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Dr. Fox: Will the Secretary of State further clarify the matter? The management services officer, Alex Haggerty, said, as the right hon. Gentleman will be well aware, that the council knew of problems concerning losses in the DLO in March 1997. When did the Scottish Office first become aware of that?

Mr. Dewar: I first became aware of Mr. Haggerty's report--I am neither accepting nor rejecting it--when I came across it in a daily newspaper this morning. To the best of my knowledge, we in the Department did not have access to the document. I have already told the hon. Gentleman--I hope that he will take this from me as fact--that my first intimation of the difficulties was on 27 May. Indeed, a very senior civil servant to whom I turned learned about it from me. We have certainly not been sitting on information about the activities of DLOs and refusing to act on it.

Mr. Alex Salmond (Banff and Buchan): The precise suggestion in Mr. Haggerty's report, which is published in today's Daily Record and which I have read, is that four Labour councillors had known for some time of the situation concerning the North Lanarkshire DLO. If that suggestion proves to be correct, how will those four councillors stand vis-a-vis disciplinary action in the Labour party?

Mr. Dewar: The hon. Gentleman will have to wait and see, as I will. I do not know who the four councillors are; none of them was referred to by name. I have not at this stage had any evidence about the contents of the report.

I do not at this stage know very much about Mr. Haggerty, except that he has left the employment of the council. I rely for that information on the press cuttings to which the hon. Gentleman referred. It is not helpful to build great theories, or to speculate on such reports. Obviously, I intend to try to find out about the situation, and we shall take appropriate steps in order to do so. I was replying to the specific question of the hon. Member for Woodspring, who I hope accepts my reply.

Mr. Wallace: There has been some speculation, and it would be helpful if the Secretary of State could clarify matters. I have been led to believe that the post of chief management accountant in North Lanarkshire was created

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last year following expressions of concern by officials about the accounting system in the department that is now giving rise to concern. Does the Secretary of State know whether that is so? If it is, does it not suggest that councillors should have monitored what was happening?

Mr. Dewar: I am not in a position to answer such detailed questions at this stage. We have taken steps to establish the facts, which I shall explain in a moment. Perhaps we can take the matter forward on that basis.

I stress to the House that North Lanarkshire and East Ayrshire are two out of 32 authorities; there are 30 other authorities with DLOs. We have, of course, been trying to check the position in order to establish the extent of the damage and the problem. Other DLOs have deficits either on part of their operations or overall, but the distinction is that none of them is unknown. They have all been established for a purpose--for the management of funds--and are, to that degree, under control.

One can argue about tactics, but there is a sharp distinction between that and what appears to have happened at the two councils at the centre of the storm, where undoubtedly matters ran out of control. On the face of it, there was a collapse of financial discipline, and a quite substantial failure of management systems.

In North Lanarkshire, it looks as though the deficit is about £4.2 million. The provisional figure in East Ayrshire is £3.5 million. Even though there are variations on the figures, they give some idea of the scale of the problem. In both cases, there have obviously been very serious failures of management and financial control. As the House will know, DLOs are required, very properly, to meet a 6 per cent. return on the capital they employ. It is deeply worrying that deficits in these two cases were not detected or monitored at an early stage. Both became fully evident only after the end of the financial year in question.

My first and immediate reaction in both cases was to ensure that the councils called in their external auditors to verify financial figures and try to establish the position. As I have said, I also used my statutory powers to require information and explanation of the councils. That is a necessary step, which I stress is to pave the way for further action. I shall return later to what further action I may take.

On the face of it--I will not conceal this--there has been an unacceptable and intolerable level of failure and mismanagement in the two councils. It is indefensible; no one on the Labour Benches, or indeed in local government, is attempting to defend it. It raises three important questions: first, what is to be done about the cases; secondly, what is to be done to avoid repetition; thirdly, what broader lessons can be learned about the future of DLOs and, indeed, of local government as a whole, especially as we begin to consider the relationship between local government and the Scottish Parliament that will come into being in the middle of next year?

I have already initiated the statutory process. I expect a response from the councils later this month. It is already painfully clear that the contracts under which the DLOs have made such losses cannot be allowed to continue. The councils concerned have already acknowledged that, at the minimum, the work will have to be re-tendered. I am not yet convinced that that is enough. The question clearly arises whether the organisations can deliver a proper

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service in a controlled way without an unacceptable impact on the council tax payer. Before making up my mind finally on that, I will want to hear what the councils themselves have to say. We are waiting for that information.

I want to make it clear today that I am perfectly prepared to use my powers to require the council, if necessary, to wind up the DLO and obtain services from the private sector in either or both of the cases. I intend to come to an early conclusion after I have considered the information provided by East Ayrshire and North Lanarkshire councils.

I want the reassurance that we do not have similar breakdowns in management and control elsewhere. My Department has already approached every DLO; we have asked that external auditors be brought in. The Scottish Office has written to every council in Scotland asking them to check the operation of their bonus systems in direct works departments, and to report back. It appears--at least on the face of press reports--that something went very far wrong with the bonus system in North Lanarkshire particularly. I have certainly no wish to see any repeat of the bizarre anomalies that seem to have emerged in that council, which have been so widely noticed in the press.

Dr. Fox: Leaving aside the two DLOs in question, does the Secretary of State draw a conclusion about the whole system of DLOs from the fact that a more direct relationship with the private sector may be the answer? Will he organise an investigation into how they operate in their entirety?

Mr. Dewar: I certainly said--I am sure that the hon. Gentleman was listening--that lessons would have to be learned in local government in a wider sense. I shall come to that later.

Mr. Andrew Welsh (Angus): Although the Secretary of State is understandably dwelling on the downside, does he acknowledge that there are well-managed, well-run direct service organisations, such as that in SNP-controlled Angus, which produced a surplus of £250,000 last year while providing top-quality public services at low cost?

Mr. Dewar: The hon. Gentleman can always be relied on to paddle his own canoe--or perhaps his own coracle--in such matters. I do not want to comment on individual councils that are not at the centre of the matter with which we are concerned; we might get into some difficulties. The hon. Gentleman is making a party point. He could consider the DLO in Perth and Kinross, for example, where he might find a rather different situation.

Mr. Welsh: I ask the Secretary of State not to destroy the whole system, but to accept that, where it works well, it does so in the public interest. Bringing in the example of Perth and Kinross is rather pathetic, since it had £1.1 million in reserves and has produced a surplus elsewhere in its accounts. That does not compare with the real problems on Labour councils, on which he has dwelt. That is where the difficulty lies. Well-run and efficient DLOs should not be wiped out.

Mr. Dewar: We are not talking about wiping out anyone. I have no wish to go into this, but I understand

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that Perth and Kinross faces a deficit of £450,000 in respect of its DLO and services. I do not make too much of that, but if we are talking about perfection in every respect, I mention it as a corrective.

Mr. Welsh indicated dissent.

Mr. Dewar: Perhaps we can agree to disagree, on that as on so many other things.

We have brought the external auditors in, and will closely examine their results. We want final conclusions by September. We have asked the Accounts Commission for Scotland, an important safeguard that is totally independent, to conduct a rather different sort of audit starting in July. It has been asked to examine the financial and management control systems of every DLO in Scotland. It will be an important report.

That may help answer the point that the hon. and learned Member for Orkney and Shetland (Mr. Wallace) made by implication. The commission has the power not only to investigate but to comment on fault and on where the problems arise, and, if necessary, to hold public hearings on the matter. Not only that, but it can make recommendations and findings that come to the Secretary of State, which might include recommendations for personal penalties. I do not anticipate that, or make any assumptions. The House can see that we have brought to bear a battery of inquiry and expertise to try to establish exactly what happened and why.

In answer to the hon. Member for Angus (Mr. Welsh), I accept that the two councils are, to the best of our present knowledge, alone in respect of the scale of the problem and the background to it--the loss of control that appears to have occurred. I say this with proper caution, because we have not definitively covered every angle, but we think that it is unlikely that there are any more cases. That does not detract from the seriousness of what happened. The breakdown of financial controls inside the two councils was especially worrying, because it allowed the deficit to accumulate unnoticed. I want to be sure that that is not happening elsewhere.

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