Examination of Witnesses (Questions 40-59)|
WEDNESDAY 30 OCTOBER 2002
40. Could we turn now to the classification
of Network Rail? Perhaps I could begin by asking you why it has
taken so long to get this joint statement hammered out with the
(Mr Cook) Firstly, it was developed during the holidays.
41. You promised a statement in July. It is
(Mr Cook) That holiday period did create some problems
and in the end it involved a fair amount of exchange at a working
level. Robin Lynch was very much involved in that and then Sir
John and I both personally ended up wanting to be content with
what was written, so it did take a lot longer than one might have
expected, but the fact that a huge part of the time was included
in the summer break did not help.
42. Was part of the delay the argument with
the Department of Transport statisticians themselves?
(Mr Cook) The Department of Transport statisticians
were not involved.
43. And you and the Comptroller and Auditor
General had taken different views on the classification of Network
Rail. It hardly inspires confidence, does it, with the public?
(Mr Cook) The Auditor General has not taken a different
view on the national account treatment of Network Rail, which
I think is by far the most important element of this. For those
things which the Auditor General is responsible for he has very
clearly asserted his explanation of why he has taken that position,
and for the national accounting definition, which I am responsible
for, that is quite clear. The explanation of why they are different,
the key elements, the different treatments of those two elements,
contingent liabilities and control of directors, is explained
in the statement and how they relate to both definitions.
Chairman: I am sorry to interrupt, Mr Ruffley,
but what the public want to know is whether this is a public body,
in the sense that the taxpayer stands behind it, or not.
44. That is the issue and the public, if I may
say so, Mr Cook, could be forgiven for thinking that these are
fiddled figures. Your job is to inspire confidence in the way
that statistics are presented and I can only repeat Mr Fallon's
question. You have a duty to be clear about these things. Are
you saying that the Comptroller and Auditor General is happy with
this separate view that he expresses from you? Do you think there
should be a more unified view which the public can have faith
(Mr Cook) Firstly, the production of national accounts
is quite different from the production of accounts of the accountability
of government and in the public accounts the accounting process
that we have. With regard to the national accounts, the rules
for that come firstly from the United Nations system of national
accounts. In the European Union it is the European system of accounts
established by the European Union. The European Statistical Office
has endorsed the classification that we have applied to National
Rail. It is very difficult to get a more significant authority
for that We are also accountable in the international statistical
community in terms of other bodies, such as the International
Monetary Fund, the OECD. In terms of professional endorsement
of what we do, that is abundantly clear. There is a huge issue
with something as complex as national accounts in being able to
explain in quite simple terms what we have done. I think one of
the real difficulties that exists is that it is much easier to
explain commercial accounting to people in terms which they intuitively
can relate to than the national accounts can be explained. What
I will be happy to do is to ask Robin Lynch, if you wish, to explain
how we come to that position.
45. There is a piece in the joint statement
which I would consider almost in the nature of a get-out where
you say that they are not therefore alternative views on the same
issue but fundamentally different activities undertaken for separate
purposes and hence can lead to different conclusions. Is the Comptroller
and Auditor General happy with this state of affairs?
(Mr Cook) Very much. We have had no difference. He
has signed the report. He has agreed on a joint report. I think
it is a remarkable precedent in fact in government that two independent
authorities with some comment and criticism of their views have
been able to come together and prepare a joint statement, so quite
the contrary. I should have thought that should provide confidence
in the work at my Office very particularly in an area where there
is a huge amount of criticism, I appreciate. I think what people
are getting confused about is criticism of the public policy of
the Government which is not for me to comment on or judge, but
my job is classifying activity which is the outcome of that.
46. Do you think the International Convention
should be modified in some way? Would you lobby for it to be changed?
(Mr Cook) No.
47. Why not?
(Mr Cook) Why would I? I am not sure why. We did not
find, given the rules that existed, that this was a particularly
arbitrary decision. It was a clear-cut conclusion given the nature
of the enterprise that was set up for national accounting purposes.
Could I make one comment? Some of the criticism of the decision
of my Office rests on transparency. This is a completely transparent
decision. It was made public when it was made. The actual reasoning
is there. There is no hiding of the figures of this transaction.
They are available in the public accounts. They are quite clear.
The fact that it does not appear in the national accounts in the
public sector side but in the market side is something that basically
every commentator in the United Kingdom knows about and would
have known. One of the concerns I have is that a huge amount of
criticism exists on transparency and I would argue that that is
48. Can I just get this straight? I asked you
about this and you said it was not relevant, but you said in your
joint statement that the head of accountancy at the Department
of Transport said these were contingent liabilities.
(Mr Cook) Yes.
49. I will just try to summarise this in popular
jargon. You have ruled that a contingent liability is not actually
a financial liability unless it is called on, and therefore is
nothing to do with you, but are you not, as the senior statistician
in the country, obliged to make some kind of judgment as to whether
or not it is likely to be called on, and when we are dealing with
Network Rail presumably it is quite likely to be called on?
(Mr Cook) Can I ask Mr Lynch to give you the reasoning
of how we use those probabilities in coming to the conclusion?
(Mr Lynch) We measure the national accounts using
the European standard and in the standard there is a paragraph
that says that if something is a contingent liability it shall
not be scored in the national accounts. We believe the best person
to determine the particular nature of the Government support for
Network Rail is the Chief Accountant of the Department of Transport,
so we wrote a letter to him, and he wrote a letter back to us
saying that in his opinion as an accountant this support was a
50. Is that not self-validation? You are supposed
to be checking on this. You asked him what he thought it should
(Mr Lynch) We asked him as head of accounts of the
Department of Transport in his professional judgment what was
the nature of that Government support and he said it was a contingent
liability which the National Audit Office agrees with. I think
that is good enough for us.
(Mr Cook) It is the Auditor General's view that that
is also a contingent liability and because it is a contingent
liability the national accounts determine that it meets one of
the criteria, because there are others to meet, to be in the private
(Mr Lynch) If I could rephrase that, the contingent
liability is not scored in the national accounts. The national
accounts record an integrated picture of the economy and record
transactions as they occur. A contingent liability has not yet
51. According to the joint statement, your decision
principally rests on who exercises control over the ability to
determine general corporate policy. Can you explain to us how
you concluded that this rests with the board of Network Rail when
the Comptroller and Auditor General, as I understand it, considers
that the controls available to the SRA are consistent with those
of a parent/subsidiary relationship?
(Mr Lynch) I can explain the national accounting part
of that very clearly. In the national accounts we believe that
units are classified to sector according to who is in control.
If you examine the articles of association of Network Rail and
how it has been set up you will find that the majority of members
by the articles of association are from the private sector and
of the 12 directors 11 of them are from the private sector. It
is by majority voting how they do their business; therefore I
can say from the national accounts conventions that this is controlled
by the private sector and therefore I shall classify it in the
national accounts as in the private sector. I find that very straightforward
using my rules to be able to say that. Then you asked me to comment
on what the National Audit Office say and I move out of my realm
of competence in that I am not a certified accountant. They are
using a system of accounting in order to come to their conclusions.
They are using something called GAAP. I can understand why they
have come to that decision but I am certainly not qualified to
verify to you that they have come to the correct decision. That
is not my field of competence.
52. So what does the Comptroller and Auditor
General think? The fact that he takes that view and you take another
(Mr Lynch) There is no disagreement between our positions,
but they are positions for different purposes using different
53. You are saying that you are arguing from
different premises but at the end of the day the Comptroller and
Auditor General just does not agree with you, does he? Why do
you not just come out and admit it? You talk about transparency
at this committee. Why do you not just say he does not agree with
you instead of trying to represent this joint statement as everything
in the garden is rosy and he is a happy bunny, because he is not?
(Mr Lynch) There is no disagreement between us.
54. I am speaking to Mr Cook now.
(Mr Cook) In the two and a half years that I have
worked in the British Government I think it would be unlikely,
if the Comptroller and Auditor General disagreed, that that would
not be quite clear.
55. Sorry: what does that mean in English?
(Mr Cook) If the Comptroller and Auditor General had
a contrary view on my work and he thought it were material then
he would express it. I have no doubt about that.
Mr Ruffley: But he is expressing it, is he not?
56. He said, "Should liabilities crystallise
under the guarantees and stand-by loan facilities the SRA would
have to seek funds from Parliament . . .". That is what he
said. He said, "Contingent liabilities represent the possible
obligation that arises from past events . . . and whose existence
will be confirmed only by the occurrence of one or more uncertain
future events . . . not wholly within the entity's control."
It is not a private sector accounting matter, is it?
(Mr Cook) It is true of the national accounting situation.
If all those liabilities are called on then this becomes a government
(Mr Lynch) If I can rephrase it more accurately, we
do not disagree with that statement.
57. You do not disagree with it?
(Mr Lynch) No, I think it is a correct statement.
We are using different systems for different purposes and we want
to classify this unit correctly according to the national accounts
conventions. He wants to show the correct true and fair position
of the relationship of this unit to its parent, and he calls it
a subsidiary. I am sorry; I am outside my realm of competence
here. I am trying to help here.
58. You represent the taxpayers. What we want
to know is whether the contingent liability falls on the public
sector or the private sector.
(Mr Lynch) The contingent liabilities in the national
accounts are not recorded and therefore, as we use the national
accounts to classify units between public and private, I am telling
you that in the public sector according to the national accounts
you will not find Network Rail and you will not see the debts
on the Government because they are contingent liabilities.
59. At what point would they be demonstrated?
If the contingency liabilities were called upon would that be
a point at which you would put them in the public sector?
(Mr Lynch) Yes.