3 Failings in LEDU's oversight of
EBT
15. We commend Invest Northern Ireland, which replaced
LEDU in April 2002, for promptly identifying and investigating
the failings in this case.[19]
16. In 1996 the International Fund invited four organisations,
including an accountancy practice, MTF, in which the Deputy Chair
of LEDU was a partner, and LEDU itself, to tender for the establishment
of EBT. It is not clear on what basis these four organisations
were selected or why an open competition was not held. Without
an open competition the Department is unable to demonstrate that
the award of such a valuable contract to MTF represented value
for money. It is appalling that the well established rules for
procurement of services involving public money were set aside.
The terms of the contract were heavily loaded in favour of MTF;
it is unacceptable that the contract was awarded on a three year
rolling basis and was never tendered again, although it was renewed
in 1999 and 2000.[20]
17. The Accounting Officer acknowledged that LEDU
should have objected at the outset to that particular form of
contract. Given that the Department also knew about the terms
on which MTF was appointed to manage EBT, it too should have objected
at the outset to the terms of the appointment of MTF.[21]
18. There was no signed contract between MTF and
EBT. When the International Fund for Ireland issued its Letter
of Offer in 1996 it appended a draft contract that was never signed
by the parties concerned, though it did form the basis of the
working relationship between the parties. However, it is clear
that the unsigned contract was not sufficiently robust or comprehensive
to support a business relationship worth £1.4 million. This
led to the Board making a number of payments to MTF which it later
argued were not covered by the unsigned contract. The Accounting
Officer surmised that the contract was prepared by the International
Fund staff but could not be sure. Whoever was responsible, the
document was clearly defective and, setting aside the conflicts
of interest, the Department should have insisted on sound contractual
arrangements.[22]
19. Mrs Townsley's accountancy practice received
a total of £1.4 million in management fees out of the £4.35
million in public funds paid to EBT. This represents over a quarter
of the total funding made available for small business regeneration.
The C&AG found that the management of loan fund bad debts
was poor. The Loan Fund paid MTF £77,000 in fees which could
have been avoided if the loans had been written-off on a timelier
basis.[23]
20. On an occasion when a LEDU Grant Inspector, challenged
the information provided by EBT, his concerns were dismissed by
Mrs Townsley. It was fundamentally unsound to expect a relatively
junior official, in the course of his duties, to challenge the
LEDU Board member who was managing a project LEDU had funded.
It was precisely to avoid this kind of problem that this Committee
in a 1996 Report[24]
into another of the Department's NDPBs made it clear that "it
can never be acceptable for a Board Member to negotiate directly
with Board officials for grant assistance."[25]
21. The fast-track loan to Arcom was provided under
the Department of Trade and Industry's Small Firm Loan Guarantee
Scheme. EBT, as a qualified lender within the scheme, was guaranteed
85% of the value of the loan by the Department of Trade and Industry
in the event of a default. The loan was provided in this way because
of the risks of the sector and the company and because no security
was offered by Arcom. The Department did not know whether EBT
satisfied its obligation to provide the Department of Trade and
Industry with all the necessary information on the loan proposal.
The impression is that EBT was trying to safeguard its prior investment
by offloading a particularly risky loan to the Department of Trade
and Industry and disregarding the fact that this was also public
money.[26]
22. The senior official who was LEDU's representative
on the EBT Board should have been well placed to guide the Board
on governance and financial control issues. Despite the guidance
produced by this Committee on the role of nominee directors,[27]
he failed in his duty to point out elementary good practice, and
seems to have been oblivious to the innumerable problems in this
case including the failure to observe competitive tendering rules.
He failed to bring any questionable practices to the attention
of the funding bodies. In the Committee's view, he must have been
fast asleep.[28]
23. This official is on precautionary suspension
with pay in relation to his involvement with one of the three
other bodies currently under investigation. Invest Northern Ireland
told us that it will wait until the investigation of this case
is complete before any further action is taken and the cumulative
effect is understood. A second official, the former head of the
Business Development Division of LEDU, has been formally disciplined
as a result of the EBT case.[29]
24. The C&AG's Report shows that LEDU's operating
procedures did not permit capital grants or equity to be paid
through a third party organisation. However, to facilitate the
establishment of EBT's Venture Fund, LEDU proposed to employ an
indirect payment mechanism which was intended to circumvent this
restriction. The Committee agrees that this type of creative funding
is wholly improper in a public body. This was, however, only one
in an extraordinary series of lapses identified in the C&AG's
Report. For example, there was no independent appraisal of the
business case to establish the Loan Fund; LEDU failed to establish
distinct Boards for the Loan and Venture Funds in contravention
of the independent consultant's advice; LEDU failed to disclose
Mrs Townsley role in EBT in its own accounts which were audited
by Deloitte and Touche; and it did not secure all the necessary
approvals from the Department and the Department of Finance and
Personnel before committing funds to EBT. LEDU issued ineffective
Letters of Offer which failed to protect public funds, for example,
LEDU's Letters of Offer were completely silent on how conflicts
of interest involving EBT managers should be handled.[30]
25. The problems in LEDU date back to 1995, yet in
2006 many of these have not been resolved. Although the EBT investigation
started in 2003, the case is ongoing. Investigations are also
underway into contracts with three other third party organisations
inherited by Invest Northern Ireland, where there are points in
common with EBT and concerns about the proper use of public funds.
Two of these cases, where Mrs Townsley has a connection to the
bodies concerned, have been referred to the Inspectors appointed
under Northern Ireland companies' legislation. The third has been
referred to the Police Service of Northern Ireland.[31]
19 C&AG's Report, paras 7, 9; Qq 22, 121 Back
20
C&AG's Report, paras 1.3, 1.32, 1.47; Qq 31, 36-50 Back
21
C&AG's Report, para 1.32; Qq 47-48 Back
22
C&AG's Report, paras 1.40, 3.12 and Appendix 6; Qq 114-118 Back
23
C&AG's Report, paras 319-3.20, 3.23 and Table 4.1; Qq 147-150 Back
24
11th Report from the Committee of Public Accounts,
Selective financial assistance for tourism in Northern Ireland
(HC 266, Session 1995-96) Back
25
C&AG's Report, para 4.23 and Appendix 3; Q 3 Back
26
C&AG's Report, para 2.10; Q 75 Back
27
1st Report from the Committee of Public Accounts, Role
and responsibilities of Nominee Directors (HC 33, Session
1985-86 (incorporating HC 124-i (1984-85)) Back
28
C&AG's Report, paras 4.18-4.19; Qq 5-9, 75, 111 Back
29
Qq 119-120, 127-130 Back
30
C&AG's Report, paras 1.47, 4.17; Qq 31, 63 Back
31
C&AG's Report, para 11 and Appendix 3; Qq 15-16, 22-25 Back
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