which is the Treasury

disseminating these lessons. The Department of Finance, the

equivalent of the Treasury in Northern Ireland does that and I do think

my Treasury colleagues would be sufficiently alert to the significance

of PFI issues that with something like the Strategic Investment Board

they would’ve given them a very strong steer.

I do think there is a secondary element here, which is our own role.

We have the benefit of being very close to the NAO’s work on PFI –

just sitting and listening at discussions in the PAC year after year with

Sir John about the progress of PFI projects and when we saw three

years ago that PFI was emerging as a much more significant element

in Northern Ireland we came and asked for more resources to staff

ourselves up on PFI. We set up a small unit with money we got from

TPAC. We sent them over to NAO to be trained. We’ve tried to get

them close to the Strategic Investment Board so that we are

providing, I won’t say an advisory function because it should always

be a challenge function really in our role, but we do think we have a

fairly close relationship with the SIB and I’m not saying there aren’t

going to be PFI projects that will go wrong in Northern Ireland, but I

do think there has been a significant effort to read across the lessons

from GB and actually learn them.

CHAIRMAN: £10 billion extra investment over ten years is quite a significant --

JOHN DOWDALL: Sixteen, I would say.

www.wordwave.co.uk 52 CHAIRMAN: £16 billion. Sorry, I was using my memory, which isn’t very good

nowadays. That level of investment, does it concern you that this is

about to happen at the very time when Sir John was expressing some

doubts about obtaining bids on the basis of what Richard had asked

him? Do you envisage similar problems in Northern Ireland, ending

up with a relatively small number of bidders?

JOHN DOWDALL: Yes. I think that is always one of the challenges for Northern Ireland

and I know the Strategic Investment Board as the body overseeing

this, that Mr Bacon referred to, really has one of their big challenges

to increase the competitive field within Northern Ireland. But although

the £16 billion is a very major strategic investment programme for us

that isn’t entirely PFI by any means. The PFI element within that is

probably, I think, three to four billion and that is actually much more

manageable. Nonetheless, securing good competitive tenders for

your PFI project is actually one of the critical first steps in making sure

you get a good deal.

EDWARD LEIGH: Is there any evidence of paramilitary corruption at local government

level? We were talking about the auditing of local government.

JOHN DOWDALL: I must say I am not aware of corruption back into the government

structure but I am always aware of paramilitarism around the region

and I am looking very closely at the moment, Mr Leigh, at the work of

the Northern Ireland Select Committee, because they have embarked

on a study of the impact of paramilitarism across the board. I have

had a discussion with the Clerk about that. I am interested to see

where they get to because they have impressive powers to pull in www.wordwave.co.uk 53 witnesses and get specialist advice and I do think one of the things I

might do at the end of that is to think myself about whether there is

anything my office should be doing to try and take some sort of

mapping of the impact of paramilitarism on the costs of the public

sector or something like that. But that would be an issue to think

about later this year when the Select Committee has reported, I think.

EDWARD LEIGH: Because you have got political parties in Northern Ireland which have

links to quasi-mafia organisations which are represented in local

government, that has no impact then, as far as you are aware, on

what is going on in local government in terms of corruption?

JOHN DOWDALL: Not obviously so. Local government in particular has very few

powers in Northern Ireland at the moment, though it will get more

later, and to be honest with you there isn’t a lot of scope for the kind

of corruption that --

EDWARD LEIGH: In terms of giving out planning permission?

JOHN DOWDALL: Yes. No real hands-on planning permission yet, though it is part of

the plan to give them more power in that area. Local government

mainly empties the bins and the scope for corruption in that is fairly

limited, but of course all government in Northern Ireland is local and I

must say I didn’t, during the period of the Assembly, have any

concerns that those associations with paramilitarism were actually

feeding back into the government process.

www.wordwave.co.uk 54 EDWARD LEIGH: In Northern Ireland, how is the work of the PAC perceived? Do

people think they get better value for money from having the UK PAC

rather than the Northern Ireland Assembly one? Or is there

resentment at a United Kingdom PAC muscling in on domestic

issues, or not?

JOHN DOWDALL: No, I don’t think there is any resentment about the PAC doing its job

in Northern Ireland while there is direct rule, quite the reverse. I think

most public and media commentators in Northern Ireland will have a

strong sense that there is a lot in the spending in our fairly small

region that does need public scrutiny and they welcome it coming

from the PAC source.

Having said that, I do think there is a background preference for

having that scrutiny done locally and unfortunately that background

preference doesn’t really seem to translate itself into real pressure,

not to our political parties, to respond to it and grasp some of the

nettles they have to grasp and move into government.

EDWARD LEIGH: Just lastly, we’ve mentioned this business of departments being

rather slow agreeing Value for Money reports. Is that progressing all

right?

JOHN DOWDALL: Yes. I did just hope to have a chance to comment on the first of the

returns I’d given you on this because you asked me for it last

October. We’ve produced a first quarterly return and I must admit it

does show rather a good picture. Most of the returns we got in this

period were close to the timetable. One of them, I should say, was

very good indeed. The report on the local enterprise development www.wordwave.co.uk 55 unit that we took with you a fortnight ago at PAC – we were very

rushed to get that completed and we couldn’t have done it without the

department really putting its shoulder to the wheel to help us meet all

the deadlines on that.

I would actually suggest that a quarterly return, now I see it, is

probably not an awfully useful instrument to be putting in to you

because you’re not going to be looking at it as a Commission

quarterly. I wonder whether a better mechanism for this wouldn’t be

for me to produce an annual list for you at the Corporate Plan stage

when I bring that forward for you. The next one will be early in the

summer when I could flag up by exception those reports where we

have had particular problems because clearance has been slow.

CHAIRMAN: What we want is what would be most useful to you. So, if you feel

that would be beneficial, I am sure my colleagues would be willing to

go along with your judgement.

JOHN DOWDALL: Thank you, Mr Williams, I think that would be a better way to do it and

more useful.

CHAIRMAN: Then of course do it that way. That’s fine. Thank you for the

suggestion. Well, thank you very much. As I say, I’m sorry that you

had to wait so long. Before we finish, then, does the Commission

agree to take note of the Northern Ireland Audit Office’s 2006-2007

Estimate?

www.wordwave.co.uk 56 CHAIRMAN: Agreed. Now, isn’t that a surprise? Thank you very much. Thank

you, gentlemen, and thank you to your colleagues as well for coming

in.

www.wordwave.co.uk 57