Examination of Witnesses (Questions 40
WEDNESDAY 16 JANUARY 2002
MOTTRAM KCB, SIR
KCVO AND MR
40. As I shall not be here at the end of the
meetingmy apologies; I am sure you are very sad to hear
thatI genuinely wish you well in your new post because
you have brought a much needed tightness to the financial disciplines
within the Palace, even if I still may disagree with you on certain
aspects of it.
(Sir Michael Peat) Thank you very much.
41. I had a letter from the C&AG on 8 January
which has been circulated to all the members and you as witnesses
had it several days ago so you have had chance to read it. It
is in reply to a letter I wrote to Sir John on 20 July last year.
At the top of the second page of it, Sir John points out, "From
the start of the new arrangements", this new grant-in-aid,
in 1997-98, "all the parties", Palace included, Treasury
and the Department, "were keen that the Household should
be charged at a rate which represented the full cost of flying".
You were all in favour of that. Then it goes on to explain that
that meant covering fixed costs and variable costs. Then Sir John
ends the paragraph with a statement, "This represented a
fair and reasonable method for apportioning the full cost of the
squadron". Do you still stand by that?
(Sir John Bourn) You can look at this on the basis
of full cost for every user; that is certainly one way in which
you can think about the attribution of costs. You can also look
at from the viewpoint of why you buy 32 Squadron's aircraft and
as we have heard from the Command Secretary, they are required
for military purposes. On that basis you can say that if somebody
outside the military uses the aircraft, since it is a public asset,
there is an advantage in encouraging the use of spare capacity.
As we have heard, if there is not an operational crisis on, there
is spare capacity. If you charge everybody full cost for that
spare capacity, there is an incentive, as Sir Michael has said,
for people to go to the private sector and buy the flying hours
from them. If you charge the variable cost, which is the cost
involved in the Royal Family or a Minister going somewhere, you
provide a greater incentive on the part of the payer to go and
use this public asset rather than go and use a private asset.
That is what I mean by the wording here. It is a
42. It is a fair and reasonable method. We have
just switched to resource accounting and we have all been told
the great advantage of resource accounting is that it is going
to lead to more direct attribution of costs where they belong.
Yet here we have perversely done the exact opposite. As you have
said, this is simply a matter of shuffling government money between
government departments, but nevertheless in terms of transparency,
it would make much more sense for the full cost to be borne by
each individual user. Then, as my colleague has said, instead
of the rather perverse decision of switching the Palace, it would
make sense to switch all the ministries. It does not cost the
taxpayer anything, but it makes clearer where the costs of the
Royal Squadron should fall.
(Sir John Bourn) What it does do of course is provide
an incentive on Ministers and the Royal Family not to use the
spare capacity of 32 Squadron. If they pay the full cost, they
have to pay more than if they pay the variable cost, so there
is an incentive on them to go to the private sector and leave
32 Squadron aircraft idle.
43. That is all well and good. This comes back
to you, Sir Michael. That is all well and good when we are dealing
with an almost philosophical accounting point, when we are dealing
with the one government user or another government user paying,
but when it comes to private use it is a different matter altogether.
This is where my great concern is, as you both well know. May
I just say for my colleagues' benefit that when I started asking
questions 10 years agoThe Guardian used to carry
these things at that time and will have it on recordI discovered
that with the old Royal Flight they did not even log the private
flights of the Royal Family, the Royal Family did not pay a penny
for using the Royal Flight like a taxi service. After I focused
attention on this and the press took it up, then variable charges
were applied, so at least they paid for the petrol costs but virtually
nothing else. Then we switched again, a third time in 1997-98
to full costs, which Sir John described as being a fair and reasonable
method. So now we are all rather puzzled as to where we are because
we find we are moving back now to variable costs again. It does
look like a device to conceal the true cost of the royal private
(Sir Michael Peat) I must say I would have thought
that the last thing the Royal Household could be accused of doing
was trying to hide the costs of royal travel. Our report is about
the most detailed report on travel anywhere in the world. It has
nothing to do with that.
44. Is it not a fact that as a result of this
change a royal private flight which today would cost just under
£5,000 would actually not be recorded in detail because it
would subsequently under the new system in a 125 be down to less
than £500 and you do not even record those in detail?
(Sir Michael Peat) Yes, but they still get paid back.
Obviously this report is already 30 or 40 pages long and, in addition,
we do list 414 journeys in the appendix. If we also listed all
the journeys of less than £500 we would not get it through
anyone's letterbox. Whether or not a private journey costs more
or less than £500, the money is reimbursed, I can assure
you of that. If I may say so, what lies at the root of your questions,
which are as ever very fair and reasonable questions, is whether
there is a need for 32 Squadron. If 32 Squadron were just required
for communications flying, for normal passenger flying, then in
my view you would be absolutely right to say that full cost should
be charged because we would want to find out whether we really
needed 32 Squadron for that purpose. The way we would find that
out would be whether anyone would actually use it if they had
to meet the full cost. However, since 32 Squadron needs to be
there in any event for military purposes, there is no point charging
full cost because all it means is that the money will leave the
public sector and the taxpayer will pay £2,000 for chartering
a private sector aircraft rather than £1,000 to use the Air
Force aircraft. It is whether it is needed for military purposes
or not which lies at the heart of it and my understanding is
45. If you do not mind my saying so, we have
gone all around the mulberry bush but not addressed the actual
issue. If you turn to page 17 of the report, and Table 8, fixed
and variable charges to the Household and if you look at the lower
section headed Unit Charges it deals with the fixed and the variable
costs of two particular aircraft, one of which is understandably
favoured by the Royals because it is smaller and good for European-length
trips and that is the BAe 125. The fixed costs of that are £4,600;
the variable costs are £600. Its total cost per hour is £5,200.
Can you tell me why the taxpayer should subsidise a member of
the Royal Family who chose to use that in order to take some of
his friends or her friends on a jaunt using one of these aircraft?
Why should they pay only one tenth of the cost and the taxpayer
should pay nine tenths of the cost?
(Sir Michael Peat) May I give you three answers to
that? First of all, because there is no subsidy, because the actual
cost of the journey, the money incurred as a result of undertaking
the journey, is paid for and that is the variable cost. There
is absolutely no subsidy whatsoever.
46. There is a subsidy to the private individuals
who are not paying their share of the fixed costs any longer.
(Sir Michael Peat) There is no subsidy to the taxpayer
because those fixed costs would be incurred and paid for whether
or not the private journey was taken. That is point one. Point
two is because it is the method recommended by the National Audit
Office in paragraph 3.13 of their report. Point three is that
obviously it is up to the Ministry of Defence to charge the Queen
what they like for private use of the aircraft and then Her Majesty
can decide whether or not to use it. It is not a question of subsidy,
it is a question of straightforward economics.
47. You seem to be missing where the subsidy
is going. The subsidy is not a subsidy to the taxpayer, it is
a subsidy from the taxpayer. The taxpayer is paying the cost which
otherwise would be recouped if the private passengers, Royals
plus friends, were to pay their share of the fixed costs. The
situation we now have is that nine tenths of the cost at the full
cost basis which you were eager in 1997 to adopt is borne by the
taxpayer where under the system you preferred in 1997 it would
have been borne by the private individuals. I do not worry about
what happens with the Royals in their public use; that is transferred
money. This is transferred money from the taxpayer to private
individuals and that I do not like.
(Sir Michael Peat) I hesitate to mention it, but it
is even more complicated than you have said. Actually full cost
was not charged for private flights in 1997, variable cost was
charged. Full cost was only charged for one year and it was not
1997. As I understand it, your point is that it is less than the
full cost of the journey. Well, it is not, it is the actual cost
of the journey. That is the amount of money that the taxpayer
incurs to provide the facility. That seems a perfectly reasonable
amount to me to charge. If the Air Force would like to charge
another amount, of course they can do so and then members of the
Royal Family can decide whether or not they want to use the service
at that price or whether they want to go to the private sector.
As we have said on a number of occasions before, what underlies
the National Audit Office's recommendation in this respect is
that it is better to keep the money within the public sector than
to force people out into the private sector which can be to the
detriment of the taxpayer.
48. That is all well and good in its public
use. I can go along with that. I am not arguing about that, but
it does not apply when it comes to the Royals using a bit of their
own money. When Prince Charles went over to Zurich some years
ago when variable costs were introduced, I seem to remember he
was charged something like £1,200 for the 125, which would
have cost over £5,000. It seats seven and he and a group
of friends went in it. I do not see why they should have been
subsidised, but the ultimate mean-mindedness was that the Palace
then turned around and sent a bill for two sevenths of the charge
to the Metropolitan Police to pay for the cost of his bodyguards
who were accompanying him. The idea that the Palace does not think
in terms of pennies is not actually right.
(Sir Michael Peat) We do think in terms of pennies,
absolutely, and you can see the evidence of it here in this report.
I would say again that the Royal Family are not being subsidised
but it might possibly be helpful if I said that this issue of
private travel is not a large issue. In 2000-01 there was one
private flight and so far this year there have been three private
flights. I cannot agree with you that the Royal Family are being
subsidised but at least it is not a large issue which involves
a huge amount of resources.
49. Four thousand pounds an hour may not be
a large issue to you, but to my constituents it is a large sum
of money. A lot of them would love to see that sort of money or
love to have it available to them.
(Sir Michael Peat) That is why the NAO have made the
point. If £4,000 an hour were charged, the public sector
would get nothing because we would go to private charters. I agree
with the NAO on this. Therefore the rate has to be set at a level
50. In that case, why were you in favour of
it in the first instance.
(Sir Michael Peat)which encourages people to
use the service.
51. It says here, "From the start of the
new arrangements all parties (the Treasury, the Ministry of Defence,
the Department of Transport and the Household) were keen",
not just agreeable, enthusiasm was being shown at the Palace,
"that the Household should be charged a rate which represented
the full cost of flying".
(Sir Michael Peat) But only the variable cost was
attributed to journeys.
52. You have realised you were wrong, have you?
(Sir Michael Peat) No, no; that was perfectly right,
based on the need for the Squadron for military purposes. It was
absolutely correct that variable costs should be attributed to
individual journeys, official and private, which was what happened
then and that is now the system that the NAO have reconfirmed
and I have to say I agree with them. I think their conclusions
in this report are correct.
53. Could the NAO just tell me what annual expenditure
we are talking about in this report to the Committee of Public
Accounts? Take 2000-01.
(Mr Cavanagh) In the current financial year 2000-01
expenditure on the grant-in-aid is around £5.4 million.
54. So these rows of officials here plus a gallery
full, all the MPs round here, are here discussing £5.4 million
a year. What is the total government expenditure per year?
(Mr Cavanagh) In the range of hundreds of billions:
(Sir Richard Mottram) Much more.
55. As a percentage of that what is this sum
we are talking about today?
(Mr Cavanagh) A very small percentage.
56. I think it is about 0.001 per cent. Do you
think this is a useful use of National Audit Office time?
(Sir John Bourn) It represents a great interest on
the part of one of the members. As you know, I discuss my programme
of work with the members of this Committee. All the subjects,
apart from frauds which arise without us knowing when they will
come, all these reports are discussed with the members of the
Committee and I am responsible for the reports I do and I take
that responsibility but the emphasis on this subject does reflect
views expressed to me very strongly of interests of members of
the Committee. That is why I did the work.
Chairman: Sir John was responding to what he
was asked to do.
57. Exactly, and I am addressing the whole Committee
and not Sir John. I think we need to deal with the billions before
we start dealing with the millions. I think most of my constituents
would actually regard this money as well spent and I should like
to offer my congratulations to you, Sir Michael, on the way in
which you have pursued your role as Keeper of the Privy Purse.
I think my constituents would regard the £5 million a year
spent on royal travel as a better spend than £52 million
lawyers fees at the Saville inquiry or £18 million of lawyers
and accountants fees spent by the DTI about BNFL in the last couple
of years. I have one question to Sir Michael. Can you confirm
that the pressure on travel expenditure has not meant that members
of the Royal Family have been forced to turn down visits, particularly
visits within the UK and the Commonwealth which they would otherwise
have made but for pressure on this travel budget?
(Sir Michael Peat) Absolutely. We have what I call
slightly tritely a more-for-less approach. All our cost savings
can only be put into effect if we can maintain or improve the
level and quality of service, which is the more-for-less approach
which we have done here through the helicopter. The helicopter
costs us £2.8 million a year less than the old helicopter,
but because it goes further and goes faster we can actually use
it more. It is a good example of more for less.
58. May I follow up one point Mr Williams was
going on about? I have a slightly different view on this business
of variable costs which I should like to put to you. I understand
why it is important that we should try to get the Royal Family
and indeed private people to use spare capacity within the Squadron
and I understand how that is a potential saving to the taxpayer.
It does not seem to me to be absolutely clear that the right way
to encourage them is simply to look at what the variable costs
are and make sure we cover those and those alone. Surely it would
be more sensible to try to maximise the advantage at least as
far as private use, reimbursable use, is concerned, not from the
Royal Household but from others by charging something which was
better than they could get otherwise. In other words you look
at the outside market, you say if the press or whoever are going
to have to pay £500 to travel somewhere if they go on British
Airways and pay a standard scheduled fare that you could offer
it to them for, say, £450 although the variable cost may
be only £350.
(Sir Michael Peat) It is a very good point. I am only
the poor customer in this, so I do not know how these prices are
determined. We pay the prices which are on the invoices which
are sent to us. I suspect that has happened. If you look at the
table on page 17, which Mr Williams was just referring to, with
the unit charges, when we last had variable costs for the 146
for example it was £1,213 and that was back in 1999-2000.
The amount we are presently charged for the 146 is £1,536
and that is an increase of closer to 20 per cent than 10 per cent,
so that is not inflation. I suspect that what you are saying has
happened, but it is not for me. When I see the invoices coming
through I have assumed that has happened.
59. You seem to be saying that it is not true
that it is the variable cost. You seem to be saying that it is
more like a market price which is being charged. I thought we
had just been told that you were now only paying variable costs.
(Sir Michael Peat) There may be a hint of additional
in there but I do not know. I am just the customer so I am not
the right person to ask.
1 Note by witness: Total public expenditure
in 2000-01 was forecast to be £368 billion (Public Expenditure
Statistical Analyses 2001-02, April 2001). Back