Select Committee on Public Accounts Minutes of Evidence


Supplementary memorandum submitted by the Office of the Deputy Prime Minister

Question 9:  The dates on which TDC Board members were given clear guidance about their responsibilities?

On first appointment, in May 1987, the Chairman was sent an Instrument of Appointment under Schedule 26 of the Local Government, Planning and Land Act 1980 and a letter from the Department that set out details of the length of the appointment, the remuneration that would be paid, information on expenses, liability to tax and National Insurance contributions and conflicts of interest. In addition the Chairman received a personal letter from the Secretary of State setting out some key points about the relationship between the Corporation and the department. This included information on accountability and the financial regime under which the Department expected the UDC to operate.

On first appointment, and on subsequent reappointment, individual Board members also received an Instrument of Appointment under Schedule 26 of the Local Government, Planning and Land Act 1980 and a letter from the Department. In addition Board members received a Standard Terms of Appointment and the Department's Code of Conduct for UDC Board members.

When a Board member was appointed, the Department opened a personal file for them on which copies of correspondence relating to their appointment was kept. The personal files held by the Department indicate that on their first reappointment in 1991 the TDC Board members were sent:

    —  copies of the Department's UDC Code of Conduct, and around the same time;

    —  a note of the responsibilities of Board members, the legislative background to UDCs and details of the relationship between UDCs and the Government.

The note setting out the role and responsibilities of Board members said that:

    "Board members should contribute to the direction of the Corporation to ensure that regeneration is achieved, while having regard to the need to ensure the highest standard of regularity, propriety and value for money in the use of public funds."

Amongst the more specific responsibilities of each Board member were:

    —  Help to ensure that the proceedings of the Board and the UDC generally meet the highest standards of propriety and that public funds are used for the purpose for which they are intended.

    —  Help to ensure that the UDC's activities conform with legislative requirements and bear in mind the collective responsibility of the Board for the conduct of UDC business.

In December 1993 the Permanent Secretary wrote to all UDC Chairmen giving them a more detailed note of roles and responsibilities and requested that this information should be brought to the attention of Board members. Also in 1993 the Department introduced new appointment procedures and from that time individuals appointed to the TDC Board were given:

    —  A copy of the Board Code of Conduct.

    —  A general note on the role and responsibilities of a UDC Board member, the legislative background to UDCs and details of the relationship between UDCs and Government.

    —  Questionnaires to complete on conflicts of interest and ethic background.

From May 1995 all new Board members appointed to the TDC Board were sent the new note on roles and responsibilities as part of the information they received on appointment.

Following PAC hearings on NDPBs in Wales in 1992 and 1993, the Treasury undertook to prepare guidance on the responsibilities of Board members of executive NDPBs and to consider whether the approach recommended in the Cadbury Committee's report, The Financial Aspects of Corporate Governance, published in December 1992, could be adapted to meet the needs of NDPBs. Following discussions with Departments the Treasury prepared and issued a model Code of Best Practice for Board Members of Public Bodies in June 1994.

The DOE Permanent Secretary wrote to the Chairmen of all departmental NDPBs in August 1994 to draw their attention to the model Code of Best Practice and to invite them and their Boards to consider how best to adapt or adopt the Code, and to report back to him by October 1994. In August 1995 TDC submitted its own Code of Best Practice for Board members that set out how Board members were expected to discharge their obligations.

Questions 197 and 201:  Did anyone in the Department draw the Department's concerns about aspects of the Corporation's financial and business dealings to the attention of the Corporation's Audit Committee Chairman, Mr Ian Mathieson?

From 1987 to 1994, the Corporation had no Audit Committee because the Board of the Corporation took the view that there was no need for it and there was no Departmental requirement that its NDPBs should have such committees. However the instructions given by the Department to the Corporation's External Auditors required that as part of their annual audit, they should produce a Regulatory Compliance Report and Management Letter. Accordingly these reports were presented to the full Board for their consideration, and were copied to the Department. Each year the Department met with the External Auditors to discuss the issues raised in their reports and these meetings were then followed up by correspondence and meetings with the Corporation.

In 1992, following PAC hearings into a breach of rules by a major NDPB, the Permanent Secretary wrote to all departmental NDPB Accounting Officers to set out his thinking on the role of Audit Committees in helping to prevent such lapses. The letter noted that the Government Internal Audit Manual encouraged NDPBs to have Audit Committees and at that time half of DOE's NDPBs had such committees. The Permanent Secretary said that "I would strongly encourage the remainder to set one up." His letter asked NDPB Accounting Officers, in consultation with their Chairman and Board to review their Internal Audit services in general and Audit Committee arrangements in particular.

In August 1994 the Permanent Secretary wrote to all Departmental NDPBs to draw their attention to the new model Code of Best Practice for Board Members of Public Bodies that had been produced by HM Treasury. Following its consideration of the model Code, the Board established an Audit Committee on 15 September 1994.

From September 1994 onwards the Audit Committee, including its Chairman Mr Mathieson, must have been aware of the issues that Price Waterhouse were raising in the Management Letters and Regulatory Compliance Reports. In accordance with our normal practice at that time, the Department's concerns about issues raised in the reports were raised directly with the Corporation's Chief Executive and Accounting Officer, Duncan Hall rather than with the Chairman of the Audit Commission. We were entitled to expect that the Chief Executive would have reported the Department's concerns to the Board, but we will consider whether a change in practice is called for in relation to our current NDPBs in the light of this experience.

Question 255:  Is the Department aware of any letter sent by Richard Caborn after a visit to Teesside Development Corporation? Did such a letter exist and what did it say?

Richard Caborn wrote to Sir Ronald Norman, the Chairman of the Corporation, in October and November 1997 in response to proposals from the Corporation to establish a Teesside Trust for Regeneration that would carry on some of the Corporation's regeneration activities after wind-up in March 1998.

In his October letter, Mr Caborn told Sir Ronald Norman that he should not be pursuing the Trust proposal further at this stage, and that it was essential that Urban Development Corporations were wound up in the following March with the fewest possible loose ends. He knew that, in the case of TDC, this strategy was based on securing a very high level of receipts and he would like them to concentrate on achieving this rather than letting management attention be diverted to other matters, such as the Trust.

In his November letter, responding to a further letter from Sir Ronald Norman pressing the case for the Trust, Mr Caborn explained why in his view the Trust proposal presented problems and said that he did not believe it right for the Corporation to devote further time to this idea. It should concentrate instead on delivering the exit strategy.

Mr Caborn subsequently met the Chairman, Chief Executive and several Board members during his visit on 13 November. The Chairman told him that he was confident that TDC would leave all matters in good order on the wind-up date of 31 March 1998.

Questions 260-265:  Was the Department always consulted by the Corporation about the Chief Executive's performance bonus?

Yes. Performance bonuses were first awarded for the Chief Executive's performance in 1989-90. The Chairman of the Corporation was responsible for setting the Chief Executive's performance targets. The Chairman made an assessment of the Chief Executive's performance against the agreed targets. He then consulted the Department on the performance bonus award he proposed to make.

From April 1993 full responsibility was given to UDC Boards to determine the level of the performance pay award, subject to consultation with the Department's Permanent Secretary on the level of the proposed award and on the performance targets that the Chief Executive would be set in the following year.

The Department could offer comments to the Chairman on the proposed award, and did so, but was not in a position to second-guess his assessment.

Questions 273-276:  On how many occasions did the Corporation's external auditors raise the issue of deferred payments? Why did the Department not feel it appropriate to take any action over deferred payments when they were highlighted in the Management Letters for seven years in a row?

The Management Letters for the financial years ending on 31 March 1993, 1994 and 1995 refer to several payments to creditors outside contractual payments dates. The Management Letter for 31 March 1994 also refers to a staged payment agreement in relation to one contractor.

The Management Letter for the financial year ending on 31 March 1995 refers to deferred payments as a significant issue.

The Management Letters for the financial year ending on 31 March 1996 and 1997 again refer to payments to contractors outside the contractual payment dates. In addition the 1997 letter refers to one deferred payment to a contractor.

The Department did take action over deferred payments. Each year, following receipt of the Management Letter and Regulatory Compliance Report from the Corporation's External Auditors, the Department held a meeting with the External Auditors to discuss the issues that they had raised, and raised the issues directly with the Corporation, usually by correspondence with either the Chief Executive or the Finance Director, but also in meetings.

For example, in respect of deferred payments,

    —  On 9 September 1994 the Government Office wrote to say that TDC should "ensure that suppliers are paid by the due invoice dates at all times and that contracts are managed so as to fulfil this requirement without exceeding approved external financing limits."

    —  This letter was followed up by a meeting with the TDC Finance Director on 6 October 1994 at which the same points were made.

    —  The Government Office wrote to TDC on 19 December 1994 to say that, "for the avoidance of doubt, transactions involving any form of payment deferral, unless it is very clear that deferral is at absolutely nil cost to TDC should be submitted to the Department for decision."

    —  Following the 1994-95 Management Letter which again raised deferred payments and suggested that TDC was ignoring the advice that the Government Office had given it in December 1994, the Government Office wrote to TDC on 29 August 1995 about the deferral of payments issue and the costs, for example interest payments, that might arise from this practice.

    —  TDC responded on 13 September 1995 to say that the Corporation "prior to expediting payment of valuation certificates has such certificates agreed by its professionally qualified consultants. The consultants are only able to certify cost on qualifying works, contract variations and other eligible heads of expenditure. A payment in respect of interest for deferral is not an eligible head of claim and therefore not capable of being agreed by the consultant or paid by the Corporation. The arrangements entered into by the Corporation therefore preclude interest payments for deferral."

Question 292:  Has DTLR taken legal advice on the actions of the Development Corporation?

The Department has taken legal advice on three matters that appear to arise from questions asked at the hearing on 4 March. The legal advice that we have received is necessarily confined to principles; advice on the merits of any action could not be given without knowing all the facts and circumstances, with evidence, of a complaint. The following replies reflect the advice received.

—Were the individual actions taken by the Chief Executive, Mr Hall and the Board within the powers set out in the Part XVI and the related Schedules of the Local Government, Planning and Land Act 1980?

For the reason given above the Department is unable to answer this. This was clearly a matter for the Corporation and its advisers to decide at the time when the Chief Executive and the Board decided to take the actions referred to in the NAO Report. It is not possible now for any firm advice to be given on the lawfulness of decisions taken so long ago.

—What are the legal implications of being in breach of Treasury guidance, specifically of acting outside the scope of a delegation given under a Financial Memorandum?

This does not necessarily have any legal consequences. If the Committee are interested in knowing whether any money has been or will be lost because contracts are ultra vires, then it is relevant to consider whether the decision or transaction made in breach of Treasury guidance or other rules was unlawful.

We cannot take any firm view on the evidence available. The National Audit Office report and the facts and circumstances known to the Department suggest that the losses identified were sustained because of the way in which the Corporation exercised its powers, for example, entering into bad deals, deferring payments or not getting Departmental approval for schemes. To that extent, the losses reported by NAO may have been a result of the Corporation doing things they were "never entitled" to do. But that does not mean that the losses were a result of entering into contracts that were outside the Corporation's powers.

—What legal remedies might be available to the Department if action was clearly shown to be ultra vires?

The question here is whether the Secretary of State could take legal proceedings against the Board or the Chief Executive for the recovery of any public funds shown to have been misapplied or for damages for any loss shown to have been incurred. It is not necessarily the case that the matter complained of must have resulted in an ultra vires decision or transaction. An action brought against the members or the Chief Executive would focus on their breach of rules or guidance specified in the statute or ancillary documents. There is no reason to believe that personal liability could only arise for actions and decisions shown to be ultra vires.

The Secretary of State could in principle bring proceedings for damages for the tort of misfeasance in public office. He would have to show a deliberate and dishonest abuse of power; negligence or inadvertence is not enough. Malicious intent does not require the claimant to prove that the power was exercised for the purpose of causing injury. It suffices to show reckless indifference or knowledge that injury would probably result.

A claim for damages for breach of contract might be another opinion. This would rest on ordinary principles of contract. However, officers and staff of the Corporation were appointed by the Corporation with the approval of the Secretary of State. The Department had no contractual relationship with the Chief Executive.

If there appeared to be a good case for pursuing a claim against the members of the Corporation or its officers, it is probable that the claim would now be statute barred under the Limitation Acts. The basic rule is that an action for breach of contract or in tort should be brought within six years of the date on which the cause of action accrued, which is typically the date of the breach or the wrongful act or omission.

Question 380:  Did UDCs hold their meetings in secret?

The advice that was given to all UDCs in the UDC Guidebook [paragraph 1.24] was as follows

    "Whilst public access to UDC meetings is at the UDC's discretion, UDCs are encouraged to admit the public to meetings about planning applications. It is unlikely that UDCs would want to allow the public access to other board meetings."

The practice was that some, but not all, UDCs did open their board meetings to the public when planning applications were being considered. Amongst those holding open planning meetings were Trafford Park, Black Country, Birmingham Heartlands and Leeds.

Other discussions at board meetings tended to be "closed" since many commercially confidential matters were discussed. At Birmingham Heartlands, however, discussion of non-sensitive issues was open to the public. Trafford Park also published a summary of board minutes, although confidential items were excluded. Several UDCs, for example Trafford Park, Plymouth and Merseyside, held public consultations and meetings over plans for compulsory land acquisition or major schemes and projects.

All TDC board meetings were held in private with only Board members and the Chief Executive present. If necessary, other TDC senior officers attended the meetings, but not very often. TDC did hold some public meetings about specific issues.

Planning applications where the Corporation was the planning authority were dealt with at closed Board meetings. Planning applications were referred to the appropriate local authorities and this allowed the local authorities and members of the public to comment on them.

Mavis McDonald CB

Permanent Secretary

Office of the Deputy Prime Minister

July 2002

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