Examination of witnesses (Questions 60
- 79)
MONDAY 9 MARCH 1998
SIR JOHN
BOURN, KCB,
MR ANDREW
TURNBULL, CB,
CVO, MR
BRUCE SHARPE,
MR JOHN
CLOUGH, MBE
and MR FRANK
MARTIN
60. You do not believe the figures.
(Mr Turnbull) They are true, I am not saying they
are not correct, the question is are they absolutely like for
like.
61. The question could be put the other
way round: are you satisfied that HEES is getting the same value
for money as the electricity companies are?
(Mr Turnbull) We are satisfied that HEES is getting
value for money.
62. As good a value for money as the electricity
companies?
(Mr Turnbull) I have not examined in detail the
value for money the electricity companies get but I am satisfied
that HEES itself is getting value for money.
63. Can I take you on to Eaga's legal past
and ask you how much has been claimed since these powers were
clarified by your Department in July? How much has been claimed
back from the installers?
(Mr Turnbull) I think Mr Clough's answer was that
this was never really an issue. Before this issue was raised about
the legal powers Eaga was able to challenge claims that it thought
were unreasonable and never had any difficulty when challenged
in getting those claims modified. It never had anyone come along
and say: "You are interfering in a free contract entered
into between me and the householder" which is the theoretical
point at issue here. It has not made any difference. However,
in the way we are drawing up the regulations we will make this
point more explicit, that Eaga does have this power. It has not
caused any problems in the past.
64. Can I take you on to the structure of
Eaga and refer you specifically in the first instance to figure
13. Maybe I should ask Mr Clough why we have this structure when
the bulk of the work is carried out by Eaga Limited who administers
HEES in the Northern Ireland scheme? Why do you need to have this
structure of holding companies and service companies and Eaga
Limited?
(Mr Clough) The intention there was that Eaga
Limited is the original company, Energy Action Grants Agency as
was established in 1990. When opportunities arose in the market
in terms of regional electricity companies coming into delivering
energy efficiency measures we were approached by many of these
electricity companies to manage their programmes of work for them.
We felt that it was most appropriate to do this through a separate
company, not least so that we could demonstrate that our activities
were separate and that there was no cross-subsidy between either
of these operating companies in terms of these public and private
finances. That was the overwhelming reason why Eaga Services was
created. Therefore, it made sense to have some sort of co-ordination
to subsidiary companies rather than have them as entirely stand
alone. That was a matter for the board at the time and the board
judged it correct and proper to have the group structure which
is designated here.
65. I am sorry I do not have the annual
report of Eaga Services Limited but can you give the Committee
some idea of the commercial work that Eaga Services Limited carries
out, the turnover, who are its directors and how much the directors
are paid?
(Mr Clough) Sure. Eaga Services Limited in the
last financial year turned in the order of £800,000, mainly
working for regional electricity companies, some local authorities
and some water companies. That compares with Eaga of the order
of £6.1 million in the same year. The directors are the same
currently between Eaga Services and Eaga Holdings, albeit they
have separate meetings etc.. The only payments made to directors
are from the holding company and the boards of these companies
have a common board. The only difference there is that I am on
the board of Eaga Limited whilst I do not sit on the other two
boards. The board is entirely constituted of non executive directors.
The non executive directors receive £5,000 per annum and
the Chairman receives £12,500. Clearly there is only one
payment, there is not a payment for each company, there is one
payment.
66. Thank you very much for that helpful
answer. Can I come back to Mr Turnbull and ask him about the reserves
which Eaga Limited hold which I believe now amount to three million.
Is that correct?
(Mr Turnbull) Yes.
67. Are you satisfied that a company which
is solely set up to receive taxpayers' money from your Department
to deliver Government schemes should accumulate that amount of
surplus in the time which it has been operating?
(Mr Turnbull) Yes we are. We are satisfied with
the position to date, although we recognise the point that is
pointed out in the report, there ought to be an understanding
of what would happen if something changed in the scheme which
meant that this accumulation of the surpluses accelerated. As
things stand at the moment the accumulation at a rate of about
£500,000 a year is something we think is reasonable and the
consultants who investigated this at the time we renewed the contract
thought the same.
68. Clearly that surplus is accelerating,
is it not, because they have built up a total surplus over the
period of 4.9 million of which 4 million was accumulated in 1996-97.
(Mr Turnbull) It accelerated in particular in
the year 1995-96, which was the year when we had this surge of
applications from the over-60s before their eligibility for the
scheme was restricted. What has happened since then was the rate
of the operating surplus as a proportion of Eaga's turnover was
lower in 1996-97 and we think it will be lower again in 1997-98.
69. But is it sensible, Mr Turnbull, to
give a grant to a company that then makes a profit, a wholly non-distributing
company, and pays tax of £1.3 million. Would it not be more
sensible to renegotiate your arrangements with Eaga Limited on
a lower basis so that they do not make a profit on the money you
have given them and do not pay tax on it? It seems a daft sort
of circular way of the Government paying out and collecting money.
(Mr Turnbull) They are a contractor. Eaga Ltd,
although originally started by a charitable organisation, are
a trading organisation. One of the things that the directors can
be conscious of is, as we said earlier on, come 2001 they could
just lose the business overnight and they have to be prepared
to face that which is why they are looking for alternative business
opportunities. The question is whether we could have done it better
by either employing one of these facilities management companies
but we do not think we would have got it significantly cheaper
from there, and we did not want to do it in the Department which
would have committed us to running the scheme indefinitely. This
is a contractual arrangement. Admittedly it was one where the
price was set by single tender plus negotiation rather than by
competition, but nevertheless there was quite a hard negotiation
on the fees for the period from 1997 onwards.
70. Two further questions if I may, Chairman.
I would like to ask the Treasury in this company structure whether
there is a VAT gain to the Treasury or a VAT loss?
(Mr Martin) I am afraid I cannot answer that question.
71. The report does not make that clear.
(Mr Turnbull) What happens here is that the VAT
on the fees that we have paid to Eaga since 1994 have been refunded
and we have redirected those into the grant. By agreement with
the Treasury, the Department has been allowed to keep the money
we get back, VAT rebate, and put it into the grant. If Eaga charge
us about £6 million there will be £1 million of VAT
in that and we take that £1 million of VAT and add it to
the grant which means we can do so many more homes.
72. Finally, 0.55 million has been distributed
by Eaga to charitable causes. Are both of you satisfied that these
charitable causes are genuine charitable causes which benefit
home energy efficiency schemes?
(Mr Turnbull) I am satisfied that they benefit
the cause of home energy efficiency. They would not necessarily
go into schemes, they may be research projects of the kind that
John Clough has mentioned. I am satisfied that they go into causes
that we as a Department are supportive of.
Mr Clifton-Brown: Thank
you.
Mr Hope
73. Can I turn to the question of costs,
page 55 of the report. The way that the system works as I understand
it appears to be that you agree with the control on to the list
on the basis of the average costs that they put up at the start
but you do not have any kind of control over the individual claims
that are then submitted once the thing is up and running. Figure
23 seems to show that. In seven out of 30 cases the installers
had a huge variation between what they forecast their cost would
be and their actual cost. Have I read that graph correctly?
(Mr Turnbull) All of these bar charts are all
descriptions of pre-1997 schemes.
74. We are looking back.
(Mr Turnbull) We now have a better scheme.
75. Indeed, and I am looking forward to
hearing about that, but first I just want to——
(Mr Turnbull) There are variations. Those variations
arise principally where someone does some work on a property that
is different from the average. That is the principal source of
these variations.
76. Variation between the forecasts and
actual was because of the difference in the properties that they
were thinking of doing.
(Mr Turnbull) Yes.
77. Is that what you are saying?
(Mr Turnbull) Yes.
78. They did not in their forecast take
into account that they might be doing different sorts of buildings
when they were doing their work?
(Mr Turnbull) Yes.
79. You took them on the basis of their
forecast costs, their forecasts did not take into account the
different nature of the properties they were doing work upon?
I cannot believe you could have done that.
(Mr Clough) This really comes down to whether
they forecast accurately or not.
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