Examination of Witnesses (Questions 180
- 201)
WEDNESDAY 11 MARCH 1998
Mr Jamie Mortimer, Treasury Officer of Accounts,
further examined.
180. That is what I am trying to get to.
I think what we want to receive assurance of at this meeting this
afternoon is that there are no differences between you and that
you will not be back here next year. What will you do if your
accounts are qualified next year for this very reason? Will you
not find yourself in a position where you will have to adopt the
measures that are being asked for by the National Audit Office
if you do not reach agreement with them in the discussions that
you are about to have?
(Mr O'Brien) In my experience as
an accountant I have never had a set of accounts qualified. Clearly,
you do your work to ensure that the accounts are not qualified,
which is why I am more than happy to discuss it with the NAO because
I want to ensure that my accounts are not qualified. I am not
interested in getting accounts which are qualified. I want to
avoid that.
181. But if I can take the example that
we have here in front of us, you carried out the work clearly
to your satisfaction that did not meet the requirements of the
National Audit Office and that is why we have the Report here
in front of us. What we are anxious to do is not to find ourselves
in that position again. Do you feel that in some way your organisation
is caught in the dilemma that the National Audit Office is in
about being able to get assurances about the expenditure of public
funds because of the inability so far-and this is an issue that
the Committee of Public Accounts is only too well aware of-of
the NAO to chase public funds through in certain areas where they
have to come back to you for reassurance? Do you think that that
is a burden you really should not have to bear?
(Mr O'Brien) As the law stands I
believe that is part of my job.
182. That is not the question I asked you.
Is that a burden you feel you should be able to bear?
(Mr O'Brien) It is the burden that
I am required to bear by the law now and it is what I am bearing.
My objective clearly is to ensure that I can provide the level
of assurance to the NAO that the accounts are not qualified. I
would repeat, and I know I have said it a few times now, the fact
that the C&AG's Report says "I have not qualified my
audit opinion on the accounts for 1996/97 but I am making suggestions
for the future". I agree with that and we are doing it. There
is no difference between us. The point is that in 1996/97 I am
satisfied that the accounts are properly stated. The C&AG
is satisfied the accounts are properly stated. The amount of money
flowing under the performance regime to franchise operators in
this year is £1.5 million out of total payments to the passenger
railway of £1.81 billion. I am satisfied that we can rely
on these accounts. It is for that reason that I am happy that
the C&AG has not qualified the accounts and I am happy to
take on board, which I have, his comments as to how we should
do things in the future to ensure that he has got the assurance
he needs as well.
183. Finally, can I just ask you one further
question. I think the difference of view that exists between the
two of you comes down to seeking a balance between assurance and
prudence and the impression I get from this Report, from the work
that you had done previously, from the answers that you have given,
is that you believe that the original assurance tests that you
did were prudent in the circumstances. That was not a view that
was supported by the National Audit Office, hence the Report here.
Are you sure that the view that you will take in the future will
seek the balance that the National Audit Office is trying to get
to of proper assurance within the prudence principle?
(Mr O'Brien) Clearly, prudence is
something that I take on board very seriously. What this Report
says, and I quote from the Report, is that "this Report focuses
on the evidence available to support the contractual payments
specified in the franchise agreements amounting to £550 million".
It is £550 million out of the £1.8 billion with the
balance going to British Rail. I am not aware that anyone has
any concerns that that amount of money has not been correctly
accounted for. What we are talking about is the extra £1.5
million over and above the £1.8 billion where the systems
may not have been completely reviewed to everybody's satisfaction.
I am happy that in the year under review, and I am sure that is
why the C&AG was happy to give an unqualified audit opinion--
184. You keep repeating the phrase an unqualified
audit opinion, but is it not clear from the Report that because
a significant amount of the expenditure incurred during the time
that this Report was prepared for still rested with organisations
that the National Audit Office could seek assurance from and therefore
they did not qualify it and the clear implication of the Report
was that if all of your monies had been distributed to the train
operating companies and Railtrack then this Report would have
been qualified?
(Mr O'Brien) I am afraid I cannot
answer that. That is not a question for me to answer. All I can
tell you is that the C&AG Report in paragraph 18 says it "focuses
on the evidence available to support the contractual payments
of £550 million" and then "we have a clean audit
opinion". I am afraid I cannot answer your question about
whether or not something different might have happened. I am not
aware that there are any worries that the £1.8 billion has
not been paid out properly. In terms of the franchise payments,
the amounts are laid down in the franchise agreements. The £1.5
million net that we paid out to franchise operators under the
performance regime is covered by these other systems, like TRUST
and GEMINI and I want to do a review of those anyway to satisfy
myself going forward. I do not believe there is a difference of
opinion between us.
Mr Love: Can I just say, finally,
that you were rather diffident earlier on about coming before
the Committee of Public Accounts and this is your first occasion.
You will be aware that the Committee of Public Accounts stands
at the apex of the public expenditure watchdog system, if I can
call it that, and it will be important. The reason you have come
before us this afternoon is because we require assurance regarding
the expenditure of public money and we will be looking to see
progress and agreement so that you do not have to come back in
front of us again next year.
Jane Griffiths
185. Mr O'Brien, do you really believe that
the commercial relationship between Railtrack and franchise operators
eliminates the scope for the manipulation of data?
(Mr O'Brien) I do not believe it
removes it, but given that they have got opposite objectives then
the scope for any wrong doing is limited.
186. Note 11 on page 72 illustrates the
amount of taxpayers' money that is being used to make incentive
payments to operators for providing a service which the public
should expect but with no tight controls to assess the quality
of the data on which the meeting or otherwise of those obligations
is based. How can it be guaranteed? How can this Committee be
assured that this expenditure of taxpayers' money is good value?
(Mr O'Brien) I need to assure myself
and in due course the C&AG that money is being properly spent.
We have conducted a review in this particular year of the train
running systems which provide the information which enabled us
to form a view that the areas that we were particularly concerned
about had been adequately covered. As I mentioned before, we are
looking to extend that review this year to make it a more thorough-going
systems review.
187. But these figures and this report are
before us at a time when, to use Great Western as an example which
has been referred to by Mr Williams, Great Western has been in
receipt of large amounts of public funds and is now about to change
hands, so it seems, with very great enrichment of certain individuals
as a result, and this report comes before us at the time when
that situation pertains. I do not think I have had an answer to
the question about the quality of data. Where is the assurance
of the quality of data on which these assessments are based? You
have said that you have satisfied yourself, but how?
(Mr O'Brien) First of all, the incentives
under this performance regime accrue to a number of different
people. The people who get money from these incentive regimes
are Railtrack, the 25 train operating companies, where those moneys
flow between the two. Those companies' accounts have been audited
by different firms of accountants who have themselves given clean
audit opinions that the accounts are properly stated. In the case
of Railtrack, which is the biggest one, the amount that they receive
under the performance regime is the £29 million in the year
in question, which was almost 10 per cent. of their total profits.
That is a material amount, in my view as a professional accountant,
and their auditors would have taken that seriously in forming
their view that the accounts were properly stated. So you have
the fact that the people receiving this money have themselves
been independently audited by a number of different people. We
ourselves conducted our own independent review, together with
the operators and Railtrack, to address the particular areas in
the system that we thought might be at risk and they were the
areas of potential fraud and potential error. The report was produced
by Coopers & Lybrand and, as I said, went to 15 volumes, and
basically said that we could take a level of assurance that what
we were seeking to cover had been covered and in the C&AG's
report he also says it is correct that we could derive substantial
assurances from that work. So in the year in question I believe
we have done whatever was necessary to assure ourselves that the
accounts were correctly stated. Clearly the C&AG must agree
with that, otherwise they would not have signed the accounts,
but I do accept the point that as the amounts grow over time we
will need to do a more thorough-going system review, which we
said we are going to do, and we will agree the terms of reference
with the NAO.
188. The C&AG mentions in his report
that there have been some new systems for monitoring franchising
operators that you developed this year. When do you expect the
results of that developmental process?
(Mr O'Brien) They are happening
now. We have developed our own in-house suite of programmes which
allows us to take the information and interrogate it, but it does
not address the C&AG's underlying concern, which is, "That's
all very well but what about the source data?" so our own
information, our own systems, I believe, are, frankly, getting
better as we are refining them and we are actually pushing more
and more things back to the train companies because we are getting
tighter and tighter, but we still need to do, in my view, a review
of the underlying systems which provide the core data.
189. So the in-house systems that you have
just referred to, when fully in place, are going to provide no
opportunity to let errors go unchecked?
(Mr O'Brien) If errors occur in
the source information which is put into the original train running
information, there is still an opportunity for error, but with
our own systems the opportunity for that error is being narrowed
all the time.
190. Would you agree that it would be a
good idea to have as a priority for the future independent assurance
of both systems and data? I know that you have given me an answer
on that already but it does seem to me that it is something worth
presenting to you as a suggestion for the future, that there be
independent assurance on those data?
(Mr O'Brien) Yes. As I mentioned
earlier on, I do not believe it is a sensible use of my resources
to try and replicate the data which has already been provided
by Railtrack. I do think it makes sense to rely on independent
verification of that data and that is what we want to put in place,
yes.
Mr Campbell
191. Mr O'Brien, I will be very brief, just
two or possibly three points. You have made regular reference
to South West Trains as an example of how you propose to take
action in compelling them to improve their services. Despite the
difficulties that you have discussed of categorising breaches,
if we could talk about serious breaches of contracts, in your
view how many breaches in the last year have been serious breaches?
For example, in how many cases did you have to issue threats?
(Mr O'Brien) None.
192. So South West Trains was the worst
example?
(Mr O'Brien) Yes.
193. I come back to my original question.
How many were, in your view, serious?
(Mr O'Brien) There has been no other
instance where I have had to take enforcement action in terms
of proposing an endorsement notice. That is the only one.
194. Moving on, how far, in your view, would
train services have to deteriorate before you would consider suspending
franchise payments or presumably, in the worst case, actually
cancelling the franchise?
(Mr O'Brien) The procedure would
be that once the operator is in breach of the franchise agreement,
we then have to apply the enforcement powers under the Railways
Act. As it is currently constituted, if there is a serious breach
which I do not believe has been remedied, I will then propose
to make an order which says, "Fix it by this time or else
this is the action I will take." If by that time it is not
fixed, we will levy whatever penalty we said we would and then
put in place another order, which may say, "If you do not
fix it by another month or so, then the penalty goes up,"
whatever appears reasonable in the circumstances, but if it is
not fixed, ultimately that is a default of the franchise and we
take their franchise away.
195. In answer to one of my colleagues'
questions earlier asking about the comparison between British
Rail's performance and the current performance of operators-and
I understand that BR's performance is, in many senses, the benchmark
against which these operators are currently being measured-you
said in fairly general terms that in your view what was now being
delivered was cheaper, more reliable and more punctual than BR?
(Mr O'Brien) Yes.
196. I am not doubting your judgement on
that at all but that could be in very general terms. On what routes
or in what areas do you consider the service is currently worse
than BR were delivering? You could refer to paragraph 11 on page
72 if it would help?
(Mr O'Brien) As I mentioned earlier,
this is from the accounting perspective the correct information
during the course of the year but actually I do not think it gives
you the answer that you want. The question, as I understand it,
is, who is doing worse or who is doing better there.
197. Yes, who is doing worse than BR is
the question?
(Mr O'Brien) My general point that
it is cheaper was just the objective fact that under BR the amount
of subsidy was of the order of £1.7-1.8 billion, taking out
things which you cannot compare year by year, and over the next
two years it falls significantly. In terms of reliability, we
produce every quarter reliability statistics which show over time
that the number of trains which should start their journey when
they say has actually improved in the first year; it has been
broadly neutral since: in terms of punctuality, that we are paying
moneys out under the performance regime and by and large that
means that punctuality, although it has slipped back in the last
few months, is still better than it was under BR, otherwise we
would be paying out money.
198. Yes, I understand that. Now could you
answer the question, which was, on which routes, in your judgement
that you have made, is that not the case?
(Mr O'Brien) It is not a question
of judgment, it is just how the contract works. I do not intervene.
The criteria are laid down. Just to put it in context, last year
fourteen companies received money and five had money taken away
from them. This year ten companies are receiving money and nine
are having money taken away from them, and that is not covering
the period of this review, it is up-to-date now. The ones which
are having money taken away from them are Connex South Eastern,
South West Trains. If I can just say in passing, if it would be
helpful, every quarter we produce our performance bulletin which
we make widely available and that lists the amount of money that
we have paid in the previous quarter to each of the companies
under performance regimes and also the figures for the year to
date. So the ones which are in the public domain at the moment
in terms of who has paid out money are Connex South Eastern, Great
Eastern, Thames, Thameslink, WAGN, Chiltern, Mersey Rail. [16]
199. You will appreciate that this Committee
gets so much reading that I suspect that is the only thing that
I have not read in the last year. Just to conclude, correct me
if I am wrong, but what you are saying is that set against the
performance of BR previously in some areas, the ones that you
have listed for example, the performance is currently poorer?
(Mr O'Brien) Yes.
Chairman
200. I have one point to make to you and
a couple of questions, one of which I want you to answer now and
one or two later. Firstly, I think it is worth saying to you that
this exchange has been slightly frustrating for a number of members
of the Committee and that might be partly due to a misunderstanding.
The National Audit Office Act 1983 lays down the purpose of the
National Audit Office and, by implication, the PAC to look at
the efficiency, effectiveness and economy of the various aspects
of the public sector and now the privatised sector that we deal
with. That means not just the costs and the financial expenditure,
it also means the service levels, to pick a singly inappropriate
American metaphor, where the rubber meets the road from the point
of view of the consumer and the interest of this Committee is
every link in that process and not just the parts that are within
your immediate controls. That is why I think a number of people
have pressed you time and again because it has been difficult
to be clear the extent to which all those links are assured. As
a Committee we cannot rely in our approach on trust either as
an acronym or as a reality. I hope you will take on board the
point that this Committee has concerns. I have a couple of questions
for you. You were required by the new minister in November to
publish a quarterly bulletin describing the operating performance
of franchising. Was that the first time you did that?
(Mr O'Brien) No. We started that
in November 1996 when we had the first eight franchises which
had been let and we produced the information. We have been doing
it quarterly ever since.
201. So this is formalising something you
are already doing?
(Mr O'Brien) Yes.
Chairman: That is helpful. It would
be useful for the Committee to see the latest version of when
you are reporting from. [17]That
would be quite helpful in any event. The next two questions I
have got for you I will ask you to let the Committee have a note
on. Firstly, Mr Williams and others asked you about the comparative
subsidies and you hedged around your comments, quite rightly and
quite properly, with comments to the effect that not all the numbers
were perfectly comparable, the last year in effect of British
Rail as was and the current circumstances. I would like a note
from you pulling out those hedging comments so we can see a like
for like comparison. I would be grateful if you could provide
the Committee with that. [18]The
second note I would like from you relates to the time tabling
questions that you were talking about before and the specific
example was Great Western. You and Mr Stokes said that the ability
of the various companies to alter the timetable was constrained
in some fashion. Could we have a note outlining exactly how that
constraint works and could you perhaps give us a worked example,
Great Western might not be a bad example to show us so that Mr
Williams can know exactly how his own train service works. [19]If
you can give us both those things that would help clear up a number
of the unresolved issues today. Beyond that all I have to say
is thank you very much for coming, Mr O'Brien and your colleagues,
and for giving evidence today.
16 Note by Witness: and Island Line. Back
17
Note: See Evidence, Appendix 3 page 38 (PAC 237). Back
18
Note: See Evidence, Appendix 4, page 47 (PAC 240). Back
19
Note: See Evidence, Appendix 2, page 35 (PAC 241). Back
| 
