Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 40-59)

MR LEN COOK, MR JOHN PULLINGER AND MR ROBIN LYNCH

WEDNESDAY 30 OCTOBER 2002

Chairman

  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 NAO.
  (Mr Cook) Firstly, it was developed during the holidays.

  41. You promised a statement in July. It is now October.
  (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.

Mr Ruffley

  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.

Mr Ruffley

  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 in?
  (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 totally false.

Chairman

  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 contingent liability.

  50. Is that not self-validation? You are supposed to be checking on this. You asked him what he thought it should be.
  (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 sector.
  (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 been realised.

Mr Ruffley

  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 one?
  (Mr Lynch) There is no disagreement between our positions, but they are positions for different purposes using different systems.

  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?

Chairman

  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 entity.
  (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.

Kali Mountford

  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.


 
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