Examination of Witnesses (Questions 20-39)|
WEDNESDAY 15 NOVEMBER 2000
M O'CONNOR AND
MR D JAMES
20. You do not think they sought direct assurance.
(Mr James) There is no record in the minutes that
they did so and I do not believe that they specifically did because
it was taken as a given.
21. Let me turn to Mr Young. It seems to me
that the only contingency plan that this organisation has had
has been a sort of organisational begging bowl: if the Commission
will not fund us the Government will, the taxpayer will. The company,
the Commission and the Department seem to have averted their eyes
from these problems. There was no estimate in particular of the
company's forecasts through closure. In view of the vulnerability
of visitor numbers, why did you not make sure there was an effective
plan for dealing with potential difficulties before the year of
(Mr Young) I think the report has it right in paragraph
19 on page 4.
22. I hope so, because you signed it off.
(Mr Young) I am certain the report has it right on
page 4, where it sets out the stark truth, "Once the Dome
had been constructed and much of the project cost already incurred,
the room for manoeuvre in the face of low visitor numbers was
very restricted". That was always recognised from the start
and that is a statement of fact. We can then go on to the next
paragraph, "As the financial situation deteriorated the only
options, short of closing the Dome", which we knew was more
expensive, ". . . were to rely on receipts from the planned
sale of the Dome and further grant from the Commission".
The last two courses are of course what has actually happened.
That was recognised from the start and I have to argue that in
a thing which was meant to last for a year and where the spending
was all before the year started, there is a certain inevitability,
as the report says in that paragraph.
23. All that brings us to my next point which
is the question of reporting to Parliament which you are directly
accountable for. Paragraph 2.44 shows that in June you gave the
directors of the company a guarantee against law suits. The law
suits are based on the presumption of trading while technically
insolvent. There are of course two penalties for trading while
technically insolvent. One is the liability to law suits from
the creditors, which would be precipitated by that. The other
of course is disqualification since this is a criminal act. You
presumably could not give them any degree of indemnity against
(Mr Young) Nor did they seek it. What we did in the
circumstances described in paragraph 2.44 was look to the indemnity
which we as a department and all Government departments automatically
give to members of the boards of their non-departmental public
24. Let me just stop you there. This was not
automatic. They asked in May, you gave the approval in June, about
a month later. It is clearly not that usual.
(Mr Young) If I may finish, our presumption when we
got their letter was that the indemnity which applies to all members
of the boards of all non-departmental public bodies applied. Before
giving that immediate assurance, which we could have done and
which we did orally give to them, they asked us to check. We therefore
checked with our Treasury colleagues and lawyers just to make
quite certain that the indemnity which applies to all members
of the boards of all non-departmental bodies could indeed apply
in this company's case. We had that assurance and then in June
I wrote back saying yes, I could reassure them, I could confirm
that the indemnity which applies to all people does apply to them.
25. I understand the sequence you followed.
The simple fact, however, is that if they were susceptible to
law suits from creditors they were susceptible to disqualification.
There is the same trigger in both cases, namely that of trading
while technically insolvent. However, let us move on because what
that means is that such costs would be met from tax money. Can
you tell us why Parliament was not informed under the arrangement
for notifying contingent liabilities? That again is your responsibility.
(Mr Young) It is indeed. We were advised that Parliament
had been informed under a Treasury Minute in January 1996,
whose reference I am groping for, and that that was covered by
a Treasury letter.
26. I am familiar with the Treasury Minute:
that is a description of the general giving of indemnity to NDPB
board members, not of this specific thing.
(Mr Young) I am sorry but what we are saying is that
because this is a non-departmental public body, that general indemnity
covered by that Minute does indeed apply to these directors. That
is all we said.
27. The order of magnitude of these liabilities
is quite large. They are not just normal running operational considerations
in your Department; these are quite unusual things, are they not?
(Mr Young) Yes. The intention is of course that this
is a solvent trading company and should remain so. That is the
intention. We were advised that the Treasury Minute indemnity
rules did apply and do apply to the members of this NDPB in the
same way as they do to all others. Nothing that we did could alter
that. That was the advice we received.
28. That does not let you off the requirement
to tell Parliament about the contingent liability being undertaken
there. I have looked at this and because I was concerned about
the specific issue I sought advice from two quarters. Both the
quarters are actually the authority in this area. One is Speaker's
Counsel of this House because it is the rights of this House we
are talking about. The other was the Comptroller and Auditor General.
I shall give you a copy of both pieces of advice at the end of
the meeting but I shall read them to you now so that you know.
This is from Speaker's Counsel. "You have asked me for my
advice on whether the indemnity given by the Department for Culture,
Media and Sport to the Directors of the New Millennium Experience
Company on 21 June 2000 ought to have been reported to Parliament
. . . To justify their decision not to do so, the department must
essentially satisfy two tests, demonstrating (a) that the giving
of the indemnity was in the normal course of the department's
business; and, not or, (b) that the indemnity is of a standard
type which is given in the course of normal, commercial business
dealings . . . On the first test, I am not in a position to question
the department's assertion that such an indemnity is routinely
offered to Board Members of non-departmental public bodies . .
. The crux of the matter, therefore, is whether the department
has satisfied the second test. What is, or is not, a normal commercial
business dealing is a matter of fact not of law. Nonetheless,
I would be very surprised to discover that the giving of an indemnity
to directors of a company to protect them against the personal
consequences of their breach of statutory duties were regarded
as a normal business practice . . . It is noteworthy that the
department's letter of 10 November 2000 entirely fails to address
this issue and concentrates instead on the first test. I therefore
have nothing before me which attempts, on the department's behalf,
to demonstrate satisfaction of the second test". That is
the view of Speaker's Counsel. I shall read you the key paragraphs
of the view from the Comptroller and Auditor General. "Government
Accounting section 26.3 covers Parliamentary reporting procedures.
Indemnities should not be given until 14 days after a Minute on
a specific case is laid before Parliament. Liabilities arising
in the normal course of a department's business need not be reported
to Parliament in this way unless: . . . They arise as a result
of a specific guarantee, indemnity or statement of comfort; or
. . . Expenditure at a later date may be of such a nature or size
that Parliament should be given notice . . . Government Accounting
goes on to say `. . . that the test is what Parliament can be
expected to regard as normal course of business in the light of
the activities which it has authorised.' . . . The Department's
view was that the indemnity was in their normal course of business
and did not need to be notified separately to Parliament. The
National Audit Office's arguments against that view are that:
i) The Department itself can only give support based on Exchequer
funds. They have no powers to offer lottery funds in support,
only lottery distribution bodies can do that. This was the first
time that Exchequer funds were committed to the Dome. ii) The
circumstances in which this indemnity was given were far from
the Department's `normal course of business' and no comparable
cases are apparent. iii) Expenditure at a later date `. . . may
be of such a nature . . .' that Parliament should have been given
notice, in terms of paragraph 3i) above . . . This indemnity fails
the test set out in paragraph 4 above". Both of our authorities
take the view that you should have notified Parliament on this
matter. I am surprised you did not seek advice either from this
Committee or from the C&AG.
(Mr Young) Certainly faced with advice like that one's
confidence slightly dissipates. I shall naturally apologise now
or later if we have done wrong. Our view was that we were not
giving an indemnity, that an existing indemnity which Parliament
has approved automatically applies. That was our view. If I may
take issue perhaps with the question you asked your two advisers,
I do not believe I was giving indemnity, I was confirming to them
that an existing indemnity which Parliament has approved automatically
applies, as it does for all NDPBs. I repeat that if that was wrong,
I can only apologise and obviously I shall look at all the advice
carefully. If I may state that we discussed this with Treasury
colleagues and I had thought that was sufficient.
29. This Committee does not have a habit of
accepting Treasury's view of its own procedures.
(Mr Young) No, and I was not about to say therefore
I was right and you were wrong. That was not where I was going.
I was just trying to say that in my judgement we were not giving
indemnity, we were confirming the application of an existing indemnity,
which I would say was a bit different from what you asked your
advisers about. Secondly, it was not just the view of the DCMS
it was the view of the Treasury as well. I repeat, if I have done
wrong I certainly apologise.
Chairman: I would recommend you re-read paragraph
2.44 which you signed off.
30. Welcome here again, Mr Young. I am sure
you are delighted to be here today. Your defence has been to shelter
behind the protection of the Treasury Minute of 1996 which was
a general description of the way the system works. It is a singularly
leaky defence. May I put it to you that if it is just a routine
procedure, as you claim, then one wonders that it was not until
May that you bothered to get it ratified. Was that because you
had forgotten or was it because events in May focused your attention
on the need to get it quickly? In other words, what triggered
it? Was there a threat from some of the directors that they would
leave unless they got confirmation that they would have such a
protection? Why May? Why not January?
(Mr Young) The answer to that is because we had always
assumed that this document, which is entitled Government Indemnity
to Cover the Personal Liability
31. I can see you are reading that. I understand
that. We already know that. What happened in May that made you
think that perhaps it was not, or that you had better get the
position clarified? Something happened which suggested there was
(Mr Young) The company wrote to me. The Chairman of
the company wrote to me on 25 May asking me either to confirm
or clarify the indemnity position for the board members.
32. In other words, the Chairman of the company
and his directors were already concerned that they might be in
danger of, if not already, trading insolvently.
(Mr Young) They were seeking my reconfirmation, which
33. But you would not do that if everything
were going normally, would you?
(Mr Young) No.
34. They did not ask for it in February.
(Mr Young) No. If you look at paragraph 2.43, you
will see that "The Board engaged a firm of solicitors in
mid-May to advise them on what the consequences would be if the
Company was trading whilst insolvent, and the solicitors have
attended every Board meeting since 18 May". In discussion
I understand doubts were raised about the applicability of the
general Government indemnity.
35. Yes, there was genuine concern that they
were trading or about to be trading insolvently. You do not just
out of the blue come up with a question like that and engage solicitors
unnecessarily when you think you are in a normal situation. I
think the facts speak for themselves. May I also welcome you,
Mr James, it is a great pleasure to have you here and we are grateful
to you for bringing your expertise to bear on a rather messy situation.
If it had not been for you there would not even have been a Pricewaterhouse
report, or probably would not have been. It was at your initiative,
was it not?
(Mr James) I believe that it is correct that it was
my initiative which resulted in the report.
36. So they would have blundered on blindly.
Having got this protection their shoulder blades were clear now,
they had armour on their backs, they knew they could not face
the court or they had protection from the indemnity and they would
have blundered on in the same old blind way if you had not come
in and said that it needed to be checked for certain whether it
was solvent or not. You then, on the basis of that report, said
that in your opinion they had been trading insolvently since February.
(Mr James) May I respond to your first point as well?
I do believe that the New Millennium Experience Company board
at that time did have a rather more positive view of its strategy
and its way forward, albeit one which we today recognise was wrong
in the quantum of the finance which it identified. They recognised,
however, that they were dependent wholly upon the grant at that
time for further funds to see them through to a solvent resolution
and they believed at that time that they had achieved that with
the new grant application which had gone in and been approved
around 26 or 27 August.
When they approached me, they believed that they had got enough
for stability to go forward. I do not believe at that time they
believed there was a solvency issue. The very strange characteristic
of this company is that in my view it has had a recurring pattern
of insolvency beginning to be a problem and then solving it with
a new grant. Each time they have cured it, they have hoped it
is sufficient to go forward until a further shortfall in the paying
attendance has resulted in a renewal of the solvency problem again.
37. That is a rather generous interpretation.
I would see it slightly differently. Until they got outside expert
verification of the fact that they were in trouble, they felt
they had a defence. You came charging in and now robbed them of
the defence of ignorance by insisting on expertise being brought
to bear on their financial circumstances. So if you had not done
what you did, they would have carried on in the same way. In fact
it would have been a great embarrassment to have found out even
earlier, as they did with Pricewaterhouse, that they might be
trading insolvently, would it not?
(Mr James) Yes. I am very concerned that wherever
I am also critical of things that have passed that I should also
be extremely fair in giving a balanced view of what I have found
and seen. I believe it is perhaps necessary to recognise that
the principal thing which they had left out of their calculations
was the sufficiency of the resources needed for the close-out
cost. I believe at the time at the end of August
that they were fairly accurate in their perception of the likely
revenue which would be forthcoming and the costs they would have
to sustain for the trade-out of the business of the Dome. That
still left them short, on my perception, with the PWC endorsement
of the funds they required for close-out as a solvent business
after it closed.
38. Looked at from where I am, this is just
one more example of the endemic incapability of the people involved
to face up to reality. If you look at the letter to Lord Falconer
in February from Chris Smith, he describes the situation as extremely
serious when it comes to solvency and financial matters. He spells
out, "Clearly it is for you and the Chairman to decide what
needs to be done to improve corporate governance". A lot
of us here have been Ministers. If I had received a letter like
that from another Minister I would at least have been somewhat
concerned about it and would have wanted to attend to it rather
rapidly. About a month later a reply comes from Lord Falconer
who indicates that he is now grateful to have received the first
of a weekly management report the day before, which was 12 weeks
after the Dome had been in operation. Then we get the situation
where you have the indemnity being sought. Then there is a letter
in September again to Lord Falconer, from the Earl of Dalkeith.
"For a long time now we have raised questions with NMEC on
. . . the quality and capacity of its management capacity".
That was one of the issues which Chris Smith had raised in February.
". . . we have been frustrated by the company's responses,
many of which we have perceived as reflecting unchecked resistance
by the executive . . . it is your responsibility, not ours, to
ensure that NMEC performs in this area". It is a long time
from February, from Chris Smith's letter, and here we are in September
and we have had the indemnity, we have had the Pricewaterhouse
report, we have had your declaration at the end of August and
still we are faced with the need for a letter such as this. Does
it not suggest to you that there was a rather cavalier disregard
for common sense.
(Mr James) I can say with some certainty from my knowledge
of the members of this board, that whatever concerns and problems
they had, cavalier was never one of their attitudes. They were
all extremely concerned and very dedicated to finding solutions
and they would take the view that a number of solutions during
that period were put into place. The report makes clear in the
table that up until April, they still believed that they were
on course for a target of 10 million paying visitors. This is
shown in the chart on page 40, figure 12. It shows that they only
came adrift at that time. Also, they had made a number of operating
improvements which gave them the confidence that things were going
to continue to get better at that time and this included the introduction
of Mr Gerbeau, who brought with him new expertise in the management
of a theme park, which greatly benefited the performance of the
Dome as a whole. A great deal was happening during this time.
They were being very proactive in seeking this change.
39. The very remark you made about the attendance
figures confirms the suspicion that they had been suffering from
delusions for a long time about this particular operation. If
you look at the letter of 21 September from Lord Falconer to the
Earl of Dalkeith, ". . . I was shocked by what the PWC report
implied about NMEC's financial management and corporate governance".
That was on 21 September. Chris Smith had written to him about
that very item previously. Most Ministers, faced with a letter
like that received from Chris Smith, would have said they wanted
to get to the bottom of this and they wanted to be absolutely
sure they put it right. Yet here we have someone shocked eight
months later at finding the situation is every bit as bad as he
was told it was in the letter in February. Does that surprise
you? What would you do with an executive who had been employed
by you if he wrote a reply like that eight months later after
all the warnings he had received?
(Mr James) I would ask myself first whether I had
created the correct management environment in which his skills
could be developed.
3 Note by Witness: The date of that Treasury
Minute was December 1998, not January 1996. Back
Note by Witness: The new grant application was submitted
on 2 August and was approved on 4 August. Back
Note by Witness: The month was, in fact, July, not August. Back