Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 1 - 19)




  1. This afternoon we shall be taking evidence on the Comptroller and Auditor General's Report on Emergency Aid: The Kosovo Crisis. The witnesses are Sir John Vereker, Permanent Secretary at the Department for International Development, and Mr Peter Berry, Executive Chairman of the Crown Agents and you have some other colleagues. Would you like to introduce them, Sir John?

  (Sir John Vereker) On my right is Dr Mukesh Kapila, Head of our Conflict and Humanitarian Affairs Department. On his right is Mr David Sands Smith, Head of our Aid Policy Department.
  (Mr Berry) On my right is Alan Matthews who is Head of our Emergency Relief Team.

  2. Welcome to all of you. Some of you have been here before, others not. Our proceedings are reasonably informal. I will outline what paragraph I am talking about before I start the question. Can I say before I start, Sir John, that I think the whole Committee recognises the Department's major contribution to easing the humanitarian crisis in Kosovo and the dedication and hard work of all involved in that operation. You start with that commendation.
  (Sir John Vereker) Thank you.

  3. I would like to start with a question about preparedness and it relates to paragraph 2.22 and also paragraph 2.29. I see from that first paragraph that as you did not re-tender the contract for an emergency response service in good time, you had to operate for much of the crisis on the basis of contract extensions. Paragraph 2.29 tells us your contractual arrangements for air charters had lapsed. How did this situation arise and what does it say about your state of preparedness?
  (Sir John Vereker) Thank you, Chairman. Let me take the air charter one first because I want to say straightaway, as this very fair Report points out, we did find ourselves in the position at the beginning of this severe humanitarian crisis of not having an extant air broker contract. That, Chairman, was because we had not expected that we would find ourselves again in the business of directly contracting air charters rather than using international organisations. We had not expected it because our practice increasingly had been to fund international organisations. With the advantage of hindsight, we should have extended or renewed that contract. We have now done so. When the crisis began we did so by means of an oral contract with Hanover Aviation and that worked fine. It was undoubtedly the case we were left without a contract there. As far as the contract with the Emergency Logistics Management Team of the Crown Agents is concerned, that situation is a little different. We recognised that the first contract was coming to an end. We had re-tendered. The team had been selected as the preferred bidder and we were starting on post-tender contractual negotiations when the crisis broke. I would invite the Committee to agree that it would not have been reasonable under the circumstances of this particular crisis for us to have called a halt at that point and said, "Okay, we are going to start all over again." We simply renewed the contract for a number of different periods as set out in the Report until the crisis was over, and meanwhile carried on with the post-tender negotiations. So we were ready for that one.

  4. The air travel aspect left you in a position of no documentation to demonstrate you had obtained the best price for the 54 air charters arranged by Hanover Aviation. How did that come about?
  (Sir John Vereker) That was not a consequence of not having a contract because, as I say, we had an oral contract with them to continue on the basis of the previous written contract. The documentation which had been made available to us on two occasions when we asked to see it in the course of crisis, it turns out we did not keep. We should have kept it, with the advantage of hindsight, and next time we shall make sure we do keep it and I checked before this meeting and we have since had an occasion to use the emergency air lift for Sierra Leone and we are now keeping appropriate documentation. I believe the Audit Office had access to the books of Hanover Aviation and will have seen themselves that the procedures were followed.

  Chairman: That is not the point, is it, in this case? It is the question of your notes. We will adjourn for a few minutes. We will not keep you very long.

  The Committee suspended from 16.41 to 16.46 for a division of the House


  5. My apologies, Sir John. Let us press on. Others will come back to the issues we have talked about. My next question relates to paragraph 3.7 and that states that it was not always clear what criteria you applied to specific grant applications, what you had done to test the robustness of project proposals, and how you reached the judgments you made about the amount of money to award. Given this lack of documentation, how can you be satisfied about the prospects of value for money in these cases?
  (Sir John Vereker) Chairman, the principal protection that we have are the guidelines that we send out to all of those who apply for grants from us contained in this document called Guidelines for Humanitarian Assistance which requires applicants to set out in very considerable detail the purposes for which they are seeking the grant, their qualifications, and the outcomes they are trying to secure. I have personally looked at a number of these to check that we were getting this kind of detail and, indeed, we certainly have been. For instance, of the two that I looked at one was from the World Health Organisation and one was from Marie Stopes, Marie Stopes for a rather modest amount of money, less than £200,000. There was a detailed application running to some 15 pages setting out in very great detail exactly what they proposed to do and why and what they were trying to get from it. I have also looked to see how the Department handles these. We did have a very large number of applications and we were trying to do quite a lot of things at once. We did not go through an enormously elaborate or structured process but it is clear that we did two things. First of all, we looked carefully at all the data we were getting and assessed it and tried to reach a judgment on it and, secondly, we took the decisions at the appropriate level of delegated authority, and indeed the NAO Report says as much. In the light of what, I repeat, we have found a constructive report, we have concluded that it would be sensible for us to somewhat more tightly structure the work we do when we get these applications. We have now prepared a check list through which the officers concerned at the appropriate level of delegated authority should go through before taking a decision and in future that will be there on file as part of the audit trail.

  6. Thank you. The point made was not that there were not individual cases, which there were, but that the system in total was not thorough, which from reading again the paragraph on page 37 you will see. However, I am sure others will come back on that. Let me move on to paragraphs 4.3 and 4.4 and figure 11 which show—to me I say rather worryingly—you did not keep the level of funding to Crown Agents under review and the balance in your non interest bearing accounts did not fall below £2.7 million. Why was this and what lessons have you learnt?
  (Sir John Vereker) Well, Chairman, I have to say that I am somewhat unapologetic about this, having looked at it carefully. The truth is that we were dealing with a rather unusual situation in which the requirement placed upon our contractors was to run accounts for, among other places, Albania and Macedonia which have rudimentary banking systems and Kosovo which at the time that they had to run accounts had no banking system. Cash was an absolutely vital part of our ability to respond quickly and our ability to respond quickly was one of the niches which in this crisis we clearly occupied. The international system was looking to us to do things fast. I have not been able to persuade myself, looking at this, that we were wrong to fund this system in as liquid a way as we did. I should, for the avoidance of doubt, make it clear that these accounts were held in our name by Crown Agents Financial Services Limited. They were not amounts of money passed to someone else. The issue that interestingly the National Audit Office put its finger on is that because of the average amounts of these balances there may have been some loss of Exchequer interest because we were, as it were, drawing down funds which the Government could have been earning interest on. I also looked at that carefully and I have talked to my contractors and it is a noticeable feature of these arrangements that we were not charged banking fees on these accounts. The reason we were not charged banking fees was because there was a substantial amount of liquidity there which made it possible for Crown Agents not to charge us those fees. A quick calculation would lead me to believe that were they to charge fees as a result of our having lower balances the public purse might actually have been worse off. I do not think, Chairman, but I am happy to debate it further, we have an open mind about this, there was any loss of value for money for the taxpayer and there was certainly no loss of control because the accounts were in our name.

  7. Let us deal with these points one by one. Firstly, the question of liquidity in Kosovo. This £2.7 million presumably was not all held in Kosovo or Macedonia?
  (Sir John Vereker) The £2.7 million which is referred to in here is, as I understand it, subject to correction from our colleagues in the National Audit Office, the aggregate average month end balance from accounts which were held for use in Albania, Macedonia, Kosovo, an account for procurement, an account for payment to the United Nations High Commission for Refugees and one other account.

  8. Can we get confirmation of that from the NAO?
  (Mr Burr) That is correct.

  9. Where was the money? Was it in the London account? Was it in the Kosovo account? Was it in cash?
  (Sir John Vereker) The money was held in the UK.

  10. That is what I thought.
  (Sir John Vereker) In an account operated by CAFSL regulated by the FSA in our name.

  11. Okay. That is the point I want to be clear on. You are quite right, you were very fast off the mark in this theatre and we would not want to handicap that, but this money effectively is on balance in the UK and, therefore, the next question coming up is why did it need to sit in the Crown Agents' account at zero interest? We are talking now about something which must be at least £100,000 per annum in terms of interest charges. Are you actually trying to tell us you would have been faced with over £100,000 per annum of bank charges for having a call down account in your name which is interest bearing?
  (Sir John Vereker) Chairman, you might want to address that question to our contractors.

  12. I will in a moment.
  (Sir John Vereker) Who will be in a better position than I am to say what they would have charged.

  13. I will get to them in a moment.
  (Sir John Vereker) But the National Audit Office calculation recorded in paragraph 4.4 is that the Exchequer interest cost might have been £5,000 for each one million transferred in advance of need. I have not been into the arithmetic of that. The truth is that the overnight rate would be very, very low indeed, but no doubt the NAO know how they reached this figure. I would not be surprised to be paying bank charges which amounted to that order of magnitude given that the Crown Agents were operating, I think I am right in saying, at the end of this period 50 different what we call MIS codes—Management Information System codes—within these six accounts.

  14. They would have to cost that amount per month per million, a total of £10,000 a month in bank charges. I will put the question to them in a moment.
  (Sir John Vereker) The main point I want to make, Chairman, is it is material that there would have been a charge had we been running at a lower level. There would have come a point at which we would have been charged bank charges.

  15. I wonder if it would have been £2.7 million. All right. We will come back to that. Let us move on. Paragraph 4.9 shows that there is a potential conflict of interest in field office staff, who are themselves employees of the Crown Agents, deciding whether to use the Crown Agents to procure items which incur transaction fees payable by the Department. What steps have you taken to ensure that the procurement decisions taken on your behalf by employees of the Crown Agents are appropriate and give value for money?
  (Sir John Vereker) I have done two things, Chairman, because I read this passage extremely carefully. It is obviously a concern to an accounting officer if it is suggested that there is a conflict of interest which might lead to a loss of value for money for the public purse. The first thing I have done is I have looked very carefully at what actually happened. It is quite revealing that when you look at the pattern of procurement undertaken by ELMT, the pattern that emerges is a very strong preference on their part for using local procurement and the most rapid possible sourcing rather than sending things to the Crown Agents procurement group because the nature of the contract with ELMT and all the incentives on them are for rapid effective response. For instance, there was a large order I saw for electrical machinery which went to Dubai because it was off the shelf and most quickly available. I have not seen any evidence in what actually happened of ELMT behaving as if they were in a position of conflict of interest. However, recognising that we want this arrangement to continue because it is effective and fast to have the same contracted party who are undertaking supply of emergency response services to us to undertake procurement, we have instructed also our own procurement team to visit the ELMT—the Crown Agents' emergency response people—four times a year to audit the way in which they are using their discretion under the procurement arrangements. So we will have a structured way of telling whether any conflicts interest are being exploited.

  16. That is fine. I take the point, I think it is rather an important point in this context, that you want to have a system which will stand up robustly in the face of these problems in the future. After all, in two years you have had at least two major emergency responses. Your Department is the one that has to respond faster than any department, other than the MoD, and maybe faster than them sometimes, but I will pass by that. Here you have a situation where in plain English you have a Crown Agent purchasing from a Crown Agent and you are paying for the privilege of doing that, so it is important that arrangements are place. Thank you for that. I am going to move on to Mr Peter Berry. Others will come back later no doubt on many of these issues which are open-ended. Mr Berry, my first question to you relates to paragraph 2.7. That tells us that although the people you employ in field offices are on short-term contracts, they have not been given detailed written guidance on matters such a financial controls and procurement practices. Why is that, and what have you done about it?
  (Mr Berry) Thank you, Chairman. The people we employed were under the terms of our contract experienced people, some of whom in fact have worked for us for a long time. From that point of view the staff of the field offices themselves were really experienced and well-qualified people as the bosses, as it were and, as the Report also says, a lot of responsibility was centred locally, as it had to be. We were in three different countries and it was a very fast-moving situation. They were kitted out with packs of computers, equipment and so on. On the detail which the National Audit Office referred to, some of which was obviously not there on day one because the thing was moving very rapidly, I wonder if I might bring in Mr Matthews at this stage because he was responsible directly for the application.
  (Mr Matthews) Chairman, we really would have liked to have prepared our people to the very last detail. I am an ex-military man and standard operating procedures is what we lived by. The plain fact of the matter was we did not have standard operating procedures because it was not a standard operation. We briefed our people as best we could. As my Chairman said, we selected the best people we could get. Many of them have worked for us before. For example, the individual we deployed on day one to head up the Skopje field office had worked for me in headquarters, had worked for us in Bosnia for four years, and had worked in Sierra Leone, so he knew the procedures better than any of us and was an experienced field man. The same applies across the other two field offices. We agreed with them that part of their remit when things settled down was that they would contribute to standard operating procedures from their own experience on the ground which, let us face it, is where the lessons are best learnt. They did that. The administrator of the Pristina office produced a very substantial set of operating procedures which we have now incorporated into a major set. If you look at them I think you will find that they are particularly comprehensive.

  17. My only reaction to your initial comment is that SOPs are most useful when it is a non-standard situation. They help get most things in control when you were dealing with the uncontrollable.
  (Mr Matthews) We never lost control.

  18. Others will come back to that, I am sure.
  (Mr Matthews) Surely.

  19. Can I move on, Mr Berry, to paragraph 4.5 which relates to this question of the sums involved between you and the Department and it tells us there were significant delays in providing the Department with monthly financial statements, which they need to satisfy themselves that the money you spend on their behalf you spend properly. Why did you take so long to do this and what action have you taken to ensure that sums spent are accounted for promptly in future? Again, either you or Mr Matthews, we really do not mind.
  (Mr Berry) I am very happy to take that one, at least initially. There are, if I may say so, three different levels of financial reporting covered by this one line to which I think you are referring. At all times the Department had a bank statement showing a financial statement of its balances coded by its projects and the MIS code so that the banking and cash management was there at all times. It was in its bank, crudely. Secondly, the contract requires us to invoice for our own services after the end of each period of service, each 30 days, so that is covered too. The third element, which is the one you are really referring to in the Report (although this sentence covers all three) is the issue of project management accounts in accounting for and charging off what was happening to the money on the ground. As has already been said and indeed is said several times in the Report, this was an extremely rapid and unexpected change of circumstances. We mobilised, as the Report says, at the beginning of April. By the middle of May it was clear that this was not something that was going to be a very short-term emergency response so in the middle of May we proposed to the Department we employ a project accountant and in fact we transferred somebody who had been handling the banking accounts as soon as we could. He was in post in June but there was already a backlog because there were 17 projects within six weeks, but we have got the point and we have taken that on board.

previous page contents next page

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

© Parliamentary copyright 2001
Prepared 14 February 2001