LETTERS OF COMFORT
38. In Minutes in March and July 2002 the Paymaster
General expressed "strong reservations about paying increased
amounts to Mapeley."[52]
However, in June and July 2002 letters and a draft Memorandum
of Understanding were sent to Mapeley (paragraph 29 above refers)
"as part of the continuing attempt to identify recommendations
to make to Ministers, and they were not, in consequence, brought
to their attention at the time ...it was made clear throughout
the discussions that any changes to the contractual arrangements
would be subject to approval by Treasury officials and Ministers.
Our legal advice was at the time, and remains, that, because of
this strong and unequivocal proviso, the letters do not create
a contingent liability for the Departments."[53]
39. The financial statements of Mapeley STEPS Contractor
Limited for the period ended 31 December 2001 were lodged with
Companies House in August 2002. They contain a note entitled "Going
Concern" which states:
"The directors note that the company has net
liabilities of £23,656,000 as of the balance sheet date.
The directors have prepared these financial statements on a going
concern basis following their review of the current cash flow
forecasts for a period of no less than twelve months from the
date of approval of the statements. These cashflows assume a successful
outcome to current negotiations with the Departments in relation
to the restructuring of certain aspects of the STEPS contract,
including additional revenues, and changes to the financing arrangements
and contract structure. The Directors have received a signed letter
of the intent from the Departments in relation to these key proposals
and therefore consider that the outcome to these negotiations
will be successful. In addition, as part of these negotiations,
the ultimate shareholders have agreed to provide certain additional
funding to support the ongoing contract to 2005 if required."[54]
40. The Departments told us that this "going
concern" note "might be taken to imply a greater degree
of certainty about a possible settlement than the provisos in
the letters sent to them warranted. Three members of the working
group, including a representative of the Inland Revenue, were
sent a draft of the proposed "going concern" note ...
but they did not recognise the significance of the note and so
it was not considered further in the Departments before publication
of the accounts."[55]
The Departments also informed us that they had been advised subsequently
by the Treasury Officer of Accounts that the letters sent to Mapeley
may constitute letters of comfort within the meaning of 'Government
Accounting'. Accordingly, they had brought the letters to the
attention of the Chairman of the Public Accounts Committee and
had apologised for not doing so earlier.[56]
41. Government Accounting states that "departments
should approach any request for a letter of comfort with a strong
predisposition to reject it. While letters of comfort are not
generally legally binding, they may lead to a moral obligation:
a public sector body, which is ultimately dependent on government
credit, is unlikely to be able to issue such a document without
effectively committing government credit and having to meet the
obligation if it should materialise. Moreover, the existence of
a letter of comfort could lead to threats of legal action, which
might have implications for government credit. Proposals to issue
a letter of comfort should therefore be exceptional and should
be cleared in advance with the Treasury. If the Treasury agrees
to the proposal then the Department should follow the parliamentary
reporting procedures."[57]
42. We asked the Departments why, when Government
Accounting says that departments should approach any request for
a letter of comfort with a strong predisposition to reject it,
they had issued two letters of comfort without realising it. Sir
Nicholas told us that they had been strongly advised to provide
the assurances so that Mapeley could show them to its auditors,
bankers and shareholders. The letters had been cleared by the
Departments' legal advisers to ensure that they did not create
any contingent liabilities for the Government and on that basis
they had been sent. Mr Broadbent accepted that the requirements
of Government Accounting had been overlooked when the letters
were sent which he thought was regrettable.[58]
43. The letters of comfort were not brought to the
attention of the Inland Revenue Board or the Customs and Excise
Management Committee before they were sent[59].
Mr Broadbent told us that in relation to the July 2002 letter
"I received an e-mail I think the day before the letter was
issued saying that this was proposed. I responded and questioned
the wisdom of doing that but we were subsequently told the letter
had then been sent the following day."[60]
Mr Broadbent agreed that the working group should have recognised
that the letters issued were letters of comfort and he considered
that the Boards should have been informed about them.[61]
"This was a situation where we had no reason to doubt at
certain points that Mapeley might pull out, collapse, and there
were some very important tactical decisions to be taken to keep
this thing going to enable the Boards to fully understand the
situation and to consider all the options. In doing that, I think
the working group did one or two things (of which probably this
is the main example) which perhaps went beyond tactical and they
should have informed the Board."[62]
44. We questioned why the members of the working
group that had received a draft of the "going concern"note
that Mapeley STEPS Contractor Limited intended to include in its
financial statements had not recognised its significance. Sir
Nicholas Montagu told us that this was an oversight and that,
with the benefit of hindsight, where they went wrong was in not
reacting to it.[63]
45. Despite the Minister's "strong reservations
about paying increased amounts to Mapeley" the Departments
sent two letters to Mapeley to reassure Mapeley's auditors, bankers
and shareholders about the state of negotiations regarding a financial
settlement. These appear, from the financial statements of Mapeley
STEPS Contractor Limited, to have been fundamental to the company
being viewed as a "going concern" despite net liabilities
of over £23 million at 31 December 2001. We are surprised
that the officials who saw a draft of the relevant "going
concern" note in advance of these financial statements being
published did not appreciate its significance. This was a serious
failure.
46. Government Accounting requires departments
to approach any request for a letter of comfort with a strong
predisposition to reject it. Following the Treasury Officer of
Accounts advice, it appears that the Departments have issued two
letters of comfort to Mapeley without realising it. We note the
Departments' view that their letters have not created any contingent
liabilities for the Government, but we are concerned, as Government
Accounting itself points out, that the letters may have led to
a moral obligation and could lead to threats of legal action.
47. The letters of comfort were not brought to
the attention of either the Board of the Inland Revenue or the
Customs and Excise Management Committee before they were sent
and the requirements of Government Accounting were also overlooked.
Again the Minister responsible was not informed. We are astonished,
and extremely concerned, that such failures can have occurred.
We consider these to be serious lapses in the standards required
from officials and we expect the Departments to have identified
exactly where and how things went so seriously wrong. We expect
them also to have taken all necessary steps to prevent a recurrence.
48. We are concerned at the evidence from this
project of officials repeatedly failing to inform or seek Board
level approval at appropriate times. Similarly, the responsible
Minister was not informed of key events before they took place
and she has, in our view, the right to be deeply disappointed
by the service she received. This is not the first time that we
have encountered such problems in the course of our work and we
recommend that a review be undertaken of the relationship between
Treasury Ministers and the bodies for which they are accountable
to ensure appropriate standards of governance and accountability
are met.
36 
