House of Commons - Public Accounts

Select Committee on Public Accounts Forty-Fifth Report

DEPARTMENT OF THE ENVIRONMENT, TRANSPORT AND THE REGIONS: THE HOME ENERGY EFFICIENCY SCHEME

THE DEPARTMENT'S AGREEMENT WITH EAGA

16. Eaga were set up by NEA, a national energy charity, specifically to administer the Scheme. The Department awarded the initial contract to administer the Scheme to Eaga in 1990 following competitive tendering. A second contract, which ran from April 1993 to March 1996, was awarded on a single tender basis, as was the current contract awarded in April 1996 which runs until March 2001.[23] By March 1997 Eaga had received fees totalling £23.8 million, excluding Value Added Tax. Over the same period they made surpluses and other net income totalling £4.9 million, of which £1.3 million was paid in tax and £0.55 million was paid to the Eaga Charitable Trust. The remaining £3 million was held in Eaga's reserves.[24]

17. We asked the Department about the level of Eaga's surpluses and reserves and whether these were reasonable. The Department took the view that in principle Eaga should be allowed to make a surplus, provided that it was at a reasonable level, because they needed an incentive to do the work well. Whilst Eaga could not distribute their surpluses as dividends they could donate them to charity or use them to develop their business against the possibility that they lost the contract in 2001. The surplus had built up at a rate of £0.5 million a year, a rate which the Department regarded as fair. The Department's consultants had also concluded that the surplus was reasonable when Eaga's contract was last renewed.[25]

18. The Department told us that whilst they were satisfied with the position to date, they recognised that there ought to be an understanding of what would happen if this accumulation of surplus accelerated.[26] They acknowledged that it was possible that Eaga would make a lot more money if, for example, the number of grants fell because of a sharp increase in the number of people applying for cavity wall insulation, or if the Department's current review resulted in significant change to the size or scope of the Scheme.[27] If the surplus exceeded current levels the Department would be concerned. In those circumstances they would seek a re-negotiation of the agreement.[28] Such a re-negotiation would be voluntary, but since the Department provided 80 per cent of Eaga's business they had significant power. The Department assured us that the nature of the relationship with Eaga was such that if Ministers were dissatisfied and thought that Eaga's operating margin was excessive, there should not be any difficulty in reaching agreement.[29]

19. We noted that Eaga's surpluses had been very much higher in 1995-96. The Department explained that this was the year in which there was a surge of applications from the over-60s before they were taken out of the Scheme, and Eaga's surplus had been about £1 million. On the basis of 1994-95 and 1996-97 figures it seemed likely that a £0.5 million surplus would prove to be the norm. The Department told us that they expected the surplus in 1997-98 to be about the same as it was in 1996-97. Moreover, the surplus as a proportion of Eaga's turnover was lower in 1996-97 than in 1995-96, and they expected it to be lower again in 1997-98.[30]

20. The Department told us that they had changed the Scheme and Eaga's fees structure, but that it was not yet possible to see the results from that change. Their latest contract included an "inflation minus X" formula that was not in the previous contract, which would mean that over the life of the contract Eaga would have to accommodate a fee reduction in real terms, amounting to some four percentage points less than inflation.[31] As a result, whereas the fee per grant in 1996-97 had been £12.53, the Department expected it to be something like £11.90 or £12.00 in 1997-98.[32] The Department believed the fee per grant could well come down further thereafter, and they would continue to keep this under review.[33]

21. Eaga's fee was calculated on the basis of the value rather than the number of grants paid. The Department's consultants had concluded in 1995 that this arrangement did not provide an incentive to Eaga to control the cost of grant payments. However, the Department had chosen not to take the advice of their consultants.[34] They told us that the decision to relate the fee to the total value rather than the volume of grants had, with hindsight, proved to be a good thing because the reduction in VAT on energy efficiency services from 17.5 per cent to five per cent from April 1998 meant that for the same money Eaga would have to administer about ten per cent more grants than they had done in the current year. We pointed out that the Department could have related the fee level on a diminishing scale to the volume of grants, to take accounts of the benefits of scale.[35]

22. By March 1997 Eaga held £1.3 million in a designated reserve to meet the cost of redundancies should there be any significant reduction in the level of its operations and to fund a diversification strategy, and £1.7 million in a general reserve not allocated to any specific purpose.[36] If Eaga's surpluses continued at current levels, by 2001 their reserves would grow to some £5 million. Since designated reserves, intended to pay for possible redundancies and to develop the business, could be expected to stay fairly constant at their current level of £1.3 million, reserves for unspecified purposes could rise to £3.7 million. We asked whether the Department might not require Eaga to use these surpluses and reserves to provide energy efficiency measures for eligible households, and how many households might stand to benefit. The Department told us that the £3 million currently in Eaga's reserves would pay for energy efficiency measures in some 20,000 additional homes in a single year. However, it had been money earned by the contractor, and it was not the Department's money.[37]

23. The Department had not included any claw-back provision in Eaga's contract, despite awarding it on a single tender basis. The Department told us that at that stage they had not seen the need to have such a claw-back, and in view of the Eaga's current rate of operating surplus it was still doubtful whether there was need for a claw-back.[38] The Treasury said that it would be concerned if there were a continued increase in the size of Eaga's surplus and the Department were not able to take action by claw-back or other means, but this was not their impression of the current position.[39]

24. Eaga have transferred around £0.5 million to the Eaga Charitable Trust.[40] We asked about the Trust's status and the extent to which Eaga and the Trust promoted each other's work. Eaga said that the Trust were entirely independent, with a separate Chairman and Board of Trustees. Eaga promoted the Scheme directly through those organisations that came into day to day contact with households in the qualifying groups. In contrast, the Trust's aim was to promote better understanding of fuel poverty, its causes and effects and how it could best be alleviated, and they hoped that their work would assist policy development.[41] The Department assured us that they were satisfied that the Trust had put their resources into causes that the Department supported.[42]

25. The Committee asked why the Department had decided in 1996 to give the contract to Eaga on a single tender basis rather than on a competitive basis. The Department told us that they believed that Eaga had been doing a good job. There was also excess demand for the Scheme at that time, with a waiting list of 30 weeks, and the Department were worried that a change from one contractor to another would make that situation worse. Finally, they had not found any alternative contractor likely to bid and were conscious of the risk that in the absence of a credible competitor Eaga might bid a higher price than the Department had negotiated.[43]

26. The Department assured us that in 1996 they had made it clear that when the contract came up for renewal in 2001 it would be awarded after competition. In the lapse of time between 1996 and 2001 there would have been five more years of contracting out and of the Private Finance Initiative, and more operators who could run this kind of contract might well have come into existence. The Department would certainly advertise the competition.[44] The Treasury confirmed that they had reluctantly agreed to single tender action in 1996, and were looking to the Department to introduce competition at the end of the current contract period.[45]

27. Eaga's articles of association prevent the company's reserves from being distributed as dividends or in any other way to the members of the company. Upon winding up or dissolution, any remaining assets could not be paid to the members of the company but must be given or transferred to some institution having similar objects. Eaga told the Committee that this included, for example, organisations such as NEA and the Eaga Charitable Trust, although Eaga judged that there were many organisations consistent with these objectives.[46] We asked whether the Department had any legal right to those reserves. The Department told us that they did not, since the relationship was not between a government department and a non departmental public body, but between a government department and a contractor.[47]

Conclusions

28. We are concerned at the reserves which Eaga have already accumulated, which appear well in excess of those needed for Eaga to meet their contractual liabilities and to fund their diversification strategy. By March 1997 Eaga had total reserves of £3 million, including £1.7 million not allocated to any specific purpose. At current rates of surplus, these reserves will continue to grow by £0.5 million a year.

29. It is surprising that the Department do not consider Eaga's surpluses, which could be used to fund more grants to householders, to be a cause for concern. We are concerned that, in spite of the single tender arrangements, no claw-back provisions were made should Eaga's surplus prove excessive. We are not persuaded that the Department's reliance on voluntary re-negotiation of fees, should Eaga's profits be judged to be excessive, is sufficient to safeguard public funds.

30. The Committee note the Department's justification for their decision to award the administration contract to Eaga on a single tender basis in 1996, but look to the Department to take steps which will ensure that there is genuine competition for Eaga when the contract comes up for renewal in 2001. We believe that the Department should include a provision for claw-back in their contract with Eaga and any successor, to be deployed should their surpluses prove higher than is considered reasonable.

31. Eaga's constitution includes specific provisions which circumscribe what can be done with their surpluses or assets on wind up. Nonetheless, we are concerned that the Department would have no share or influence in the distribution of Eaga's assets should they be wound up.

23 C&AG's Report paras 1.8 and 3.2 Back

24 C&AG's Report paras 3.6 and 3.13-3.14 Back

25 Qs 33, 67, 150, 201, 210 and 212 Back

26 Q 67 Back

27 Q 222 Back

28 Qs 33, 67 and 140 Back

29 Qs 141-142 and 207-210 Back

30 Qs 68, 139, 182-184 and 197 Back

31 Qs 185 and 216 Back

32 Q 192 Back

33 Qs 217 and 221 Back

34 C&AG's Report paras 3.8-3.9 Back