Examination of Witnesses (Questions 100
- 119)
WEDNESDAY 16 NOVEMBER 2005
MR NICHOLAS
MACPHERSON, MR
JONATHAN STEPHENS,
MS MARY
KEEGAN, MS
SUE OWEN
AND MR
JOHN OUGHTON
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.
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