Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 100 - 119)



  Q100  Susan Kramer: Are you in fact satisfied? You mentioned getting stuff on to the Internet, and there was a fair amount of criticism of the website in July. What is happening in that?

  Mr Macpherson: You seek to learn continually from these events. You will recall that when things happen there is that period of real uncertainty where all of us, in a sense, are watching Sky TV and it would be wonderful if somehow central government really knew better than Sky TV what was going on, but it is hard. We have the Cabinet Office, Briefing Room A, called COBRA and we have a Treasury representative down there on these occasions whose job it is to communicate back to the Treasury to ensure that we get the information flows going. My recollection is that the website was updated at 11 minutes past 11 and 19 minutes past midday. I think there are issues about seeking to do that more quickly and more regularly. The fact is that the system did work. The financial services industry kept running; but we need to learn from those experiences to make the system work even better. The tripartite body meets every month and discusses precisely that—how we can improve. I am confident that from this test run later in the month we will learn even more.

  Q101  Susan Kramer: If you were to put us on an international standing for our ability to respond, where would you rank us?

  Mr Macpherson: I would rank us top, I think. We do have a very sophisticated financial system here, which is very advanced. The UK is at the cutting edge and it is without doubt at the cutting edge in terms of business continuity. That is not just London; we will involve other centres like Leeds, for example, in this test later in the month.

  Q102  Susan Kramer: Just another aspect of risk—obviously the extent to which the numbers tell us what our exposure is, but on the whole question of private finance initiative and more accurate information to measure the public sector accounts, the ONS, finally after some coaxing agreed that zero on the accounts for the PFI was the wrong number, but it is the current number. Have you been involved with the ONS in estimating government liabilities for the private finance initiative deals?

  Mr Macpherson: I do not think zero was ever the right number because from the start of the PFI going way back, quite a lot of projects were clearly on balance sheet, for example the Treasury building is firmly on our balance sheet, even though its refurbishment was done through PFI, so I do not think that is quite right. What is the case is that it is very important that we understand what the Government's liabilities are from the PFI. We set those out clearly in the Budget. The fact is that despite the heat which this subject generates, PFI investment still accounts only for 15% or so of total public investment; but it is very important that we track it and very important at the Treasury level that we track the potential liability moving forward. It is not some sort of financing wheeze or device; it is a perfectly legitimate form of financing investment which should be determined on value-for-money grounds, and that is what we do.

  Mr Stephens: In the Budget we publish figures and charts about the level of overall capital investment represented by the PFIs and the size of liabilities going forward.

  Q103  Susan Kramer: Are you aware that the ONS seems quite confident that it is not going to have the estimates of Government liability from PFI deals until some time next summer?

  Mr Stephens: I think you are referring about the issue of incorporation into public sector net debt.

  Q104  Susan Kramer: Correct.

  Mr Stephens: PFI does score against departmental budgets. It is scored against—well, it is on balance sheet, public sector net investment. The unitary charges score against current Budget. It has not been incorporated in public sector net debt because finance leases generally have been excluded from that. I understand that the definition of this is a matter for the ONS. I understand that they have accepted, and it has been a matter of public record for some time, that in principle and in concept it should be scored. It is a matter for ONS actually gathering the data to do so.

  Q105  Susan Kramer: What do you expect will be the impact of the ONS inclusion next summer on the public sector net debt to GDP ratio?

  Mr Stephens: That would be for ONS to assess. I understand they have discussed this with the Committee recently, and I think they are looking to reach a conclusion on that in the course of the next year.

  Q106  Susan Kramer: So from a policy perspective, as far as you are concerned, it is reasonably irrelevant.

  Mr Stephens: From a policy perspective we publish a great deal of information on the capital represented by PFI deals; the liabilities going forward; the impact on current Budget. As I say, it scores as part of public sector net investment and against the net borrowing figures.

  Q107  Susan Kramer: If you would come at this from a prudent banker perspective, there are quite a lot of—if I can use this loose term—contingent liabilities that do not appear in the public sector accounts, whether you are talking about Network Rail or whether it is some element of the off-balance sheet aspect of PFIs,—which, obviously, that is some degree of flow-back having an impact on public accounts—that is pledges, that is public sector pensions. When you factor, as I presume you must, all of those kinds of issues in and look at the picture of financial stability and where we are in the current economic cycle, do you have any concerns about the direction that we face, and the level of debt by broader definition to GDP?

  Mr Macpherson: Of course we have to keep a close eye on that. To be clear about contingent liabilities, it is in the nature of contingent liabilities that they are precisely that, contingent; and some of them are incredibly uncertain. You do not know whether they are going to arise; and if you did know they were going to arise, you would make provisions for them. In terms of risk management, we have to keep a close eye on that and continually, through—particularly on Jonathan's side of Treasury—but the Board as a whole has to keep a close eye on where potential risks are coming from. You mentioned public service pensions. One way that we try and keep an eye on the long term—and picking up your point about PFIs but also public sector pensions—is through our long-term fiscal projections, which we produce once a year, where we look to 2050 or so and see how much we will be spending on things like pensions. It is quite easy sometimes with public pensions, or anything which is going to take place over a long period, to discount all the liabilities and get some massively high figure and then get very worried. It is right to focus on some of those totals, but the fact is that they are not going to arise all at once; they will be spread out over a period of time. The key thing in terms of managing public finances is understanding when those costs will fall and whether it is likely that they are going to be financeable. At the moment we are confident that they can be financed.

  Chairman: Finally, we are going to turn to some governance issues.

  Q108  Kerry McCarthy: Can I ask about the question of finance directors. When we met recently on an informal basis, I must admit I was quite surprised to discover that you do not have professional finance directors in each department, but you have a goal of achieving that. What sort of progress have you made, and how have the figures improved over the past few years?

  Mr Macpherson: Definitely it is a very good story—and who better than Mary, our very own professional and qualified finance director to describe them!

  Ms Keegan: As of today, 60% of ministerial and non-ministerial departments have a professionally qualified finance director, and we are keeping close track on the progress of that number. That figure of 60% compares with the number which I believe my predecessor Sir Andrew Likierman, gave to this Committee in 2003, which at the time was around 20%. It is one of my objectives, and we will be encouraging departments to achieve the goal of all departments having professional finance directors by December 2006.

  Q109  Kerry McCarthy: When you use words like "encourage" and "it is a goal"—is it just a case of having friendly talks and saying, "how are you getting on with getting professional finance directors in?" or is it something more of a stick rather than just an approach?

  Ms Keegan: There is no doubt that each permanent secretary or chief executive in the departments understands that this matter of Government policy is one of their objectives. I talk regularly with the permanent secretaries who are in the 40% in terms of when the recruitment process will happen for them. This was a Government policy announced by the Chancellor in July 2004. Obviously, one does not overnight change all the people who are in post as finance directors, non-qualified at that stage. It is a matter of achieving the goal between July 2004 and December 2006. We are well on target.

  Q110  Kerry McCarthy: Have you given any thought to what sanction—if departments did not meet the target, did not take the initiative seriously or do not meet their—

  Ms Keegan: From my discussions with the Cabinet Secretary I have no doubt that he takes this objective as seriously as I do.

  Q111  Kerry McCarthy: So it is going to happen.

  Ms Keegan: The Cabinet Secretary and the Permanent Secretary of the Treasury want this to happen.

  Q112  Kerry McCarthy: Moving on to the question of the Monetary Policy Committee appointments, we recently had the two most recent appointees come to meet with the Committee. It seems that it is a slightly opaque process but also it is quite a last-minute process. One of the appointees, Mr David Walton, said that he received a phone call a few days before he actually took up his post. Will you be doing things in the same way for future appointments? Do you approve of the way they have been handled in the past?

  Mr Macpherson: These are very important appointments, as you say. I welcome this Committee's role in interviewing these people. As we move forward it is very important that these decisions on appointments are made on the basis of due diligence and in terms of proper advice from the Treasury to the Chancellor, and regular discussions between the Governor of the Bank of England, the Chancellor and the Permanent Secretary of the Treasury and others, because members of the MPC are selected with regard to their expertise and experience consistently with the Bank of England Act, and that is important.

  Q113  Chairman: One thing that has struck me, sitting through these confirmation hearings, is that the Chancellor appoints four external members; he also then recommends the appointment of the governor and the two deputy governors. Both deputy governors now will be former Treasury civil servants. In effect, seven of the nine members of the MPC will be in the Chancellor's gift. The Bank itself, when it appoints a member of its NedCo, advertises; and the Government uses advertisements to recruit now the most senior judges. Is there not a case for advertising some of these positions just to emphasise that what you say is right; that members are appointed on an independent basis, on the basis of their skills?

  Mr Macpherson: Picking up on the first point, since 1997 a number of former Treasury officials have been members of the MPC. They have shown by their actions that they are extremely independent. I remember Mr Jean Paul Trichet used to be head of the French Treasury and then went to the Central Bank and he is now European Central Bank Governor. The key thing is that these people should have the necessary skills to discharge this important responsibility. There is no evidence to suggest that any of them, once they actually are on the committee, turn out to be somehow the stooges of the Government—quite the contrary. Your point about whether you should go through a full advertising process is an interesting one. I suppose it ties in also with the idea that there should be pre-appointment hearings with this Committee. My worry on that front is that the more public and visible the appointment process is, in a sense ex ante, as opposed to ex post, the greater the risk that people with the necessary expertise and experience will simply be put off from applying. Clearly, this is an area which we need to continue to look at.

  Chairman: It just seems odd that a non-executive director of the Bank should—when there is a much more important role in membership of the committee itself.

  Q114  Kerry McCarthy: That takes me on to my next question, which is about the Treasury Board. How satisfied are you that, given only one current member of the Board, as far as I am aware, is not somebody who has come basically from the public sector; it is only William Sargent who comes from the private sector. How satisfied are you that the current recruitment process brings in people with a sufficiently broad range of experience?

  Mr Macpherson: In constructing any board, it is about constructing a team. You want to have a set of skills that complement each other. What you are saying is strictly right; at this moment, if you look across these people, William Sargent, and indeed Sir Peter Gershon, who is now employed fully in the private sector, are the only members of the Board who are working in the private sector. I would highlight the broader membership. David Varney has spent a vast amount of his life running serious private sector organisations like Shell, MMO2 and so on. Okay, he is now in the public sector as Chairman of HMRC, but I am sure he would see himself primarily as a private sector person. My colleague on my right has spent all but one year of her life working in the private sector. James Sassoon, who we recruited, who was Vice Chairman of Warburgs, has a very long private sector career. You are not just looking at what is on the packet today, you are looking at the broader experience. Stella Manzie has spent her life working in the wider public sector, not in the Civil Service, but in service delivery, in local government in Coventry. These skills sets experience perspectives are important.

  Q115  Kerry McCarthy: As far as staffing goes, there is quite a high turnover of staff. I think 40% have been at the Treasury for less than two years. I know that is partly explained by the merger, or transfer of staff from Revenue to Treasury; but do you think that rate of turnover is healthy, or do you have targets to reduce the level of staff turnover?

  Mr Macpherson: This is interesting because we had a joint board meeting with the Foreign Office this week, and they have very low turnover indeed whereas we have quite high turnover. We were discussing this and whether it was right, and what to do about it. My view of the Treasury, which is primarily most akin to a professional services or consultancy firm, is that it is quite important that you have continuing ventilation of personnel. It is important that you get people moving in and through and out. I do not have a target on turnover, but I also recognise that there is a certain point where you do start worrying about it and where experience matters and knowledge management is critical. As it happens, I am currently reviewing what our strategy is in relation to our staff to think precisely the points you are making through. We think a lot about targets today. The risk is that you have too many targets, but we need to step back and assess whether we want to change our staff strategy slightly in the Treasury, and it may be in that context that we do want to reduce turnover a bit.

  Ms Owen: We do benefit quite a lot from people coming in from outside. This turnover is not new graduates coming in and leaving within a year and that kind of thing. As Nick said, we could do with people staying in jobs a bit longer. We have several work streams in the office thinking imaginatively around "what is behind all this?" and what would be the right way to do it.

  Q116  Mr Todd: I have a couple of questions on OGC. The gateway process for examining new change programmes and IT projects has increased the rigour of the process of procurement and examination of risk, but do you feel that it has yet delivered substantial gain in terms of outcomes?

  Mr Oughton: I think it has, Mr Todd. One of the key features of the gateway process—

  Q117  Mr Todd: To give an example, tax credits went through the gateway process. The CSA's new programmes went through the gateway process.

  Mr Oughton: Some considerable time ago now, in both cases some years back. I make two points about that. First of all, the gateway process, which is a very rapid intervention, sees what it finds in a sense. It is not a substitute for the continuing good management of a programme or project from day to day. It takes a snapshot and sees what it finds. What it found in the case of both new tax credits and the Child Support Agency was what was there at the time. The question of course is not what the gateway review finds; it is what management does with the outcome of the report. If you look at the evidence most programmes and projects improve their rating from one gateway to the next; you do not see many examples of a project going into decline. You do find examples of projects where new problems arise that were not there before and need to be tackled but do you not see many examples of the same problems getting worse without being tackled. That is the difference. The other point is that in looking at our value-for-money gains, the £3 billion target that we have to meet, about a third of that proportion so far is expected to come from the benefits of the gateway process; that is to say, reducing the time overruns, reducing the cost overruns that would otherwise have been the case. We have done some modelling around typical life cycles of major IT-enabled projects and compared them with what is happening now on the projects going through gateway reviews. I am not saying that every project going through the gateway process turns out perfectly, but I am saying that they are in better shape than they would have been if the process had not been there.

  Q118  Mr Todd: You have said what I expected, which is that the test is what people do with the outcome, not the outcome itself. Do you think that the effectiveness of delivery would be improved by greater transparency of the process, because one of the criticisms is that because it is a private process that transfers the information back to the department, it is rather difficult to scrutinise except through your own organisation where the people have followed what sensible practice should be?

  Mr Oughton: I have thought a lot about this, particularly in the context of freedom of information requests for the release of gateway reports, both requests made to ourselves and to the departments, those that own the projects in question. Of course, we apply the public interest test for disclosure in each case and we do not have a blanket approach to refusal. However, I am bound to say that my current view is that there would be some significant risk to the gateway process if we were to publish reports. I say that because talking not just to the project directors in the departments, but also to the gateway reviewers themselves, they are very clear that one of the major benefits of the gateway review process is the fact that we have created a safe space, where people can be honest about what they have found on the project. There is a lot of evidence, not just in the public sector but also in largely private sector corporations to show that people do not like to report bad news, or they do not like to admit to bad news and report it up the line. Of course, by the time they reach a point when they have to come clean—and McKinsey has done some very interesting work on this—it is crisis management in projects. I am much more comfortable with the idea that people can be really honest in this three or four-day period, say what they think is going right and going wrong; and the evidence suggests that we can then tackle those issues more quickly than otherwise would have been the case.

  Q119  Mr Todd: But the process is not even transparent to the suppliers, is it? I think I am right in saying that the gateway documents are not disclosed to—presumably they are spoken to in the process, otherwise it would be pretty one-sided.

  Mr Oughton: You are right; they are not directly exposed, but it is the responsibility of the senior responsible owner, for whom the gateway report is done, and then the project director, to address the issues. Some of those will be issues that are matters where engagement with the supplier is necessary. If you look at the common issues that come through in the Gateway reports, one of the key ones is management of the relationship with the supplier, contract management after the contract is awarded. Therefore, I would expect, in the case of an SRO and a project director that genuinely takes the gateway report and wants to implement the recommendations—they would be having those conversations with the suppliers straight away.

previous page contents next page

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

© Parliamentary copyright 2005
Prepared 30 December 2005