Select Committee on Public Accounts Minutes of Evidence


Examination of Witnesses (Questions 40 - 59)

WEDNESDAY 16 JANUARY 2002

SIR RICHARD MOTTRAM KCB, SIR MICHAEL PEAT KCVO AND MR IAN MCEWEN

  40. As I shall not be here at the end of the meeting—my apologies; I am sure you are very sad to hear that—I 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 ago—The Guardian used to carry these things at that time and will have it on record—I 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 flights.
  (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.

Mr Gibb

  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: £350 billion.[1]

  (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.

Mr Rendel

  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


 
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