Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 160 - 179)



Mr Ruffley

  160. Some people think that is happening now!
  (Ms Primarolo) Really, Mr Ruffley, I wonder why!

Mr Laws

  161. There are no lessons for the Treasury at all in its own oversight of departments that come out of this?
  (Ms Primarolo) They clearly do not engage in that. This is a rather, forgive me for saying so, bizarre point in that Customs and Excise is a department that has operational responsibility, that is managed through a board that is held to its targets and has to deliver within that. That includes the revenue it collects and the way it discharges its responsibility.

  162. So if the new Chairman had not come to you, this inefficiency and incompetence and fraud could have gone on for ever and the Treasury would never have been any the wiser?
  (Ms Primarolo) No, because, with respect, Mr Roques says that the department itself had discovered it, had actually made all the connections, was dealing with the problems and that by 1998 it had been completely closed down. Mr Roques then goes on to make further observations about the department, which have also been responded to.

Mr Mudie

  163. I think you are in a very good position because the activities took place when we were not in government. Secondly, you are obviously no longer the Minister and so you take a detached view. I would urge you to take a detached view, Minister, because I find it hard to accept that you are so blasé about an agency—and that might not be the right legal word—that is responsible to the Treasury for collecting £100 billion a year in revenue but when it makes a major mistake it says it is arm's length, "It is nothing to do with us". It is your agency. It is not the Secretary of State for Education here answering questions on it but the Treasury Minister because the link is to the Treasury. Do you not find it worrying that a board appointed by the Treasury mishandled that amount of money and is so incompetent, when you read what Mr Roques said, and yet says, "It has nothing to do with us"?
  (Ms Primarolo) I am very sorry if I have given you the impression that somehow I am blasé, I think you said.

  164. I said you appear to be blasé, but I am sure you are not.
  (Ms Primarolo) Of course not, and I commissioned an external inquiry because I felt it was so serious that we did that, and I did not give it to Customs to do an internal inquiry as they needed to have that external scrutiny. I do have the power, as the Minister responsible for reporting to Parliament for Customs, to do that. Customs as an organisation, in terms of its appointment and structures, is not an agency. It is a free-standing department that has to account for its work. Of course, the seriousness of the shortcomings that were revealed to my mind made it clear that we needed that external scrutiny, which is what we have now. I think there are, of course, lessons to be drawn, but what I am finding a little difficult is the idea that somehow Treasury manage this. We have three Treasury departments: the Treasury, Customs and Revenue. Customs failed in this particular area and Roques identifies what the failures were and has made recommendations. What triggered the report and the investigation was the fact that Customs itself finally managed to make all those connections. Now, it is regrettable it took so long and the issue is one I then cannot answer about what happened between 1995 and 1997. What I can say is that by 1998 it had been dealt with because Customs were already dealing with it.

  165. Did the Chairman go and did any of the Commissioners go? Are any of the Commissioners who were on the Board at that time still on the Board? Was any action taken by the Treasury?
  (Ms Primarolo) There was no action taken and again the Roques Report makes that clear, that there is no one individual or collection of individuals who can be pointed to as being responsible for what Mr Roques identified as a systemic failure to notify within Customs and pass information through, which is incredible, I agree; hence my rapid action. Within a month, I had commissioned this. In terms of action against the Board, I must be perfectly honest and say that I cannot actually tell you exactly who is on the Board now and whether they were on the Board in 1995. I am told that it is a new board.[1]

Mr Beard

  166. On this same topic, looking forward and weighing things, here you have a management which, according to Roques, virtually collapsed; it was dreadful, and it was only discovered to be dreadful when you have this extravagant mistake that cost so many millions of pounds. The question really is: what is the means now of supervising the present Board? I think it is admirable that it has been replaced so promptly but that Board is there. It is a small organisation that could suffer the same sort of problems that the last one did. What is to stop it? Who is supervising it? If it is the board of a company, then the shareholders supervise it and the income supervises it in a way. If it is a ministry, then Parliament supervises the Minister. Who is supervising this Board and who, in the future, is going to catch up on some of these mistakes before they get to these extravagant proportions that the last lot got to?
  (Ms Primarolo) Mr Roques deals with that in two specific steps of recommendations: one is about the reorganisation of the department, and the checking, reporting and restructuring of the department. That has been done. The second is the recommendation on estimates of fraud—therefore, how great that is and the development of strategies. That is now within the two publications that accompanied the PBR yesterday, which shows the level of fraud and suspected fraud in the various areas and the strategies necessary to tackle it. That means that Customs are now held to account on those estimates and their strategies are monitored against their delivery. To give the example of the tobacco strategy in dealing with tobacco fraud, you can see the targets we set and the department is very closely monitored now to ensure that those targets are met, which they have been, and the problem is being dealt with. So there is the second series, if you like: what is above the Board is the fact that the fraud figures are there. I think that is the key in many recommendations that Mr Roques made.

  167. I understand that and that is one element of being accountable. We go into the targets in later questions. On this question of accountability of the Board, that did not prove adequate for them to be caught up with last time because they had targets before and Treasury were measuring them against targets before. These failures that are itemised in the Roques Report are not just failures on the targets, because targets are so loose that anybody could have met them by the sound of it; it was a deep seated failure in the management. For instance, they did not have any management information to discuss between themselves; they did not have any analytical background to it. Somebody looking at this from the outside as Roques did saw this straight away. So anybody who envisaged that organisation with a critical mind anywhere in the last six years would have seen the same thing. Are we not making some preparations to spot things not in a nit-picking sort of way or down into the detail, but in a structured way that is not necessarily reflected in the targets?
  (Ms Primarolo) I think it is important to have it reflected in the targets that the department is charged not only with collecting the revenue, and so was doing forecasts of possible revenue receipts which were then measured against actual receipts, but that it now has, through the collection of information, through its risk strategies, identified, and is charged with doing that, the weaknesses that may exist, or potentially could occur, and therefore what strategies they will take to deal with that. I think when you have an organisation charged with working that way round, and that is being monitored closely, then that provides the checks that you are seeking. I am prompted on the point that the PSX Committee, in monitoring the performance, obviously now has this as a focus in terms of what departments need to do. I suppose that takes us back in a sense then to Mr Laws's question about whether the Treasury were checking that it is actually delivering what it is charged to do. I think that the Roques Report and the NAO report provide a rigorous framework in which to have a much more reasonable way of seeing how the department is operating and judging its performance and identifying the possible problems that can occur with exposure to fraud and where that might occur. They are charged with not just telling us that it is there, but what they are doing about it and what their targets are within that.

  168. Coming specifically to the targets now, could you clarify the point about the minutes? Is it still the case that the Board minutes are not copied to Treasury officials?
  (Ms Primarolo) I will have to check that.

  169. Could somebody come back to us on that?
  (Ms Primarolo) Of course. Of all the things I thought you might ask me, whether the minutes of the Board were sent to the Treasury, I am afraid—

  170. Mr Roques is critical because, first of all, he could not find minutes before 1997 and he was critical of the way the Board operated. We would like to know whether Board minutes are copied to those officials in the Treasury who look after this particular area. We would be grateful if you could find that out for us.
  (Ms Primarolo) Yes.

Mr Ruffley

  171. Paymaster, on page 167 of the Roques Report, Mr Roques says that the Board, was, and I quote "lulled into complacency by its focus on the targets it had agreed with the Treasury to deliver and which in general were being met". Could you describe—and for the record I absolutely know it was not on your watch—to the Committee what role Treasury officials and Treasury Ministers had in setting those targets?
  (Ms Primarolo) The discussions on the targets are discussions with Customs and the Treasury and then monitored, and they would be checked regularly. I think part of what Roques is saying is that the measurements pre-1997 perhaps were not the best ones to have - I think he puts it slightly stronger than that - and that they needed to be revisited. As to why those were the targets set at that time, I rely on Roques to provide that information. In the absence of any other information, it was difficult to see how that could be questioned on the change of government in 1997. There was not a perceived problem and the information was not being passed through up to Minister. I am afraid I am in some difficulty exactly how that was done when he refers to these specific issues. How it is done now is as Mr Roques suggested it should be done, which is by providing estimates, because we are particularly talking here about the exposure to fraud, and strategies of how to deal with that fraud and then being measured against that.

  172. What Roques exposes I think is well summed up in what he said when he gave evidence to this Committee within the last month, and it is a transcript which I will read out for the record. He says, and I quote: "Most of those targets were in the area of how much fraud they discovered and, as at the beginning of the period there was not much fraud, the reason they kept doing better than that was in my judgment not because they were very good but because the amount of fraud was so much larger than they had understood." I am agreeing with you here; it was the fault of the targets. But what Mr Roques is saying is that the targets were loose, they were easily met, they were useless. What I wondered was how rigorous now are Treasury officials and Ministers, who have a clear responsibility for setting the targets, which I think we would all accept, in saying, "We are not going to set soft targets that can easily be met." How are we going to set fairly high hurdles so that these are targets that really mean something?
  (Ms Primarolo) The difference is in how the targets were set, whether they were outputs and measured on outputs, or outcomes, and looking at that. The rigour, it seems to me, and this is one of the points that Mr Roques made, was in being required to assess the exposure to fraud and to make those figures available publicly and the strategies to go with dealing with the fraud. That of itself sets very tight observations by Ministers, Treasury and the Department itself, in terms of achieving those targets. Again I return to the examples of the cigarette frauds that were going on and the huge amount of revenue the Government does not collect. Very clearly there the Government Minister put before Parliament the extent of the problem, why it was happening and why we understood it was happening, and what we were going to do in order to tackle that, and that we would report on that to Parliament. So there is a much tighter pressure now on those areas than before the Roques Report. It is not a very pleasant experience to be told as a Minister, even if it is, as you kindly put it, not on my watch.

  173. That is a helpful answer. What I am trying to get at here is that the Treasury have a role in setting targets. In the past, in the period under question, the targets were soft, for reasons we understand. What I do not understand, and perhaps you could enlighten us here, is how do your officials with Ministers at the Treasury come to a target? Who gives you the information as to what is a reasonable target and what is a tough target? What kind of disciplines are you imposing on Customs and Excise? How do you arrive at a target. What is the process?
  (Ms Primarolo) The targets for achieving the reduction in fraud are revealed for everyone to see and comment on. Firstly, in the explanations in the document that was produced it explains the methodology of how the Department arrived at those figures. Secondly, the strategies agreed with the Minister to deal with that, put forward by the Department and to deal with those frauds, over a period of time are then obviously very closely followed, and indeed followed by PSX as well. The focus is shifted into ensuring that there is pressure on the points where the likelihood or possibilities of fraud exist and therefore there is a loss of revenue. So it is the combination of those activities, and I am sure that you and all other Members of Parliament will be reading these documents closely, and it is not just whether Ministers keep the Department under review; it is actually that Parliament, hence commissioning the Roques Report, would want to know exactly what is going on here.

  174. It is the responsibility of us all to find it here?
  (Ms Primarolo) No, I was not saying that, Mr Ruffley, please; I do not see this as at all combative, so forgive me if I gave that impression. What I accept is that the Roques Report reveals an unhappy and very serious sort of problem within a Government Department that had to be put right. They have been scrutinised externally in order to do that and changes have now been made. Given that I gave Mr Roques that brief, that he made all his recommendations and that he said that if we did all of that, that would put us in a better position to monitor and the Department respond, and we have implemented those recommendations, I feel that what is now necessary is to ensure that, for instance, targets on fraud are closely followed and monitored and the Department kept under pressure to deliver in that area.

  175. Finally, the PSA targets for the period 2001 through to 2004 for the Department include a target for reducing tobacco smuggling, but apparently no specific targets for alcohol or for VAT. Could you explain why there are no targets for such rather large revenue streams?
  (Ms Primarolo) I am sorry to keep referring to these figures, but the figures that are in the report give the estimates in the areas of missing trade VAT fraud, oil fraud and alcohol fraud. The question of tobacco, which had already been published, and the results of the first year's target, which has been achieved. That was published yesterday as well. So those targets are now in place and the strategy is how we expect the Department to deal with those issues.

  176. Could you quickly give us a summary of the new targets for alcohol and VAT in the PSA targets?
  (Ms Primarolo) This is where fraudsters set up frauds and buy goods that are VAT-free from another European Member State and then sell the goods but with VAT on them, and then disappear without paying the VAT over to the authorities. The figures show that the estimate of loss in 2000/2001 is in the region of £1.7 billion to £2.6 billion. The strategy is targeted investigation, increased checks on new registrations, which have to half the fraud by 2003, saving £750 million. Between September 2000 and August 2001, there were 1000 suspected registrations rejected and 350 registrations cancelled. Customs have also been charged with developing new techniques to disrupt the fraudsters, tightening on the VAT registraton procedure and increasing the numbers of post-registration visits. That is in these documents.

  177. Those qualify as PSA targets?
  (Ms Primarolo) They will become so but we are moving forward. You would not expect us to wait until the PSA targets. The Department has to act on them immediately.

  178. As PSA targets, they are operative from which date?
  (Mr Hanson) We have to finish the strategies between now and next April and, if they are approved, there will be new targets set for next April.

Mr Laws

  179. Minister, just before we leave this issue about the Treasury's oversight responsibilities, in a nutshell you are basically saying that the new Chair came to you and highlighted these problems. You then acted, in all fairness extremely speedily, to do something about them and you have taken up the recommendations that were made, but you are maintaining that there is no Treasury responsibility for allowing the Board to continue in operation, even though it is a total shambles and acting like a charity board rather than a board of a major entity. Is that not something that you could look at again because it seems to me that there is a lesson to be learnt here, which the Treasury have not managed to learn.
  (Ms Primarolo) I commissioned an investigation.

1   Note by witness: In fact, four members of the current Board were Board Members in 1995. Back

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