Examination of Witnesses (Questions 1-19)|
WEDNESDAY 15 NOVEMBER 2000
M O'CONNOR AND
MR D JAMES
1. Good afternoon. Today we shall be taking
evidence on the Comptroller and Auditor General's report on the
Millennium Dome. Judging by the crowd we could have sold tickets.
The witnesses are Mr Robin Young, Permanent Secretary and Accounting
Officer at the Department for Culture, Media and Sport, Mr Mike
O'Connor, Director and Accounting Officer of the Millennium Commission
and Mr David James, Executive Chairman and Accounting Officer
of the New Millennium Experience Company. Welcome gentlemen. In
my questions I am going to concentrate on three areas which I
shall tell you about in a second. At least one of you is not used
to our procedures. I shall try to give you an indication of where
in the report I am referring to at the beginning of the question
I ask. I shall try to indicate which of you I want to answer,
but please do not feel constrained by that if you have something
to add. The first of the three areas I am going to concentrate
on, if I have time, is financial management. I want to explore
whether enough was done to face up to the question of the company's
solvency and whether there was sufficient clarity and openness
in the management of the financial crisis of the company. The
second question I shall talk through is whether Parliament is
being kept sufficiently informed about additional costs which
might need to be met from public funds. A third, if I get there,
is the question of the management of the Dome as a visitor attraction.
I am afraid we have a long session today, so may I ask you to
be as brief as possible in your replies. I stress to you who are
perhaps not used to us, that accuracy in reply is very important
and deceiving the Committee is obviously a serious offence. May
I start with you, Mr James. Perhaps you could start by giving
the Committee a brief outline of the work you have been involved
in before taking up the reins at the Dome?
(Mr James) I spent some time in a succession
of companies, mostly in the public listed sector, where there
have been issues of governance and solvency to address and where
I have been asked to resolve those problems. These have all been
companies in the private or public company sector and this is
my first experience of anything in the government debt arena.
2. How does financial management compare with
your previous experience?
(Mr James) It is very different indeed and is governed
by a number of issues which are separate from anything which I
would have seen in the public listed company sector, principally
because, as the report makes quite clear, there has been a complex
structure available for the running of the New Millennium Experience
Company and that structure has itself represented a number of
different lines of responsibility which at times have become confusing
to the participants.
3. It is not 100 per cent clear from the report,
although paragraph 2.60 does imply it. Is it the case that before
you accepted the job you insisted on a proper assessment of the
(Mr James) I did exactly as I would have
done in every other company I have ever been asked to address.
It is a standard practice, if you are going to engage in the affairs
of a company that you want to know exactly where the winning post
is going to be before you start to run that race. In this particular
case it was quite clear that they had just had a series of adjustments
to their grant level and I wanted to be certain that they now
had sufficient with which to trade through to a solvent exit.
4. I can take that as a yes, can I?
(Mr James) It is a yes.
5. Why in your view was this not done before?
Should the company not have initiated such an assessment of its
solvency at the first suspicion of insolvency?
(Mr James) Had this been a conventional listed company
relationship looking towards extending its loan with a banker,
then that undoubtedly would have been requested earlier from any
normal commercial bank lending on the usual security arrangements.
6. The Dome itself is a large but financially
fairly simple organisation, a single site operation. Should the
financial controls of the company not have identified and crystallised
the company's solvency position much earlier?
(Mr James) To answer that question I need just to
clarify one of the strange aspects of the structure of this business.
There is one very big difference between a company trading as
a non-departmental public body, dependent upon a grant, and a
company in the listed sector, dependent upon a bank. One of the
strange things about this report, and it is understandable, is
that you will go through from cover to cover and hardly find any
reference to the balance sheet. There is no balance sheet anywhere
in this report. Yet a listed company in the commercial world normally
lives off the strength of its balance sheet. Here it is hardly
a factor because the New Millennium Experience Company has had
instead to depend upon the availability of grants which are not
refundable in the main and which are only going to be made available,
as it says quite clearly in the terms of the Commission's Grant
memorandum, in the event that the need has actually arisen. So
the company has not had the opportunity, nor has it had the incentive
to keep constantly reviewing the strength of its balance sheet
as a means of turning to its bankers for further finance. It has
effectively had to run to the very threshold of insolvency in
order to justify a further claim for a further grant.
7. That is quite interesting because solvency
has been an issue which has come up time and again in the course
of the company's life so far. It does rather surprise me that
under those circumstances they would not have had some system
of at least balancing off their assets and liabilities. It does
seem to me that the whole question of solvency in one sense was
taken terribly seriously and in the case of the systems was not
taken seriously enough. Paragraphs 2.64 and 2.44 and 2.45 tell
us that in August this year you said that the Dome had been insolvent
since at least early February. in June the board were so concerned
about the solvency that they insisted the Department formally
agree to meet the costs of any actions for wrongful trading brought
against the company's directors. Yet in July the shareholder stated
in Parliament that ". . . the position would not be reached
where the Dome was insolvent". Can you explain to us how
those differing views could be drawn?
(Mr James) Yes, indeed. There are some three separate
points there. First, yes I did indeed make the comment that the
company had probably been insolvent since February and that is
a view which was unarguably correct in the knowledge of what we
have today. We now know that the revenue fell short by a significant
amount and I am afraid therefore that my comment about insolvency
was made with the wisdom of hindsight. The defence against it
at the time by the boardand it is perhaps a reasonable
defenceis that of course at that time they continued to
depend upon an expectation of ten million or more paying customers.
Therefore they were not aware at that time of the potential shortfall
in revenue which I was able to address in forming the view that
they had been insolvent at the time. May I deal with your third
point next, which is the one relating to the indemnity which was
given? The move for the indemnity was motivated by the board at
a time when they had received £10 million
less than they had asked for from the Commission, to close what
they then perceived to be their solvency gap and they were anxious
that they therefore were left in a position of some exposure.
They needed to accept the reduced amount which had been given
to them in order to continue to trade, but they were very much
alive to the fact that this put them into an insolvency exposure
going forward if they did not get the balance of that grant application
soon thereafter. That was when I believe they felt it appropriate
to seek the protection. Your second point concerned the comments
which were made with regard to the fact that the company would
remain solvent. I would draw to your attention that it has been
a consistent statement by shareholders and representatives of
the Government to the various houses concerned across at least
the last three years that the liabilities of the New Millennium
Experience Company would be met in one form or another and a comment
to that effect has been contained in each of the three published
accounts of the company.
8. That will have some implications for questions
which are to come later. You say that with the wisdom of hindsight
you could see that. In early November last year the company's
then Accounting Officer, who was Jennie Page, advised the board
and the Shareholder that more money might be needed. In the event
the company applied for £60 million, but not until February,
some months later. The grant was approved by the Millennium Commission
just three days later, almost instantaneously, and the company
had to use £32 million almost immediately to pay outstanding
invoices. This is paragraphs 2.14, 2.23 and 2.24. Why did the
company delay that application? Was it trying to conceal the company's
financial problems? Did the management of publicity supersede
the management of public money?
(Mr James) No. This is a situation I have looked at
very carefully and I think that the board had justifiable occasion
to delay its application. May I refer you to paragraph 2.14 particularly
and especially to the second sentence, which is one of the most
interesting sentences relating to the financial burden which was
coming on the company? If I may, I shall read it to you. "The
Board considered the outcome of a reforecasting exercise for the
project, which forecast expenditure of £136 million in the
period December 1999 to February 2000." The question regarding
this issue of £136 million is how they were supposed to be
spending it, how they were going to cover it. In fact at that
time they had a total amount of cash in the bank of some £16
9. At what date was that?
(Mr James) On 1 December the company actually had
£27 million of cash available in its account. If I might
take a moment, it would be helpful to build up exactly what the
cash resource was. They had £8 million of undrawn grant at
that time as well and they had £21 million due to come in
during the immediate month or so ahead from sponsors. In addition
they had a benefit of £16 million from VAT payments in their
hands and they had a ticket income of £13 million which they
had received. Finally, they had £4 million from catering
which was coming in at that time for the period January through
February and therefore when they did their sums on this, they
recognised that the £132 million which they had to cover
was going to be in the order of some £60 million short of
all the resources. So they made an application for that £60
million. Actually I think that the board behaved quite prudently
in delaying, because they did not know the value of a great many
of those components which were going to come forth. As you will
see, in paragraphs 2.15 and 2.16, they did signal their concerns
at various levels at that time while they waited to see exactly
what the amount was that they needed to fill their solvency gap.
I do believe that they behaved prudently.
10. Then they still suddenly had to pay off
£32 million to creditors virtually instantaneously, outstanding
(Mr James) Yes.
11. I understand they were about two days from
the buffers at that point as is reflected by the Secretary of
State's comment in the House that day when he said that no application
for additional funding had been made but that when they met on
Friday they took a prudent view of what the Commission's opinion
would be if an application for cashflow support were made. Clearly
they were right on the buffers at that point.
(Mr James) Absolutely correct. They did have to pay
of it down at that time on creditors and that meant they effectively
squeaked out on the cash that they had for the creditors due at
that time. I would again refer you to paragraph 31 on page 68
if I may, because that puts very clearly the stricture under which
the Commission has to operate in making the cash available. "Grant
should not be claimed in advance of the need and surpluses should
be repaid to the Commission on a monthly basis once the maximum
grant has been drawn down." Therefore they were bound by
12. Let us move on to Mr O'Connor. The Dome
is a one year attraction yet until August the Commission as a
bank of last resort did not know the company's cost for closure.
That is in paragraph 2.64. It took Mr James to insist on an exercise
to identify these costs, yet you were concerned about the company's
solvency as early as Januaryparagraph 2.22. Why did you
not insist on such an exercise much earlier, given the apparent
assumption that the company would turn to the Commission for any
(Mr O'Connor) We were aware from the last quarter
of 1999 that it was likely that the Dome would need further grant.
As Mr James has said, the board took some time to decide how much
was needed. We were monitoring it closely and therefore we knew
what the situation was so that we could anticipate it; we did
a great deal of work on analysing those budgets before the application
came to us. We did identify at the early stage the need for an
exit strategy and we were concerned that this was not being focused
on. One of the focuses of my Chairman's letter to the shareholder
in February was the need to look at the cross-cutting issues and
the longer-term issues. We asked for an exit strategy at several
points throughout the year. NMEC either failed to produce them
or did not produce exit strategies which we though were adequate.
It was not until PricewaterhouseCoopers (PWC) were actually commissioned
to do the work by NMEC that NMEC themselves produced the first
reliable estimate of what it would cost them for the final stage
of their business.
13. You had to be directed by the Commissioners.
You sought a letter of direction to pay two of the four additional
grants awarded to the company this year. Surely this means that
the Commissioners had a choice about whether to pay the company
and therefore the company was wrong to assume the Commission would
automatically make any extra lottery funds available. This is
relevant to the description of the solvency situation which Mr
James was telling us about.
(Mr O'Connor) It is clear from the grant memorandum
and more generally that we were not obliged to pay grant to the
New Millennium Experience Company. They were of course mindful
of the commitment given by the previous Government and emphasised
by this Government that should the Dome need more money we would
have the resources to give it to them. It did not follow that
we would say yes to any application. They could not assume we
would say yes, but, as I understand insolvency law, you only enter
into wrongful trading when you do not have a reasonable expectation
that money will be forthcoming. So my assumption is that the board
assumed that they had a reasonable expectation that we would say
yes, but they did not and could not have certainty.
14. Surely that reasonable expectation would
have been somewhat in doubt at the point you sought the letter
(Mr O'Connor) At the point I sought the letter of
direction, I was at the point of being overruled and therefore
they could be confident that the decision was made.
15. Did you know you were going to be overruled?
(Mr O'Connor) I could not be certain that I would
be overruled. Each time a new grant application came, the commissioners
were very concerned and their frustration mounted. I could not
be sure whether I would be overruled but I did make clear to the
Commission the ground which I as accounting officer could consider
and which led me to my conclusion. I did point out to them that
there were other factors which they could consider if they wished
and on which they could make their decision. They did make a decision.
They overruled me and they provided a grant to NMEC.
16. You thought it was poor value for money
and had your recommendation effectively been accepted, they would
not have got the money.
(Mr O'Connor) That is right.
17. What that would mean, given that other people
had said they would be supported, was that if the company were
assuming that lottery money was not available, taxpayers' money
(Mr O'Connor) It is a matter of speculation about
whether the public purse in the form of the taxpayer would have
stood in to provide the grant which the Commission did not. However,
on all the analyses we have seen, many of them in hindsight, closing
the Dome at any point during the year would have led to greater
debts than the extra grant which we provided. It could be that
the Chancellor might have decided that it would be economically
rational to stand in for our grant rather than meet the insolvency
18. So it was not certain.
(Mr O'Connor) I do not think it was certain; no.
19. That is relevant to the solvency issue.
May I come back to you, Mr James, on this? In continuing to trade
the company is taking assurance to do so from ministerial statements.
Paragraph 2.45 sets out the Shareholder's statement, "If
the Dome became insolvent it would be a matter, ultimately, for
Government to bail it out in some way or another". Did the
company seek direct assurance from the Shareholder on this, since
he attended most of the company's meetings?
(Mr James) There is no such record of any exchange
in the minutes of the company but they have relied upon the renewal
of that intention as evidenced in the accounts of each year end
and they further in the later course of that drew comfort from
the statement made by the shareholder in the House of Lords on
1 Note by Witness: NMEC had applied for an
additional grant of £38.6 million against which the Millennium
Commission awarded £26 million, plus a further unbudgeted
£3 million ring fenced specifically to enhance the marketing
programme. The £38.6 million had not catered for additional
marketing spend. Consequently, the grant awarded was £12.6
million that that applied for. Back
Note by Witness: The figure was, in fact, £32 million,
not £31 million. Back