Examination of Witnesses (Questions 246-259)
RT HON
JOHN DENHAM
MP AND MR
STEPHEN MARSTON
20 MAY 2009
Q246 Chairman: We come to our final session
this morning, part of this topical session which was suggested
by the 157 Group as part of our open consultation on what the
committee should be doing about the FE college capital expenditure.
We are particularly grateful to the Right Honourable John Denham
MP, Secretary of State for DIUS, for appearing yet again before
the committee. You should have a regular slot and a special chair
in order to do this! Your ability to give us your time is much
appreciated, John, and we thank you very much indeed for that.
We welcome, again, an old friend of the committee, Stephen Marston,
the Director General of the Department for Innovation, Universities
and Skills, someone who looks after universities and skills issues.
I wonder if I could start with you, Secretary of State. Are you
able to tell us who knew, and when, in DIUS, that things were
going wrong with the LSC capital budget and, in particular, who
first saw within your department the February Capital Affordability
Review document? When did that come to light?
Mr Denham: Chairman, I think it
is fair to say that I have not, I am afraid, for the committee,
tried to construct a precise week by week timeline, but when that
document was produced within the LSC, at that time, or very soon
afterwards, it would have been seen by at least one official from
my department. As the Foster Report makes clear, there are quite
regular interchanges between my officials and the LSC at a number
of different levels, and what I think Foster sets out very clearly
is that there were opportunities in the LSC, and I guess in my
department, if people had done things differently, for action
to have been taken earlier. One of the reasons for getting Sir
Andrew to produce this report was to understand more clearly what
might have happened at an earlier stage. That is not to say (and
I did not try and make this judgment and nor did Sir Andrew Foster)
that it was glaringly obvious to people that they should have
done something different—it is always easier to make those
judgments in hindsight—but there is no doubt that, as the
discussions went through the LSC, some at least of the information
on which people might have acted, had the significance been understood,
was shared between the two organisations.
Q247 Chairman: When you have a report,
Secretary of State, which actually says that the 2011 budget moves
up to £450 million above the funds available, that was a
very significant comment within that report and yet the official
who saw it within your department did not see fit to actually
then say, "Hang on, what are we doing about this?"
Mr Denham: I think, to some extent,
Chairman, it would be fair to bring Stephen Marston in on some
of the detail of this, but my understanding of that, from all
the discussions that we have had and, I think, from those set
out in the Foster Report, is that a report was produced which
showed potential problems. That was not universally accepted as
the only analysis of the situation, but there were continuing
discussions about the ability to manage the problem which carried
on over a period of time, and those discussions which could have
been brought to a head in the early summer were not crystallised
and decisions taken. So there is no challenging Sir Andrew's conclusion
that opportunities were missed; the one thing that I would say,
in fairness, is that that report appears not to have been accepted
universally from the outset as the only possible interpretation
of the facts. Just to put it on the record Chairman, so far as
Ministers are concerned, none of this (and I think this is accepted)
reached Ministers until November, and it is also fair to say that
the thrust of the concerns that were raised with Ministers in
November were more about the phasing of payments and how well
they would match the planned capital payments than they actually
were about the problem which subsequently emerged, which was the
sheer scale of the number of schemes in the pipeline. So even
at that stage, despite all of these discussions, the problem had
not been clearly and properly defined in the way that we now understand
it.
Q248 Chairman: Can we bring Stephen
Marston in here. Were you the responsible officer within DIUS
then that should have picked this up?
Mr Marston: As the Director General,
yes, all of this was within my area of remit.
Q249 Chairman: Was it brought to
your attention?
Mr Marston: No, it was not, I
am afraid, and I deeply regret that it was not escalated, but
I was not aware of the report until November. What did happen
is it was a member of my staff who attended the meeting—I
think it was actually in April—that first looked at the
February report, and, as the Secretary of State has said, I do
not think it is quite right to say it was just ignored. I think
a number of things followed from it. People did take the message
that there was an issue about whether we had sufficient budget
cover in the year in question, the short-term issue, and people
did react quickly to that, and that was one of the reasons why
we brought forward £110 million spending. So reaction number
one to this report was, right, we must sort out the short-term
position. The second reaction to it was, "It is right that
we are going to have to think about prioritisation", this
key finding from Andrew Foster that we were running a demand-led
programme and it needed to switch to be a prioritised programme.
If you look, for example at the capital strategy document that
we issued, it did say hypothetically there might come a time,
if demand rises fast enough, where we will have to apply prioritisation.
but we were working in the context where we thought what we were
dealing with was continuing to need to boost demand on what had
been an underspent programme. The bit that we clearly just failed
to get right was the speed of understanding that we were at a
tipping point, the whole programme was changing and we did not
react fast enough.
Chairman: That is a very fine response
and we thank you for that, Stephen.
Q250 Mr Boswell: I think Stephen
has filled me in, but I want to confirm the impression I am getting
that in a sense almost the short-term in-year management problem,
which was identified then, and I think that is incontestable,
almost distracted people's attention from the long-term. That
is not quite consistent with what Stephen said, but is there a
sense in which you could say maybe that is over and we are onto
the next?
Mr Denham: The understanding that
I had from November, when this first came to our attention, was
that was seen as a pressing issue, that actually whatever might
lie down in the future, which would have to be managed at some
point, the real issue we needed to do was short-term; but I think
we all have to accept that as this became clear over the next
couple of months, nobody had centrally an overall picture of the
state of the capital programme, because when things came to a
head in December a huge amount of work then had to be done to
construct a complete national picture, and one of the things I
found in discussing this issue is it is sometimes described as
though there were a group of people who knew exactly what was
going on and they did not tell other people exactly what was going
on. I am afraid the problem was there was a group of people that
we might have expected to know what was going on who did not themselves
have a full grasp of it and, therefore, could not communicate
the problem to us.
Q251 Mr Boswell: Perhaps, in an effort
to build empathy, I can say, having sat in the department in a
junior capacity, I have had one of these too, but it is a long
time ago. With hindsight is there a way of operating a risk-management
system within the department dealing with its agencies and mirroring
what is or might be done in agencies which makes this less likely
to happen: because I am sure, with retrospect, you would express
concern that it was not escalated to your level until November
but it would have been very much easier to deal with had you known
about it some months earlier, and can you actually build in a
better system without telling the LSC what to do, at least to
make sure that is manageable?
Mr Denham: I think there are,
and I think there are two ways that we need to tackle that. One
is that we came off the back of the Foster Report, and this was
not actually a recommendation directly in Foster, but I asked
the Permanent Secretary to carry out a review of all of our accountability
arrangements with all of our NDPBs. As you know, Chairman, from
your committee's business, we run almost nothing directly. Everything
in my department is run through arms' length bodies. Part of that
has got to be to clarify the responsibilities of officials from
my department who are representatives to those organisations,
because Foster was right to say it had never been: are they executive,
are they there to intervene, are they there to report back? Those
need to be clear, and that piece of work is important. The second
thing is that I think we need to build up the capacity to analyse
future risks in our overall policy better. If you wanted me to
pull out, frankly, a generic problem here, we are trying to move
the skill system to a much more demand-led and responsive system
from a system that most people have regarded as too centralist,
bureaucratic and rigid. The truth is that bureaucratic, centralist
and rigid systems are very controllable and I think that one of
the things we need to recognise is that, as you move to make it
more flexible and more responsive, which is what everybody thinks
should happen, you do increase your levels of risk and the delivery
of the programme, and I think one of the things that as Secretary
of State I will expect the new Permanent Secretary and the board
to do is to make sure that we have looked properly at those risks
to make sure that we have understood them in advance and we can
deal with them with all of our agencies.
Q252 Chairman: John, on this particular
programme, back in September 2008 the LSC External Advisory Group
minutes said that ministers were considering risks associated
with a capital programme. It says ministers were doing that, so
what risks were ministers considering at that point which did
not come to your attention until, really, November, December time?
Mr Denham: I have to say, Chairman,
I do not know and I have never known what that refers to.
Q253 Mr Marsden: Stephen, can I come
back to you about this obviously lamentable situation whereby
the person who sat on the policy group did not take it any further?
Obviously, I am not asking for the individual's name, but could
you tell me what level of responsibility in the Civil Service?
Mr Marston: She was a team leader,
depending on the terms you use, a grade seven, or principal.
Q254 Mr Marsden: Would you classify
that as someone who was higher grade, middle grade, or what?
Mr Marston: Middle grade.
Q255 Mr Marsden: The reason I am
asking that question is it was clearly a key responsibility and,
taking on board what the Secretary of State has said about looking
to the future, in hindsight is that the sort of grade of official
that ought to be sitting on a committee like that which has such
key responsibilities?
Mr Marston: I believe it is, because
there are lots of committees, lots of groups, lots of meetings,
and I do not think this is an issue about the grade or status
of the official. For me the critical issue is the confidence to
escalate, to err on the side of escalating if you see a problem,
even if the group conclusion in that meeting you are attending
is, "It is okay. Let us keep it under review. It is going
to be all right." That is what went wrong. I do not think
it was her status.
Q256 Mr Marsden: I do not want to
get hung up on the status, but what I am concerned about is the
actual structural process within the Civil Service and DIUS to
escalate an overview of that sort of thing. The Secretary of State
has rightly said, and we know this as well, that there was some
debate as to the validity of the Edwards Report, but would it
not in hindsight have been a reasonable thing for your department
and for your officials to say, "Look, we have had this report.
It is quite alarming. It talks about what policies could cope
with this level of demand and makes reference to the continuation
of payment profile projects being unaffordable to the council."
In private business, I would have thought that would have triggered
off at least a second opinion to go back and say, "Do these
guys know what they are talking about?", but clearly it did
not in your department.
Mr Marston: That is fair. We have
touched a bit on what the response was to the report. What my
colleague did know was that the conclusion within the LSC was
a set of actions that we have talked about, the short-term issue
and being ready for prioritisation at some later stage, and an
understanding that actually the primary escalation route was through
the LSC about the management of the capital programme. I do not
say that as any sort of excuse, it is really not meant to be.
It is just trying to say there is a dynamic within the two organisations
and perhaps we did not make it specific enough who was escalating
what in which organisation.
Q257 Mr Marsden: The truth of the
matter is that you already knew within the department, over a
period of time, that risk management in the LSC was deficient?
Mr Marston: That came out at council
level, you are quite right, and, again, there were clearly risks
here that we failed to spot, and I do regret that. We thought
we were doing our best to understand what the real risks were
that we were facing. So we knew there was a risk of in-year budget
and we tried to sort it out.
Q258 Mr Marsden: Can I move you on.
Of course, the first warning sign was the Edwards Report, but
there was also a management board report on 13 May to the LSC
warning of increasing pressures both on the capital budget and
expecting advice on short and medium-term priorities. Was your
department represented on that management board in any shape or
form?
Mr Marston: I think one of my
deputy directors was represented. There is a capital funding committee
that also has a role in this, I think.
Q259 Mr Marsden: Would your deputy
director have been at this management board on 13 May 2008?
Mr Marston: I can check that.
I am afraid I do not know.
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