Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 20-39)



  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 operation?
  (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 disqualification.
  (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 bodies.

  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[3], 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.

Mr Williams

  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 a problem.
  (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 I gave.

  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[4]. 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[5] 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

4   Note by Witness: The new grant application was submitted on 2 August and was approved on 4 August. Back

5   Note by Witness: The month was, in fact, July, not August. Back

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