Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 1-19)




  1. Good afternoon. Today we shall be taking evidence on the Comptroller and Auditor General's report on the Millennium Dome. Judging by the crowd we could have sold tickets. The witnesses are Mr Robin Young, Permanent Secretary and Accounting Officer at the Department for Culture, Media and Sport, Mr Mike O'Connor, Director and Accounting Officer of the Millennium Commission and Mr David James, Executive Chairman and Accounting Officer of the New Millennium Experience Company. Welcome gentlemen. In my questions I am going to concentrate on three areas which I shall tell you about in a second. At least one of you is not used to our procedures. I shall try to give you an indication of where in the report I am referring to at the beginning of the question I ask. I shall try to indicate which of you I want to answer, but please do not feel constrained by that if you have something to add. The first of the three areas I am going to concentrate on, if I have time, is financial management. I want to explore whether enough was done to face up to the question of the company's solvency and whether there was sufficient clarity and openness in the management of the financial crisis of the company. The second question I shall talk through is whether Parliament is being kept sufficiently informed about additional costs which might need to be met from public funds. A third, if I get there, is the question of the management of the Dome as a visitor attraction. I am afraid we have a long session today, so may I ask you to be as brief as possible in your replies. I stress to you who are perhaps not used to us, that accuracy in reply is very important and deceiving the Committee is obviously a serious offence. May I start with you, Mr James. Perhaps you could start by giving the Committee a brief outline of the work you have been involved in before taking up the reins at the Dome?

  (Mr James) I spent some time in a succession of companies, mostly in the public listed sector, where there have been issues of governance and solvency to address and where I have been asked to resolve those problems. These have all been companies in the private or public company sector and this is my first experience of anything in the government debt arena.

  2. How does financial management compare with your previous experience?
  (Mr James) It is very different indeed and is governed by a number of issues which are separate from anything which I would have seen in the public listed company sector, principally because, as the report makes quite clear, there has been a complex structure available for the running of the New Millennium Experience Company and that structure has itself represented a number of different lines of responsibility which at times have become confusing to the participants.

  3. It is not 100 per cent clear from the report, although paragraph 2.60 does imply it. Is it the case that before you accepted the job you insisted on a proper assessment of the company's solvency?

  (Mr James) I did exactly as I would have done in every other company I have ever been asked to address. It is a standard practice, if you are going to engage in the affairs of a company that you want to know exactly where the winning post is going to be before you start to run that race. In this particular case it was quite clear that they had just had a series of adjustments to their grant level and I wanted to be certain that they now had sufficient with which to trade through to a solvent exit.

  4. I can take that as a yes, can I?
  (Mr James) It is a yes.

  5. Why in your view was this not done before? Should the company not have initiated such an assessment of its solvency at the first suspicion of insolvency?
  (Mr James) Had this been a conventional listed company relationship looking towards extending its loan with a banker, then that undoubtedly would have been requested earlier from any normal commercial bank lending on the usual security arrangements.

  6. The Dome itself is a large but financially fairly simple organisation, a single site operation. Should the financial controls of the company not have identified and crystallised the company's solvency position much earlier?
  (Mr James) To answer that question I need just to clarify one of the strange aspects of the structure of this business. There is one very big difference between a company trading as a non-departmental public body, dependent upon a grant, and a company in the listed sector, dependent upon a bank. One of the strange things about this report, and it is understandable, is that you will go through from cover to cover and hardly find any reference to the balance sheet. There is no balance sheet anywhere in this report. Yet a listed company in the commercial world normally lives off the strength of its balance sheet. Here it is hardly a factor because the New Millennium Experience Company has had instead to depend upon the availability of grants which are not refundable in the main and which are only going to be made available, as it says quite clearly in the terms of the Commission's Grant memorandum, in the event that the need has actually arisen. So the company has not had the opportunity, nor has it had the incentive to keep constantly reviewing the strength of its balance sheet as a means of turning to its bankers for further finance. It has effectively had to run to the very threshold of insolvency in order to justify a further claim for a further grant.

  7. That is quite interesting because solvency has been an issue which has come up time and again in the course of the company's life so far. It does rather surprise me that under those circumstances they would not have had some system of at least balancing off their assets and liabilities. It does seem to me that the whole question of solvency in one sense was taken terribly seriously and in the case of the systems was not taken seriously enough. Paragraphs 2.64 and 2.44 and 2.45 tell us that in August this year you said that the Dome had been insolvent since at least early February. in June the board were so concerned about the solvency that they insisted the Department formally agree to meet the costs of any actions for wrongful trading brought against the company's directors. Yet in July the shareholder stated in Parliament that ". . . the position would not be reached where the Dome was insolvent". Can you explain to us how those differing views could be drawn?
  (Mr James) Yes, indeed. There are some three separate points there. First, yes I did indeed make the comment that the company had probably been insolvent since February and that is a view which was unarguably correct in the knowledge of what we have today. We now know that the revenue fell short by a significant amount and I am afraid therefore that my comment about insolvency was made with the wisdom of hindsight. The defence against it at the time by the board—and it is perhaps a reasonable defence—is that of course at that time they continued to depend upon an expectation of ten million or more paying customers. Therefore they were not aware at that time of the potential shortfall in revenue which I was able to address in forming the view that they had been insolvent at the time. May I deal with your third point next, which is the one relating to the indemnity which was given? The move for the indemnity was motivated by the board at a time when they had received £10 million[1] less than they had asked for from the Commission, to close what they then perceived to be their solvency gap and they were anxious that they therefore were left in a position of some exposure. They needed to accept the reduced amount which had been given to them in order to continue to trade, but they were very much alive to the fact that this put them into an insolvency exposure going forward if they did not get the balance of that grant application soon thereafter. That was when I believe they felt it appropriate to seek the protection. Your second point concerned the comments which were made with regard to the fact that the company would remain solvent. I would draw to your attention that it has been a consistent statement by shareholders and representatives of the Government to the various houses concerned across at least the last three years that the liabilities of the New Millennium Experience Company would be met in one form or another and a comment to that effect has been contained in each of the three published accounts of the company.

  8. That will have some implications for questions which are to come later. You say that with the wisdom of hindsight you could see that. In early November last year the company's then Accounting Officer, who was Jennie Page, advised the board and the Shareholder that more money might be needed. In the event the company applied for £60 million, but not until February, some months later. The grant was approved by the Millennium Commission just three days later, almost instantaneously, and the company had to use £32 million almost immediately to pay outstanding invoices. This is paragraphs 2.14, 2.23 and 2.24. Why did the company delay that application? Was it trying to conceal the company's financial problems? Did the management of publicity supersede the management of public money?
  (Mr James) No. This is a situation I have looked at very carefully and I think that the board had justifiable occasion to delay its application. May I refer you to paragraph 2.14 particularly and especially to the second sentence, which is one of the most interesting sentences relating to the financial burden which was coming on the company? If I may, I shall read it to you. "The Board considered the outcome of a reforecasting exercise for the project, which forecast expenditure of £136 million in the period December 1999 to February 2000." The question regarding this issue of £136 million is how they were supposed to be spending it, how they were going to cover it. In fact at that time they had a total amount of cash in the bank of some £16 million.

  9. At what date was that?
  (Mr James) On 1 December the company actually had £27 million of cash available in its account. If I might take a moment, it would be helpful to build up exactly what the cash resource was. They had £8 million of undrawn grant at that time as well and they had £21 million due to come in during the immediate month or so ahead from sponsors. In addition they had a benefit of £16 million from VAT payments in their hands and they had a ticket income of £13 million which they had received. Finally, they had £4 million from catering which was coming in at that time for the period January through February and therefore when they did their sums on this, they recognised that the £132 million which they had to cover was going to be in the order of some £60 million short of all the resources. So they made an application for that £60 million. Actually I think that the board behaved quite prudently in delaying, because they did not know the value of a great many of those components which were going to come forth. As you will see, in paragraphs 2.15 and 2.16, they did signal their concerns at various levels at that time while they waited to see exactly what the amount was that they needed to fill their solvency gap. I do believe that they behaved prudently.

  10. Then they still suddenly had to pay off £32 million to creditors virtually instantaneously, outstanding invoices.
  (Mr James) Yes.

  11. I understand they were about two days from the buffers at that point as is reflected by the Secretary of State's comment in the House that day when he said that no application for additional funding had been made but that when they met on Friday they took a prudent view of what the Commission's opinion would be if an application for cashflow support were made. Clearly they were right on the buffers at that point.
  (Mr James) Absolutely correct. They did have to pay £31 million[2] of it down at that time on creditors and that meant they effectively squeaked out on the cash that they had for the creditors due at that time. I would again refer you to paragraph 31 on page 68 if I may, because that puts very clearly the stricture under which the Commission has to operate in making the cash available. "Grant should not be claimed in advance of the need and surpluses should be repaid to the Commission on a monthly basis once the maximum grant has been drawn down." Therefore they were bound by that limitation.

  12. Let us move on to Mr O'Connor. The Dome is a one year attraction yet until August the Commission as a bank of last resort did not know the company's cost for closure. That is in paragraph 2.64. It took Mr James to insist on an exercise to identify these costs, yet you were concerned about the company's solvency as early as January—paragraph 2.22. Why did you not insist on such an exercise much earlier, given the apparent assumption that the company would turn to the Commission for any shortfall?
  (Mr O'Connor) We were aware from the last quarter of 1999 that it was likely that the Dome would need further grant. As Mr James has said, the board took some time to decide how much was needed. We were monitoring it closely and therefore we knew what the situation was so that we could anticipate it; we did a great deal of work on analysing those budgets before the application came to us. We did identify at the early stage the need for an exit strategy and we were concerned that this was not being focused on. One of the focuses of my Chairman's letter to the shareholder in February was the need to look at the cross-cutting issues and the longer-term issues. We asked for an exit strategy at several points throughout the year. NMEC either failed to produce them or did not produce exit strategies which we though were adequate. It was not until PricewaterhouseCoopers (PWC) were actually commissioned to do the work by NMEC that NMEC themselves produced the first reliable estimate of what it would cost them for the final stage of their business.

  13. You had to be directed by the Commissioners. You sought a letter of direction to pay two of the four additional grants awarded to the company this year. Surely this means that the Commissioners had a choice about whether to pay the company and therefore the company was wrong to assume the Commission would automatically make any extra lottery funds available. This is relevant to the description of the solvency situation which Mr James was telling us about.
  (Mr O'Connor) It is clear from the grant memorandum and more generally that we were not obliged to pay grant to the New Millennium Experience Company. They were of course mindful of the commitment given by the previous Government and emphasised by this Government that should the Dome need more money we would have the resources to give it to them. It did not follow that we would say yes to any application. They could not assume we would say yes, but, as I understand insolvency law, you only enter into wrongful trading when you do not have a reasonable expectation that money will be forthcoming. So my assumption is that the board assumed that they had a reasonable expectation that we would say yes, but they did not and could not have certainty.

  14. Surely that reasonable expectation would have been somewhat in doubt at the point you sought the letter of direction.
  (Mr O'Connor) At the point I sought the letter of direction, I was at the point of being overruled and therefore they could be confident that the decision was made.

  15. Did you know you were going to be overruled?
  (Mr O'Connor) I could not be certain that I would be overruled. Each time a new grant application came, the commissioners were very concerned and their frustration mounted. I could not be sure whether I would be overruled but I did make clear to the Commission the ground which I as accounting officer could consider and which led me to my conclusion. I did point out to them that there were other factors which they could consider if they wished and on which they could make their decision. They did make a decision. They overruled me and they provided a grant to NMEC.

  16. You thought it was poor value for money and had your recommendation effectively been accepted, they would not have got the money.
  (Mr O'Connor) That is right.

  17. What that would mean, given that other people had said they would be supported, was that if the company were assuming that lottery money was not available, taxpayers' money would be.
  (Mr O'Connor) It is a matter of speculation about whether the public purse in the form of the taxpayer would have stood in to provide the grant which the Commission did not. However, on all the analyses we have seen, many of them in hindsight, closing the Dome at any point during the year would have led to greater debts than the extra grant which we provided. It could be that the Chancellor might have decided that it would be economically rational to stand in for our grant rather than meet the insolvency costs.

  18. So it was not certain.
  (Mr O'Connor) I do not think it was certain; no.

  19. That is relevant to the solvency issue. May I come back to you, Mr James, on this? In continuing to trade the company is taking assurance to do so from ministerial statements. Paragraph 2.45 sets out the Shareholder's statement, "If the Dome became insolvent it would be a matter, ultimately, for Government to bail it out in some way or another". Did the company seek direct assurance from the Shareholder on this, since he attended most of the company's meetings?
  (Mr James) There is no such record of any exchange in the minutes of the company but they have relied upon the renewal of that intention as evidenced in the accounts of each year end and they further in the later course of that drew comfort from the statement made by the shareholder in the House of Lords on 12 July.

1   Note by Witness: NMEC had applied for an additional grant of £38.6 million against which the Millennium Commission awarded £26 million, plus a further unbudgeted £3 million ring fenced specifically to enhance the marketing programme. The £38.6 million had not catered for additional marketing spend. Consequently, the grant awarded was £12.6 million that that applied for. Back

2   Note by Witness: The figure was, in fact, £32 million, not £31 million. Back

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 12 September 2001