Examination of witnesses (Questions 200
- 219)
MONDAY 9 MARCH 1998
SIR JOHN
BOURN, KCB,
MR ANDREW
TURNBULL, CB,
CVO, MR
BRUCE SHARPE,
MR JOHN
CLOUGH, MBE
and MR FRANK
MARTIN
200. Why is it legitimate for him not to
distribute it? Your whole argument on an incentive is, with respect,
fallacious. It is not an incentive to someone to have reserves
if they cannot use them.
(Mr Turnbull) The way they use them is in two
ways.
201. They put them in the bank.
(Mr Turnbull) No. They can make a donation to
the charity which is something to develop research or whatever
in energy efficiency. The other is they can develop the business
against the possibility that they lose the contract in 2001.
202. We are working round to that. It is
getting more and more interesting. So you accept the broad brush
figure that the unspecified reserves might be up to 3.7 million
by the year 2001? What happens then? What legal right do you have
to those reserves?
(Mr Turnbull) We do not have any legal right to
those reserves. The relationship is not between a Government department
and an NDPB, it is between a Government department and a contractor.
203. I see. If you have no legal right to
it, what is to stop them keeping it? They are nice people. We
know they are very idealistic about the work they are doing, and
I mean this genuinely, but in law what would happen?
(Mr Turnbull) If we regard the surplus as being
reasonable and having accumulated at a reasonable rate over this
period they have earned this money and they are entitled to keep
it. In the same way that another contractor who undertook work
would be entitled to keep it and they would then distribute money
in dividends, this organisation distributes it as donations to
a charity.
204. But if they folded up in 2001, would
they have to give it to a charity?
(Mr Turnbull) They cannot distribute it as dividends.
205. They would have a big party.
(Mr Turnbull) There is not much else they could
do.
206. Is it going to float in limbo?
(Mr Turnbull) They can do two things. They can
seek some replacement business that is consistent with their articles
of association or they can distribute this to the charity, as
they have done.
207. This is why I say you have developed
a very un-Treasury like characteristic in the way in which you
deal with this. To this Committee this is not a very professional
way to be allowing a company that is not supposed to distribute
reserves to then build them up and then not have tied down your
ability to control what happens to them.
(Mr Turnbull) We can control them if we thought
the accumulation of reserves year by year was excessive or unreasonable.
208. How?
(Mr Turnbull) We would demand, and given the nature
of the relationship between us we would certainly be able to achieve,
a voluntary renegotiation of the contract.
209. Mr Clough is a very nice man but a
London bus might get him. What if a hard headed character, someone
running a rolling stock company or something like that, were appointed
in his place, where would you go then?
(Mr Turnbull) The ultimate sanction is that I
come along and report to this Committee that the Government thought
these services were unreasonable, we sought a renegotiation of
them and this lot refused to have anything to do with it. Their
position, their public credibility, would not withstand that.
210. You could go along and say that to
the people in charge of the rolling stock companies. They would
laugh at you, would they not? They would not be particularly impressed
by that as an argument. The point is that the Department has not
safeguarded the public position in relation to this money and
you have for some reason said, and I use your words "the
surpluses are an incentive to work well". I think what this
Committee finds very hard is why in fact you find not putting
the money to its intended use working well?
(Mr Turnbull) Why are you saying they should work
for nothing?
211. But according to you they are not going
to have it anyhow so they are working for nothing.
(Mr Turnbull) They are not working for nothing.
212. Tell me about it.
(Mr Turnbull) They accumulate the reserve and
they are able then to use it either to develop a successive business
when they lose this business or to donate the money to a related
charity working in the same field.
Mr Williams: I will
leave it to Mr Wardle, he is not as generously spirited as myself!
Mr Wardle
213. May I apologise for being detained
elsewhere and arriving half an hour late. Mr Turnbull, I do apologise.
I only have two questions for you, Sir. The first one has more
to do with your CV than to do with the report. The second one,
believe me, is to do with the report. When you were in Zambia
did you learn to speak Cinyanja?
(Mr Turnbull) About three words: Muli bwanji
and Tuli bwino.
214. Zkomo kwambiri. Okay, thank
you. That is simply "How are you? I am well" and I said
"thank you". In that case let us just dwell for a second
on my one question on these reserves. I am not against a sensible
reserve in any business, it is prudent, but I could not quite
understand your earlier answers, Mr Turnbull. You mentioned figures
two and three. If you relate certainly figure two to figures 12
and 15 something is missing somewhere. You said that you had not
renegotiated the fees since 1995 but you looked at the accounts
every year and, therefore, you kept an eye on the surpluses and
you are content with the way that surpluses have grown. Surely
that surplus is really only a product of one of two things: it
is either volume of business, and you have talked about that,
or it is the gross margin, the operating margin?
(Mr Turnbull) Yes.
215. It may be a combination of the two,
as more money is pumped in, and you showed us the bar chart in
figure two, as the volume increases with that healthy, possibly
improving, margin the surplus is growing. If it is growing on
this curve I am surprised that you feel it is not time to renegotiate
the fees unless there is some Machiavellian purpose because you
do not intend to renew the contract and you want to be kind to
them. By the way, these cannot be charitable donations because
if a donation is made—I am not an accountant although I
do love accounts, I am only an unskilled amateur—presumably
that would be an expense somewhere on the profit and loss account,
as it were, by definition it would not be in the reserves. So
your reserves are growing. You can take either 1993-94 to 1996-97
or just the two years, 1994-95 and 1996-97. Perhaps you can explain
it. It seems that the number of grants if you look at figure 12
increased by 14 per cent but the surplus in those two years rose
by 100 per cent which I think is a very interesting trend. If
you take the three year spread from 1993-94 to the edge of the
curve it seems that the volume of grants went up by just over
130 per cent, 135 per cent let us say, but the surplus grew in
those three years by a little over 300 per cent.
(Mr Turnbull) Yes.
216. Does not all of that signal that it
is either high time for another review, which you do not seem
to think is necessary, or it must suggest you are allowing this
organisation to fatten itself for some reason we have not plumbed.
(Mr Turnbull) This is something which has plagued
the whole business, that we have made a change in the parameters
of the scheme and the fees structure but we do not have the results
that result from that change.
217. How long is it going to take do you
think?
(Mr Turnbull) We will get the 1997-98 accounts,
the financial year ending this month. We believe that will show
that the operating margin will decline. We also need to look at——
218. But if you are keeping up the volume
by extra grant money then the surpluses could still grow. Should
you not be a little tougher on them?
(Mr Turnbull) What stays the same is the total
amount of grant which is roughly £68 million. Because the
VAT levied on that has been reduced they will have to service
a larger number of grants for the same money. The first thing
we have done is we have renegotiated the fee structure and included
a deflator element in it.
219. From now?
(Mr Turnbull) That is effective in 1997-98. For
1998-99 there is this second change, in the way that the VAT is
levied which will require them to process a larger number of grants
for the same fee. The question then is when we look at the interaction
of those two are we still satisfied with what results? We will
look at that and if we are not satisfied we will seek to adjust
the fees structure. That is understood between Eaga and ourselves.
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