Select Committee on Public Accounts Minutes of Evidence


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.


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries

© Parliamentary copyright 1998
Prepared 24 June 1998