Examination of Witnesses (Questions 220-239)
MR CHRIS
BANKS, MR
GEOFF RUSSELL
AND MR
DAVID HUGHES
20 MAY 2009
Q220 Mr Marsden: What did he tell
you?
Mr Hughes: He shared the concern
we had, and there were two concerns: there was the in-year spend
which we have and we have always managed and, therefore, the car
crash did not quite happen, but the big problem was the focus
was on in-year was at the expense of the forecasting of the five-year
horizon, and that is the bit we got wrong. I think Foster made
it very clear that we got it wrong by a few months. There was
a surge of demand halfway through the year, and we missed that.
Q221 Chairman: I cannot let you get
away with that, with the greatest of respect. You actually reflected
what the Edwards Report says. You are quite right, it is the terms
of its conclusions, but I wonder if you ever read the report,
because paragraph 21 says this: "From 2010 to 2013, however,
if current policies did not change and the tempo of capital projects
is maintained, the demand for capital grant payments moves in
2010/2011 up to 450 million above the funds available for FE projects",
and it went on to say, "This simply proves that the continuation
of the current payment profile of projects is unaffordable to
the council." It was not just an in-year problem, the significance
of the Edwards Report is that it was saying, unless there was
significant change, this is unaffordable.
Mr Hughes: The changes were set
out in the recommendations, and we said we need to implement the
recommendations and we need to move forward, which is, with respect,
what I said earlier.
Q222 Chairman: No.
Mr Hughes: So it is really important.
We said two things: we need to manage in-year and we need to do
the prioritisation, we need to limit the grant, we need to think
about phasing in over five years rather than three, as is set
out here.
Q223 Chairman: But it seemed to be
that, despite this, the message was going out, and you were a
part of this cross-cutting group at the time—you might say
it did not happen in London, but it clearly happened everywhere
else—that people were told to beef up their projects.
Mr Hughes: I am not sure there
is any evidence that that happened.
Chairman: Why did they do it then? Was
it osmosis?
Q224 Mr Marsden: Unless you are going
to say that the previous witnesses are not being accurate. We
have had evidence from the previous session.
Mr Hughes: I missed that; I apologise.
Q225 Mr Marsden: No, we are not saying
that, but, please, for the record, understand that the reason
we are asking these questions is that we have had two college
representatives before us this morning who have already said exactly
what the Chairman has said, that these projects were talked up
by regional LSC advisers, and that is why. You must have been
an oasis of rectitude compared to the rest.
Mr Hughes: As I said, I can confirm
that absolutely we did not do that.
Chairman: No. Okay, that is your word
and that is exactly right.
Q226 Graham Stringer: When I looked
through the whole of the capital project list of what has been
agreed and spent and what is likely to be spent, compared to the
Building Schools for the Future scheme it seems to me that large
capital projects are going to places like Bournemouth and Poole,
with a £102 million project, and not to the areas of greatest
need and most deprivation. How did you account for that balance
in your projects compared to my constituency, inner city Manchester?
How was that prioritised against Dorset and Poole or Stockport
within Greater Manchester?
Mr Hughes: I think that is what
Foster set out; that it was a demand-led scheme. The first schemes
that came through got considered—
Q227 Graham Stringer: I know what
Foster said.
Mr Hughes: I am just backing him
up. They were rigorously assessed at scheme level but they were
not assessed in terms of need. That is why we have taken on the
Foster recommendation and we are doing a prioritisation against
need rather than saying let us have a look at your proposal and
check it is fantastic value for money.
Q228 Graham Stringer: Did it not
occur to anybody within the LSC that this was a rum way of going
about the thing?
Mr Hughes: It did, and that is
why we were starting to move towards a prioritisation scheme.
Q229 Dr Iddon: Mr Russell has been
very quiet, so we will bring him into the debate, I think. You
are an auditor. Is that correct?
Mr Russell: Yes.
Q230 Dr Iddon: What is your perspective,
as someone with a fresh pair of eyes, on what went wrong at the
LSC during 2008?
Mr Russell: You will forgive me,
of course, starting out by saying that I have been focusing most
of my attention on the future rather than the past, other than,
of course, wanting to make sure that we learn the lessons, and
Andrew Foster's report was extremely helpful to me in that respect.
It was a clear analysis and it also made some very sensible recommendations.
Obviously, I have listened to Chris and David. I think they both
touched on what I think are a number of contributory factors to
where we are today. Andrew Foster also mentioned (and I suppose
this is more in my area of expertise) that the LSC did not have
as good a strategic level of financial management, as they should
have, and I can only agree with that.
Q231 Dr Iddon: Were the auditing
procedures sufficient, in your view, and, if not, have you changed
them?
Mr Russell: I do not really think
it is an audit issue per se. I think what public sector
auditors do is not necessarily to assess the strategic level of
financial management. Having said that, to answer your question,
in the private sector it would be unthinkable not to have the
chief internal auditor report directly to the chief executive
with a dotted line to the chairman of the Audit Committee, and
I think it was probably less than two weeks before I was in position
before I made that change.
Dr Iddon: Let me turn now to what might
happen to colleges who have lost money that has been laid down
for the reasons that the previous panel said, and for the benefit
of David Hughes it was for employing architects, surveyors and
even, in some cases, demolishing buildings ahead of projects proceeding.
The LSC and DIUS are said to be developing a policy position on
reimbursing colleges who obviously put money out that they probably
needed for other purposes. When will this procedure be finalised
and what encouragement can you give to the colleges who have lost
money in that way? I am not who sure who to direct that to, but
the chief executive or the chairman.
Q232 Chairman: I think probably to
the chief executive.
Mr Russell: Andrew Foster recommended
that we have a transparent process engaging with the sector. We
have done that. I think I probably met with Martin Doel within
45 minutes of my appointment, fortunately he happened to be in
the same building, and that was the beginning of a conversation
which has continued over the last two months. With regard to your
specific question on some costs, Foster recommended that we needed
to engage on that front. It is clearly an informed issue. It is
important to some degree by who gets to go ahead and who does
not. The more that get to go ahead, the smaller the sunk-costs
issue will be. The LSC has clear rules that set out what colleges
are allowed to spend money on at each of the stages. The external
advisers that we have appointed are assessing that very issue
for each college and we will have the position for each of them
within days. Once we know who is going forward, we will turn to
the issue of sunk-costs. We will do it in a sympathetic way, because
clearly the LSC shares a great deal of responsibility for this
and, as ministers have said, no college is going to be allowed
to go bankrupt as a result of capital issues.
Q233 Dr Iddon: So at this point in
time you have not any idea what this reimbursement process is
going to cost.
Mr Russell: As I said, it will
depend on who goes ahead and who does not. I think we have a pretty
clear idea of what the total quantum of those sub-costs is.
Q234 Dr Iddon: Are you prepared to
say?
Mr Russell: I think various figures
are floated around, but my understanding (and I cannot say precisely,
I have not seen the analysis) is that it is in the order of a
couple of hundred million pounds potentially, but it depends upon
who goes ahead and who does not. Clearly, the ones that go ahead,
to the extent that they are shovel-ready, are the ones that could
well have spent the greatest amounts already, so that might get
rid of a fair chunk of the problem. There also has to be a judgment
taken based on the analysis as to which colleges, if any, went
beyond the guidelines of the LSC and what is a fair way of dealing
with those costs.
Q235 Mr Boswell: I have got two quick
what might sound like business school questions, but I think they
are very germane. Geoff, you have the exquisitely difficult job
of a run-up strategy for an organisation which is coming to an
end, and this was already announced and applied in your predecessor's
time. How do you envisage dealing with that situation, and have
you made some changes, in the light of this experience or more
generally, as to how you are handling that?
Mr Russell: The answer to the
first question, how do I want to deal with it, is as quickly as
possible. There was a plan in place when I arrived that said by
September we will create shadow YPLA, SFA and people will start
engaging with local authorities. Given the size and complexity
of this organisation, and it is a huge organisation, plus the
additional little problems we are dealing with, this one being
an example, it seemed to me that the best way of managing that
risk was to accelerate the process of getting ourselves into those
new organisations. So even before any new management has been
appointed, we have appointed transitional management within the
organisation, we are going through the process of allocating people
to where they should go and, as soon as humanly and operationally
possible, we will try and get those organisations up and running
in the most realistic way we can and see where the kinks are.
Q236 Dr Iddon: The second question
is: how you manage relationships, and whether those have changed,
with your key stakeholders and partners at DIUS and DCSF at one
end through to the college sector at the other? How do you see
that and how much have you changed it?
Mr Russell: When you are in a
crisis, I think the only logical thing to do is to communicate,
and communicate, and communicate, and so my job is to be engaging
with all our key stakeholders. I have spent lots and lots of time
with DIUS and DCSF at a ministerial and official level multiple
times a week.
Q237 Dr Iddon: So if Mark Haysom
had an open door, your door is even more open, is it?
Mr Russell: I do not wait for
people to come in my door.
Q238 Mr Marsden: Do you prowl the
corridors?
Mr Russell: In some cases. I am
glad not to see all of my regions right now.
Q239 Mr Marsden: Again, a very quick
question to you, Geoff, on the basis of what you have heard already
about the process having been demand-led, about there not having
been a regional budget structure. Obviously you do not know the
pot of money you are eventually going to end up with, but are
you now looking to having a regional budget structure or a prioritised
budget along different priorities as opposed to just a pot of
money that is being doled out on a first-come-first-served basis?
Mr Russell: One of the other things
that happened quite quickly for me is that I got a copy of Andrew
Foster's report. People may take issue with me, but my view is,
for all sorts of reasons—the economy, value for money—we
need to move from demand-led to needs-based, not just in capital
but across our programmes. We also need to get the balance between
the very successful regional structure that we have, very good
regional relationships right between that and national oversight
and co-ordination, not just in capital, which we have done, but
in all programmes, because the world has changed. We have moved
from an environment where it was, "How much do you want?"
to "This is what you can have. Where is the best place to
put it?"
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