Examination of Witnesses (Questions 1-19)
MR ROBERT
STHEEMAN, MS
JO WHELAN
AND MR
JIM JUFFS
10 JANUARY 2007
Q1 Chairman: Mr Stheeman, can I welcome
you back to the Treasury Sub-Committee. Could you formally introduce
yourself and your colleagues, please.
Mr Stheeman: Certainly. I am Robert
Stheeman, the Chief Executive of the Debt Management Office. On
my left is Jo Whelan, who is the Deputy Chief Executive, and on
my right is Jim Juffs, who is the Chief Operating Officer.
Q2 Chairman: Thank you very much. You
will recall back in May 2000 this Committee found that none of
your performance measures adequately tested whether the DMO was
achieving its objectives and, in particular, whether it was minimising
the cost of debt management over the longer term. In June 2003
we found rather little had changed since the 2000 report. Since
we last met what have you done to address performance measurement?
Mr Stheeman: I think one thing
is clear—and this has not changed over time—and that
is that measuring the performance of the Debt Management Office
against the primary debt management objective, the cost minimisation
objective, is something which is very difficult. It is not just
difficult for us, it is something which other countries find difficult
as well. It has been highlighted by the NAO as a difficulty. We
do have various strategic objectives. We do have various targets
by which we try and measure what it is we do and how we do it.
Clearly they can tell you something about our operational capabilities
in connection with the operational targets that we have, to what
extent we might have met them. I fully acknowledge that they do
seem at one level quite micro. They do not talk about the overall
performance and how we contribute to the overall debt management
objective because it is virtually impossible to split that out
from the Government and the Treasury's overall meeting of that
objective as a separate element. It is something which is extremely
difficult to do. That does not mean that these operational objectives
which we have are in any way superficial or not important, I think
they are extremely important, in particular because as an entity
we are an operational agency and we are there to deliver specific
operational results. In as much as part of our role is also to
provide advice, advice to the Treasury and ministers on how we
can best meet that objective, it is very hard, I acknowledge that,
to split out.
Q3 Chairman: The National Audit Office
recommended that the Treasury should publish a statement wider
than the remit actually setting out what it requires from you,
do you think that would be helpful? Do you think there is a need
for greater clarity about the respective responsibilities here
between the Treasury and the DMO?
Mr Stheeman: I think that would
be helpful. If you look at that specific recommendation it follows
on quite logically from something that the Treasury itself has
done as recently as at the time of the PBR, which was to set out
specifically what it expects from us as the agent in terms of
cash management. For us to have something like that in terms of
debt management, in making clear that if we do not have a very
specific benchmark for debt management there are however various
criteria which they would like to see us fulfil, I think that
would be helpful.
Q4 Chairman: Have there been discussions
about that recommendation already with the Treasury?
Mr Stheeman: We have had internal
discussions only. At this stage it has not developed into anything
concrete. As I say, we have had PBR, we have now been able to
publish specifically a set of not so much performance indicators,
that will come, but criteria which the Treasury itself considers
important in us fulfilling our cash management task. Those criteria,
just to give you a sense, are not just in terms of measuring performance
cash management against the benchmark but they are also in terms
of saying how we should act and behave in the market, and what
the Treasury is looking for in terms of that behaviour.
Q5 Chairman: I just want to be clear
what the status of the recommendation is. You say you have welcomed
it. You say there is some internal work going on. That work is
still in progress, is it?
Mr Stheeman: It is still in progress.
Q6 Chairman: Just some housekeeping
issues. You produce rather a lot of documents for a single financial
year, do you not, report and accounts, annual review, management
account report and accounts, business plan, report of the Public
Works Loan Board. Are all these required by legislation? Why are
there so many documents?
Mr Stheeman: Some are required,
for instance the reports and accounts are required. At the moment
we produce two separate sets of reports and accounts for the Debt
Management Office as an agency and for the Debt Management Account.
I agree that they can be amalgamated, especially those two, I
think that will be very valuable. The Annual Review, that is something
which we also produce, is a requirement of the code for fiscal
stability but it is also more of a narrative and more informative
about developments in the market and is used by market practitioners
perhaps to a greater extent than our annual report and accounts
are.
Q7 Chairman: Given the importance
of people outside the DMO trying to get a better understanding
of what you do and how you do it, you would look at the case again
for streamlining some of these documents?
Mr Stheeman: Absolutely, and we
would welcome that.
Q8 Chairman: Last time you came you
told us that following the merger with the Public Works Loan Board
and the Commissioners for the Reduction of National Debt, which
you said you were going to come to, that breakeven on the investment
costs associated with the merger was expected by this autumn and
that after about 10 years you would be saving a million a year.
Are you on course for that?
Mr Stheeman: I think we are is
the straight answer to that. I believe that we also sent you,
subsequent to the last hearing, a note outlining where we were
going to make some very specific cost savings. At the time, if
I remember correctly, we talked about a head count reduction potentially
of up to five people. That head count reduction may not sound
very big numbers but in the context of an office of 80-85 people
in percentage terms it is not inconsiderable. We have increased
the head count reduction by eight people within the CRND function.
We have also achieved head count reductions within the PWLB function.
As a result, if I remember correctly I think we talked about a
figure of £90,000 in terms of cost reduction, actually we
are probably closer per annum, purely as a result of streamlining
business processes for reducing head count, to achieving cost
savings of about £230,000.
Q9 Chairman: But the overall net
savings of a million pounds will be achieved, will they?
Mr Stheeman: Yes. I should mention
a million pounds is also a saving which we have contributed not
just from the merger but also as part of the efficiency review.
We had to contribute savings there and through other things, such
as the dematerialisation of Treasury bills, reduced costs in association
with the issuance of Treasury bills as a result of that, those
sorts of things as well across the board.
Q10 Chairman: When you last appeared
before us you said you would like to see the DMO place greater
emphasis on research, policy development and the advice that you
provided to Government. Has that happened?
Mr Stheeman: It has, it is ongoing,
there is always room for more. One of the things in particular
you may have seen, in our Annual Review we refer specifically
to a piece of research work The Strategic Debt Analysis Work.
That seems quite a technical article but it is extremely important
to us and it is extremely important to the Treasury as well. That
is specific advice in relation to debt management strategy. My
main aspiration, because we are an operational entity of the Treasury
operating in the wholesale financial markets, is for us to be
ideally a centre of excellence in operating in the markets and
advise the Treasury on developments in the market where we can
add value and that remains very much the case. We do have on-going
discussions on specific topics where we can try and provide that.
We are in discussions at the moment with colleagues in the Treasury
continually about how we can effectively provide Treasury management
services potentially to government in a wider sense.
Q11 Mr Gauke: The Treasury gives
a number of operational targets and in 2005-06 you have succeeded
in meeting all of those. What do you see as the most important
of those targets and how does the Treasury assess you against
those targets?
Mr Stheeman: The most important
one, we talk about compliance with the remit. Without doubt, and
I think I said this last time as well, that was my number one
priority then, that remains the number one priority. That might
sound very much a statement of the obvious but, just to emphasise
the importance of that, if we miss one or two operational targets,
that can happen, we take that seriously. Were we in some way not
to be compliant in terms of meeting the actual remits that would
obviously have huge consequences. If you ask me which is the most
important, it is literally meeting the remit in terms of delivering
what it is that we have to raise in gilt sales but also on the
cash management side specifically we have to—we have no
choice in the matter—balance the Government's books every
working day of the year. That must be the absolute overall priority
for us.
Q12 Mr Gauke: Do you think there
are any other quantifiable targets that could be usefully added
to illustrate specific aspects of what you do?
Mr Stheeman: That is a very good
question and I think it is fair to say that we have tweaked the
operational targets as they currently exist over time but they
have not changed significantly and that begs the question what
else can we do which is new. One of the things, for instance,
which I think we can potentially do, I mentioned earlier the statement
at the time of the PBR regarding cash management, effectively
I think it is fair to say that we have already discussed with
the Treasury potentially some kind of performance indicators as
to how we meet any of these criteria, and I think if we can feed
those somehow into revamped operational targets it will make it
hopefully a little bit more meaningful; it is progression, it
is reporting just that little bit more. I do not want to suggest
that some of these—I used the word earlier—micro targets
that we have are nonetheless not important, they are important
not least in terms of how the market perceives the DMO to operate.
The fact that we need to be seen by the market to be absolutely
reliable, that sort of thing is extremely valued by the market
and it is important that we do that.
Q13 Mr Gauke: Just looking at reporting
for a moment, the National Audit Office made recommendations[1]
to enhance your reporting arrangements and I understand you are
taking those forward. What progress has been made and will be
made and when will these be implemented?
Mr Stheeman: I would like to think
that we could, for instance on the streamlining that we talked
about of reporting in terms of publications, do something potentially
this year but also, if I think about the NAO's recommendation,
reporting on developments in debt management on why we do certain
things. To me part of the reporting that we do is another word
for accountability because, as I fully acknowledge, there is this
difficulty in trying to measure what it is that we do and how
we specifically contribute. Another version of performance measurements
is ultimately making us accountable and it is trying to provide
a reason for why we are taking certain decisions, why we act in
certain ways. I think we can improve still further on that. We
have done quite a lot on that already. One of the reasons we have
the Annual Review is to talk a little bit more about strategy.
We also use the Debt and Reserves Management Report which the
Treasury produces specifically to explain certain positions but
I think a key part of performance or accountability measurement
is explaining, quite often it has to be ex post rather
than ex ante for market reasons but actually saying why
we take certain decisions and act in a certain way. It boils down
to the fundamental principle of transparency.
Q14 Mr Gauke: One of the difficulties
that the NAO acknowledges[2]
is that it is not possible to have an operational benchmark in
the same way that the private sector does for you and the NAO
sets out various reasons why that is the case. Do you think it
is practical/possible to identify a figure for your contribution
to the primary debt management objective in any way or is that
something which cannot be done?
Mr Stheeman: To identify a figure
in that way, I wish it was, I do not think so is the honest answer.
What I would say is that the Strategic Debt Analysis project that
we do will go a long way towards being able to illustrate in a
quantitative or numerical fashion what the outcomes are in certain
scenarios which we build into this model of decisions which we
take based on certain specific assumptions. That is not quite
the same thing, I admit that, but it is going in the right direction
and it is all part of greater accountability and transparency.
Q15 Mr Gauke: With all these issues,
is it something very much led by the DMO? What is the role of
the Treasury here? Do you take proposals to them and they run
with them or do you produce these proposals together? How does
it work?
Mr Stheeman: That is a good question.
I think it works genuinely in a collaborative fashion. Inevitably
I think it is probably fair to say that the initiative for many
of these proposals probably does come from us because that is
our primary role, that is what we are there for. I would like
to think that if we want to be this centre of expertise that I
mentioned before, we come up with the good ideas but at the same
time the Treasury does push and challenge us. For instance, SDA
is something which has always been very close to the heart of
the Treasury, and the Treasury has been very much involved and
I have been on a steering group with colleagues in the Treasury
actually monitoring this work so they are particularly interested
in seeing what comes out of it. Arguably as a principal that is
what they want to see from their agent.
Q16 Peter Viggers: Cash management
is a highly sophisticated operation and you are competing in seeking
to recruit the appropriate people with banks recruiting some of
the sharpest brains in the City. How do you recruit and retain
people of an appropriate quality?
Mr Stheeman: That is a very good
question and it is one which is an issue. We are part of the Civil
Service. We have the advantage—and this is absolutely crucial—that
the DMO sets its own terms and conditions. Now that does not mean
that we can effectively hire and spend what we like on staff.
We cannot. Our administrative budget from which we pay salaries
comes out of the Treasury's own parliamentary vote. It is set
in a certain way and clearly in the City, especially in the current
environment, there is no way that people will be joining us purely
for the money if they can go elsewhere, and in some cases for
significant multiples of what they earn at the DMO. What we can
do is to offer people a certain flexibility perhaps compared with
the rest of the Civil Service. We do not have grades, for instance,
in the Office. We can offer them an environment in which they
are effectively working at the centre of the financial market.
That is interesting. If you are interested in financial markets
the DMO is a great place to be. You see flows, you see volumes,
the market comes to you to a certain extent and that has its own
attraction. Having said that, retention is an issue and it is
one that vexes us. We have turnover but I believe compared with
the wider Civil Service our turnover is quite respectable. Quite
a few key colleagues that we have have been with the DMO since
its inception nine years ago. Both Jo and Jim have been there
from day one, as have other colleagues. I think ultimately people
choose quite often a career that is focused on very specialist
financial markets but also from a specific angle which is the
public sector.
Q17 Peter Viggers: A very high proportion
of turnover in the financial markets is speculative whereas I
imagine that your turnover would be much more purpose-driven.
You would not have the same level of turnover at all. How many
trades do your dealers do compared with the average outside dealer?
Mr Stheeman: That is a good question.
You mentioned cash management, and I will try and stick to that.
It is fair to say that on an average day, and I am just trying
to think of how many trades we settled because I see the statistics
regularly, it is probably close to 100 a day. I do not know if
that sounds like a lot or a little, it is not very much actually
compared with some financial organisations. It tends to be low
volume, extremely high value. In other words, specifically in
the cash management market or the money markets we transact approximately,
in value terms, close to one trillion pounds per year. You are
talking very big numbers. Now the actual size of the trades that
we transact in the markets is probably quite normal for the money
markets per se. You are absolutely right to say that the activity
is non-speculative. We transact in order to effectively offset
cash flows in as cost-effective a way as possible. We do not transact
or do not try and inflate the Government's balance sheet. I should
say this is one of the key points that was expressed by the Treasury
in a statement that they put out at the time of the Pre-Budget
Report. We do not transact in order to generate a profit where
there is absolutely no underlying need other than pure profit
generation, that is not what we are there for. We are there to
minimise costs that arise out of the Government cash management
function.
Q18 Peter Viggers: Have you looked
at the possibility of not having your own dealers but setting
out broad guidelines of what you want achieved and using outside
dealers to carry out the tasking for you?
Mr Stheeman: I think the answer
is no, we have not. I do not know, Jo, whether this was ever discussed
in the past. I think it is probably fair to say that would be
very hard to do because ultimately we are transacting and I am
Accounting Officer for the Debt Management Account and the flows
flow through the Debt Management Account. It is important to me
as Accounting Officer to know that we have full control and full
knowledge of, if necessary, every single trade that our dealers,
who are employees of the DMO, are transacting. Outsourcing that
particular function begs all sorts of questions: on what basis,
how would you try and do that, how would you potentially remunerate
someone in that way. I would prefer as Accounting Officer to retain
an element of in-house control with a small specialised team doing
that where they are accountable to me and I am accountable to
the Treasury and to ministers.
Q19 Peter Viggers: I suppose your
Office's role is one of the more essential functions of Government.
Can you say a word about contingency planning? What would happen
if one day it was not possible for your Office to trade?
Mr Stheeman: It is essential,
you are absolutely right, and contingency planning is something
which we work on. It is probably fair to say that we are constantly
developing that. We spend a fair amount of money on that. I will
just ask Jim to comment a little bit. It is absolutely key.
Mr Juffs: This is continuity which
we take very seriously and always have done since we were launched.
The rest of the world obviously came to life once 9/11 happened
but we were already hopefully well prepared to remain operational
on a daily basis. Our main objective is to remain operational
on a daily basis come what may and we also act in another capacity
for Treasury where we act as the Treasury's eyes and ears in the
market. Firstly we need to be operationally effective and resilient,
which we are, and we also act as a conduit for information. We
have been invoked in that respect too. The way we do that, we
are only in a single office but we have a disaster recovery site
which is dedicated to us and we have other accommodation that
we can go to should our building not be accessible. At the sites
there are duplicate systems. We have a dedicated dealing area
which would allow us to carry out market transactions or even
carry out auctions if necessary. We have built a fit-for-purpose
capability. Going forward, obviously the world is moving ahead
and, in fact, we can see ourselves only as a cog in the wider
network. In fact we took part in the tri-partite tests very recently
as a participant on the market wide-exercise which is a six week
exercise which tested the pandemic flu scenario. We are part of
a network and we invest in remaining part of that network.
1 http://www.nao.org.uk/publications/nao_reports/06-07/debt_management_office.pdf Back
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