Examination of Witnesses (Questions 1
- 19)
MR G LOUGHRAN
and MR G MCCONNELL;
MR S QUINN
WEDNESDAY 10 DECEMBER 1997
Chairman
1. We are now moving on to the next subject.
We have here Mr Loughran. Welcome. Could you introduce your colleague
for us?
(Mr Loughran) I am the Permanent
Secretary of the Department of Economic Development. Greg McConnell
is the Chief Executive of the Industrial Research and Technology
Unit (IRTU), which is a Next Steps Agency.
2. We are hearing evidence on the report
by the C&AG for Northern Ireland on the IRTU. Let us start
straightaway because we are running rather late, for which I apologise
to you. Let us begin with project appraisal procedures. I note
from paragraph 2.13 of the C&AG's report that there were deficiencies
in a large proportion of the projects which the Audit Office examined.
Given that project appraisal is an area where there are well-established
procedures within your Department, how do you explain the widespread
shortcomings highlighted by this report?
(Mr Loughran) May I first of all
say that we do take the previous reports of the Committee of Public
Accounts very seriously indeed. The last time I was present at
the Committee was two years ago for a report on the Northern Ireland
Tourist Board. The weaknesses which were identified at that time
have been brought to the attention of all of the agencies in the
Department. These weaknesses did include weaknesses in documentation
and that is a feature of what has been identified in relation
to this particular examination of IRTU. However, I must say in
fairness to IRTU that the arrangements for assessing projects
were in the process of being changed in 1994-95 when the new COMPETE
and START programmes were set up. The new COMPETE programme has
shown a marked improvement in terms of the way documentation and
monitoring has been handled.
3. Let us move on to that COMPETE scheme[1].
The guidelines require you to ensure that the assistance provided
in each case is the minimum necessary for the project to proceed.
In the cases referred to in paragraphs 2.14 to 2.16 we see that
you offered assistance at the maximum level of 40 per cent, without
any obvious evidence of negotiation. If you did not negotiate
with the company, how can you be sure that you are not offering
more than the minimum amount necessary to proceed?
(Mr McConnell) You will be aware
from Table 1.2 that under the COMPETE scheme, which is our largest
scheme, we spend between £6 million and £8 million a
year. It is a very significant sum of money and therefore value
for money is very important to us. Our approach is to operate
on a programme basis. We look at every project on its own merits.
The casework committees which assess these look at each project
and the company submitting it in terms of the type of company
it is, large or small, its financial position, whether it is new
to research and development or whether it has a track record in
product and process development. They also look at the type of
project, whether it is a risky project, whether it involves a
high degree of innovation or low degree of innovation. On the
basis of all those factors, they come up with a rate of assistance
somewhere below the maximum figure or up to the maximum figure.
We then offer that figure to the company on a take it or leave
it basis. We believe that we are operating an even-handed approach.
Our annual target is to reduce our average level of assistance
by one per cent and between 1994-95 and 1996-97 we have reduced
our overall rate of grants from 40 per cent to 35 per cent. You
see we are maintaining downward pressure across the board on all
projects.
4. You say that, but I have to say the procedure
you have described does not seem to me to meet the criteria I
described to you.
(Mr McConnell) We do not believe
that an individual approach to individual projects does in fact
serve overall value for money. We accept that there may be occasional
cases where detailed and intensive negotiation may produce a lower
figure, but equally, we believe, by adopting a firm approach across
the board and given that companies will understand that we do
not negotiate in this area, there will be many more which we will
get at less than would be achieved by even a skilled negotiator.
By watching the overall percentage and by putting continual downward
pressure on that, we believe we are achieving value for money.
5. I will not labour the point. Others may
wish to return to it. Part 3 of the report looks at your assistance
to a major research facility. I have a number of concerns here.
Firstly, on the technical appraisal referred to in paragraphs
3.9 to 3.12. Given that the technical appraisal was carried out
by the same officials who were negotiating with the company, by
what means did you ensure that their work achieved the necessary
objectivity?
(Mr McConnell) We are satisfied
that our approach whereby the same officials did the negotiation
and the technical appraisal is the best approach for projects
like this. We believe that technical appraisal is best conducted
by those who are thoroughly familiar with our schemes and our
objectives, have a thorough knowledge of the company and have
the technical knowledge of the project in question. When we have
those three characteristics together in our own officials, we
believe that we get the best procedure. May I spend a couple of
minutes saying that prior to the establishment of IRTU in 1982[2],
the procedures were that R&D grants were negotiated by administrative
civil servants with a separate technical appraisal by our own
industrial science centre staff.
6. I will stop you. It is interesting but
we are aiming at the current position not the history. Are you
happy with the issue I have just raised, the question of objectivity?
(Mr Loughran) This was one of the
important issues brought out in this report, so I have been looking
at it very carefully. I suppose the question for me is whether
I am satisfied that this is consistent with practice elsewhere
in the Department and the other industrial development agencies.
I am satisfied that it is. There should be separation of appraisal
at the financial stage of examination of a project and indeed
elsewhere in the Department, in the Industrial Development Board
for example, there is separation of financial appraisal. There
is also separation of financial appraisal in the IRTU schemes.
It is really a question whether technical appraisal should be
carried out separately by another agency or outside the Department
altogether. My own view is that the technical assessment should
be carried out by the most appropriately qualified people. If
we do have appropriately qualified people in IRTU, and in this
particular instance we have both a chemist and a chemical engineer
looking at it, it would have been quite difficult to get better
qualified people elsewhere to look at this particular project.
If we do not have the appropriate skills within the organisation,
then we must go outside and the other large project which is mentioned
in this report was technically assessed by an external body. If
we have the skills within our organisation I do feel that it is
important we use them.
7. I will press on. Again you can probably
see some concern on my face at that problem. My second area of
concern in this case relates to the timing of the appraisal. In
paragraph 3.14, we see that unqualified letters were exchanged
with the company on the scale of assistance-in June and August
1992-and yet the appraisal was not completed until January 1993.
How can you justify putting such a large sum of public funds needlessly
at risk by making a binding offer to the company before the appraisal
was complete?
(Mr McConnell) We do not believe
that these indicative letters of offer were a binding offer. The
company first approached us in February 1992 and the project had
been looked at and investigated by our officers in the period
between February and June 1992 when the first indicative offer
was made. The indicative offer referred to the need for a financial
appraisal. Subsequently, after the second indicative offer in
August, the company then submitted its proposal which went through
the full formal appraisal.
(Mr Loughran) We believe that the letters were
understood by the company to be indicative offers. I would have
to accept that the specific reference to money should have been
qualified by reference to the offer being conditional on successful
completion of appraisal.
8. Publicly announced an unqualified letter.
This is in your agreed report.
(Mr Loughran) Yes, I think it should
have been qualified.
9. I should like to move finally to the
effectiveness of IRTU's programmes, part 4 of the report, paragraph
4.1. I can see that even though a number of your programmes have
been running for many years, there is something of a scarcity
of information on their economic impact. You are the head of an
Executive Agency. What action are you taking to improve your performance
measurement, which is vital, and when might we see a range of
information that clearly demonstrates the economic impact of your
programmes?
(Mr McConnell) In paragraph 4.7
the report refers to us having instituted research and development
surveys in Northern Ireland. The first survey was for the year
1993, which showed that business expenditure on research and development
was then just under £60 million a year. In the last few days
we have had the results of a more recent survey for the year 1996,
which shows that business expenditure on R&D has increased
to £85 million, which represents an increase of 31 per cent
in real terms against the figures for the United Kingdom as a
whole for the same period which show a decline of four per cent
in real terms. This is one indicator we think we have which shows
we have significantly increased the business expenditure on research
and development. The link between expenditure on research and
development and economic impact has been assessed in both the
1994 review which looked at the PPD scheme and led to the introduction
of the COMPETE scheme which produced figures such as 75 per cent
of projects being technically successful and 44 per cent being
commercially successful. The 1995 review of the S&T scheme
which led to the START scheme produced a range of impacts showing
for example that 30 per cent of the cases resulted in intellectual
property rights being developed and a series of other indicators
right through to the fact that an estimate of 1,000 jobs can in
some way be attributable to S&T projects. I believe that we
have developed a range of indicators and we have further research
going on with the Northern Ireland Economic Research Centre in
this area.
Chairman: I may well return to that
at the end. One of my concerns with agencies is that you have
a systematic and consistent set of measures of performance, the
same ones you measure when they do not suit you as when they do.
You will appreciate that point. Perhaps we will come back to that
at the end.
Ms Griffiths
10. May I turn to page 22 and paragraph
2.15? Do you agree that the casework committee's control would
be strengthened if the results of all appraisal work were referred
back to it prior to any offer being approved?
(Mr Loughran) It is an honest difference
of opinion that the existing procedure seems to me to offer reasonable
safeguards in terms of the interests of the taxpayer. You could
argue that if you go a step further you have a further safeguard.
The difficulty is that you can perhaps make the arrangements too
bureaucratic so that a scheme is bouncing backwards and forwards
between the officials assessing it and the casework committee.
It is arguable and I do not believe we would take the position
that just because this is the way we are doing it that is the
only way it can be done.
11. Does that mean you do not agree?
(Mr McConnell) Let me put it this
way. If this Committee took the view that would be a view that
I could understand.
Chairman: This Committee has a cruel
preference for yes or no answers.
Ms Griffiths
12. The following paragraph. What progress
is being made by IRTU to ensure that there is sufficient evidence
and explanation to show how the level of assistance being offered
has been determined?
(Mr McConnell) We do approach this
across the board, looking at all projects together. Where we do
not negotiate on individual projects, we do look at each project
carefully and set a level of assistance which is consistent with
the type of company we are dealing with, the size, the degree
of innovation and when we offer that on a take it or leave it
basis, bearing in mind the progress we have made in reducing our
overall level of assistance under the scheme from 40 per cent
to 35 per cent, I am satisfied that we are achieving good value
for money.
13. I should like to move on to paragraph
3.4 on project appraisal. In this case the Department seems to
have allowed itself to be bullied; at least that is what it looks
like. It was placed under pressure by the company saying it had
very tight decision deadlines. Would you agree with the NIAO's
comments on page 27, paragraph 3.12, that the Department's suspension
of its usual appraisal procedures in that case was ill-founded?
(Mr Loughran) The usual appraisal
procedure at that stage was the appraisal procedure which existed
immediately before the creation of IRTU. IRTU involved the bringing
together of several different parts of the Department into a new
organisation dedicated to promoting research and development.
One of the things we tried to do was create a group of well-qualified
people who would be capable of making sensible judgements about
technically very complicated matters. Whenever we talked in that
particular situation, when the officials concerned talked about
the unusual nature of that procedure, it was really referring
to the past practice. What I have to do now is look at this and
say whether or not this is the proper practice now. Is it the
proper practice to have an examination of the technical aspects
of a scheme by officials who have been negotiating with the company?
I do believe that is proper if they are appropriately qualified,
if they have the particular skills to look at that particular
type of technology. There is still a safeguard left that the financial
appraisal must be carried out separately. There is that separate
area of challenge.
14. With this company the final instalment
of the entire grant of £4.2 million was paid in March 1994,
paragraph 3.19. The project did not happen, it was terminated.
Yet, 18 months after the end of the project, there had been no
formal evaluation. Would you accept that there ought to have been,
at least by that stage?
(Mr Loughran) There is an explanation
in the report that there was an expectation that there might be
another project which could follow on from the original project
but in fact that did not happen and if we were to do it again,
I would take the view that I would agree with the NIAO, it should
have been carried out at an earlier stage.
15. Paragraph 3.23. You told the NIAO that
the company concerned had given a very detailed and convincing
presentation on their decision to close the project down. Yet
those discussions were not minuted. Why were they not minuted?
Who is to appraise whether the presentation was in fact detailed
and was in fact convincing if no minutes were kept?
(Mr Loughran) Our comments there
depend on the discussions we have had with the officials since
we have been involved in this NIAO examination. If you are asking
me whether that explanation by the company has been minuted, my
answer is yes.
16. Do you think that there is perhaps difficulty
with your record-keeping, given that minutes were not taken on
that occasion or at least are not available?
(Mr Loughran) There is some evidence
in this examination that documentation has not always been as
good as it should have been. It is one of the areas which we are
trying to improve.
Ms Maria Eagle
17. Is this problem with information and
minuting a problem in your Department or is it a problem in the
IRTU? Where is the problem substantially based?
(Mr Loughran) If you look at the
period which has been scrutinised here, it is the first three
years of IRTU's existence and I suppose there was a bedding down
of experience there. The two main schemes were replaced by the
COMPETE and START schemes and the COMPETE and START schemes have
a complete new set of procedures. I should like to believe, and
I do believe, that the procedures are robust and that they are
capable of ensuring that the sort of documentation problems which
we refer to have now been resolved. Perhaps you could mention
how you have dealt with that.
18. Do I gather from what you say that you
perceive the problem to be at the IRTU rather than in the Department?
(Mr Loughran) No, I did answer for
the Department as a whole. Obviously in this particular case there
were problems in documentation in IRTU.
19. I will come back to that at the end.
Could you turn to page 15, Table 1.1? We see there the reason
for your existence. The percentage of GDP spent on R&D in
1990 in Northern Ireland was quite low compared with other countries.
What is that figure now[3]?
(Mr McConnell) The most up-to-date
figures I have relate to 1993 when the UK figure would have been
1.4 per cent and the Northern Ireland figure would have been 0.5
per cent. I would emphasise that those two sets of figures are
not comparable.
1 Note: See Evidence, Appendix 2, page 11 (PAC 235). Back
2 Note:
The year, in fact, is 1992, not 1982. Back
3 Note:
See Evidence, Appendix 2, page 11 (PAC 235). Back
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