Examination of Witnesses (Question Numbers
180-199)
MR NICHOLAS
MACPHERSON AND
MS LOUISE
TULETT
22 OCTOBER 2008
Q180 Sir Peter Viggers: But last
year when there was an under spend and my colleague, the honourable
member for Ludlow, asked you about the under spend you quoted
early retirement and exit costs from voluntary early redundancies.
The Treasury has under spent for each of the last six years by
substantial amounts. Were there exceptional items every year,
or do you, as it were, set yourself a target and then under spend
to set an example to all of us?
Ms Tulett: We have under spent
over a number of years. You will find, if you look back on the
history of that, that often that is because of exceptional items,
such as the reversal of the impairment in the building, which
by nature of the fact that it is a 31 March balance sheet is not
something that you can estimate in advance because it is the market
conditions prevailing at the time. I think it is also fair to
say that the governance framework around the public expenditure
is such that the gearing is always going to be towards an under
spend or hitting exactly on target. Most organisations, I think
you will find, unless they are into excess vote, will be running
at an under spend of approximately 2-5% because of the nature
of the incentives in the system which are to avoid an excess vote.
Mr Macpherson: I continue to find
the degree of under spending, certainly on people and pay, slightly
frustrating, and certainly in the coming period, with the Treasury
under quite a lot of pressure, I am very keen to look at whether,
by either over budgeting or over recruiting, we can get closer
to our spending limit.
Q181 Sir Peter Viggers: To take a
point of detail, you under spent £6.2 million on consultancy
costs. Who were these consultants who were not used?
Ms Tulett: When we took the spring
supplementary for 2007-08 we had entered into the territory of
having to employ consultants around the Northern Rock situation,
but at that point we had not actually come to a firm agreement,
either with Northern Rock or with the other tripartite bodies,
that they would reimburse us with these costs. That agreement
was reached, so we did not eventually have to consume any of our
budget for the Northern Rock consultants. If you look at the annual
accounts on page 81, you will see that we have set out there quite
clearly the amount of professional fees that we incurred and how
they were recovered from the tripartite and from Northern Rock,
but at the spring supplementary point we had to hedge against
the effect that we would not be able to recover these costs, so
we did, indeed, ask for additional cover for that.
Q182 Sir Peter Viggers: Turning to
PFI costs, these appear to have increased by some 18%. What has
caused this price increase?
Ms Tulett: The PFI contract, when
it was first agreed, actually does have an RPI clause in it, so
the costs of the PFI are linked to the RPI index. This was deemed
to be a good value for money deal under the NAO report that was
looked at at the time, because effectively it costed the impact
of RPI at its actual amount rather than building in the risk to
the costings. So that is the RPI impact on the PFI deal.
Q183 Sir Peter Viggers: The Public
Accounts Committee reported that only 29% of PFI project changes
over £100,000 are subject to competition, despite the fact
that they say there is a threat to value imposed by lack of competition.
Can you assure us that all past and future changes to your own
PFI contracts will be subject to competitive tender?
Ms Tulett: We can. The financing
was subject to competitive tender at the time when the deal was
struck, and the NAO did a report which was favourable on that.
At the moment we are just entering into re-negotiation around
the soft services provision, which is a competitively tendered
exercise.
Q184 Jim Cousins: In the recession
of the early 1990s the gap in economic performance between the
various parts of Britain narrowed. Do you expect the same thing
to happen in the present recession?
Mr Macpherson: I think it is too
early to tell. It is tempting to think that any downturn in activity
will affect the south and south-east more because of the dominance
of financial services, the banking industry, and so on, and that
may be the case. But when you get changes in trends, often they
play themselves out in an unexpected way. We are in a period of
huge uncertainty. So we are looking at that very closely, we are
monitoring things like regional unemployment rates to see whether
there is some divergence going on, and things will become clearer
over the coming year.
Q185 Jim Cousins: There was earlier
a little slippage in terms of the closure of the gap between various
parts of Britain. Are you considering any special measures, on
top of the ones that have already been known, that would help
us to close that gap further?
Mr Macpherson: I think we have
got to keep a very close eye on this. Part of the problem about
really understanding what is going on remains the fact that we
do not have regional deflators. So we know in gross terms what
is happening to the incomes per head, or the gross value-added
per head, but we do not really know whether the rate of price
change, say, in the north-east is significantly different from
London or the south-east, which makes analysis of real trends
more difficult. I think we have got to use all the data we can
get hold of to understand what is happening to employment, unemployment,
skill levels and so on. As I say, there is huge uncertainty. If
things were to get worse, I think we will continually have to
review both how we spend our money and where we spend our money
and also consider whether you need, in a sense, to ramp up certain
programmes at the expense of others; but we are not there yet,
so all we can do, in a sense, is be alert and alive to the sort
of potential problems you are identifying.
Q186 Jim Cousins: Bringing you straight
away to an issue that very much affects Newcastle, the issue of
management, the employment of Mr Hoffman as the Chief Executive
of Northern Rock: does he meet all the necessary qualifications
that were an issue about former Northern Rock appointments?
Mr Macpherson: We think he is
well qualified. I think the combination of him and Ron Sandler
means that the executive team is of a high quality. You are quite
right to identify this as an issue because it is absolutely critical
to the future of Northern Rock, but it is also critical to all
banks to ensure that the highest quality management is in place.
Q187 Jim Cousins: There clearly are
a lot of uncertainties in your accounts about Northern Rock, and
one of the difficulties in resolving them is the issue of the
European Commission's state aid inquiry, which may change the
terms in which we are discussing this issue. Is there any evidence
when this state aid inquiry into Northern Rock by the Commission
will be concluded and, indeed, do we have any real evidence that
it has actually started, never mind concluded?
Mr Macpherson: We have certainly
got evidence that it has started.
Q188 Jim Cousins: We have had formal
notice.
Mr Macpherson: My colleagues in
the Treasury have been in close contact with the Commission. We
are very keen to ensure that we are operating consistently with
both the letter but, more importantly, the spirit of state aid;
so personally I would be quite disappointed if the Commission
concluded we in some way were being excessively generous to Northern
Rock at the expense of other competitors. I think we are trying
to tread a fine line which is consistent with competition but,
equally, ensures that the Government is standing behind Northern
Rock and enabling it to succeed and thrive.
Q189 Jim Cousins: Do we have any
clear idea when the Commission will conclude its inquiries?
Mr Macpherson: I have not got
the latest information in front of me, and I will give you a note.[1]
Certainly the last time I looked at it I was reasonably optimistic
that we would get an answer through the course of the autumn,
but I recognise the autumn is now—
Q190 Jim Cousins: Is passing by us?
Mr Macpherson: Exactly. So why
do I not ensure you get a note giving the latest view on that?
Q191 Jim Cousins: The arms' length
remit that Northern Rock has (and presumably this is going to
set the pattern for the other arms' length arrangements) is to
deliver a business plan. In the case of Northern Rock's business
plan it is to repay the taxpayer and, indeed, the Chancellor has
recently told us that the taxpayer is being repaid at a very substantial
rate to the extent of knocking-on two-thirds of the sum of money
at issue. On the other hand, Mr Macpherson, that money came straight
out of the mortgage market, which of course has an impact on other
government objectives. How do you reconcile that?
Mr Macpherson: It is a problem
across the board. If it is not a problem it is certainly a challenge.
Obviously the strategy with Northern Rock is to reduce the size
of the mortgage book. I think most of the easy wins on that front
are now behind us, so I would anticipate that it will decline
rather more slowly in the future compared to the immediate past.
The issue really with Northern Rock, but the banks in general
at the present time, with some of the reduction in mortgages—it
is very difficult to tell whether it is demand or supply. At the
current time why would you buy a house, if you can avoid it---.
Some people have to change mortgages and so on, but buying housing
in a falling market is something which quite a lot of people would
want to avoid, so I think the demand for mortgages is relatively
low. There is an issue of—
Q192 Jim Cousins: Do forgive me,
Mr Macpherson, the decline in Northern Rock's mortgage book has
not been brought about because of people selling houses but because
of people redeeming their mortgages and being obliged to—
Mr Macpherson: I totally accept
that, although I think Northern Rock are still seeking to sell
some mortgages but are finding the going quite tough. All I want
to do is refer to the deal which was struck with the bigger banks
10 days ago where they have committed to maintaining the availability
of mortgage finance at the 2007 level. Obviously, whether there
will be demand out there to take up that availability remains
to be seen. The question I suppose—
Q193 Jim Cousins: Mr Macpherson,
I am sorry to interrupt, but you will immediately see the contradiction
between the arrangements with the other banks, which is to bring
back mortgages more to their 2007 levels, and the position with
regard to Northern Rock, which is to scale down the mortgage book
and continue to do so.
Mr Macpherson: I suppose the issue—
Q194 Jim Cousins: There is a contradiction
there, is there not?
Mr Macpherson: I do not think
it is a contradiction, but there clearly is something to be explained.
I suppose the issue with the Northern Rock is that, even in proportion
to the Royal Bank of Scotland or whatever, very large sums of
taxpayers' money have been injected into this bank. We own all
the capital. Even with RBS, the maximum we would hold is 60%,
but in Northern Rock it is 100%. Against that background, I think
we do have to be careful about going into sort of wholesale mortgage
expansion. It may be that down the track, with appropriate support
from the European Commission, there are things we can do there,
but the key thing, I think, from a taxpayers' perspective is ultimately
to ensure that the taxpayer does not walk away with a big loss
here. So we have got to be, I think, quite careful, and I think
it is in the nature of banking that the more the state gets into
the banking business we have got to balance the interests of the
taxpayer with the interests of mortgage borrowers and, indeed,
the interests of the employees and the companies themselves, and
that is going to require a certain delicacy.
Q195 Jim Cousins: Indeed, these contradictions
are inbuilt into that relationship, but there has to be consistency
between institutions?
Mr Macpherson: Yes.
Q196 Jim Cousins: It would not be
sensible to be pursuing one sort of policy with regard to a particular
institution with which the Government had a substantial relationship
and a different policy with a different one?
Mr Macpherson: You are right,
and we need to look at this. I think where we both agree though
is that to return Northern Rock to a position where it was lending
large sums of money on loan-to-value relationships at 125% would
be—
Q197 Jim Cousins: Mr Macpherson,
that is not the issue.
Mr Macpherson: It is partly the
issue.
Q198 Jim Cousins: The issue is that
£18 billion has been taken out of the national stock of the
mortgage pool to repay the taxpayer?
Mr Macpherson: It is, but as and
when Northern Rock's finances stabilise I am sure there would
be opportunities—
Q199 Jim Cousins: To revisit that.
Mr Macpherson: ---to revisit that.
In an ideal world we would be ceasing to own Northern Rock altogether
because it had become such a thriving institution that the private
sector would want to take it forward.
1 Ev 76 Back
| 
