Examination of Witnesses (Questions 1
WEDNESDAY 28 JUNE 2000
VEREKER KCB, DR
1. This afternoon we shall be taking evidence
on the Comptroller and Auditor General's Report on Emergency
Aid: The Kosovo Crisis. The witnesses are Sir John Vereker,
Permanent Secretary at the Department for International Development,
and Mr Peter Berry, Executive Chairman of the Crown Agents and
you have some other colleagues. Would you like to introduce them,
(Sir John Vereker) On my right is Dr
Mukesh Kapila, Head of our Conflict and Humanitarian Affairs Department.
On his right is Mr David Sands Smith, Head of our Aid Policy Department.
(Mr Berry) On my right is Alan Matthews who is Head
of our Emergency Relief Team.
2. Welcome to all of you. Some of you have been
here before, others not. Our proceedings are reasonably informal.
I will outline what paragraph I am talking about before I start
the question. Can I say before I start, Sir John, that I think
the whole Committee recognises the Department's major contribution
to easing the humanitarian crisis in Kosovo and the dedication
and hard work of all involved in that operation. You start with
(Sir John Vereker) Thank you.
3. I would like to start with a question about
preparedness and it relates to paragraph 2.22 and also paragraph
2.29. I see from that first paragraph that as you did not re-tender
the contract for an emergency response service in good time, you
had to operate for much of the crisis on the basis of contract
extensions. Paragraph 2.29 tells us your contractual arrangements
for air charters had lapsed. How did this situation arise and
what does it say about your state of preparedness?
(Sir John Vereker) Thank you, Chairman. Let me take
the air charter one first because I want to say straightaway,
as this very fair Report points out, we did find ourselves in
the position at the beginning of this severe humanitarian crisis
of not having an extant air broker contract. That, Chairman, was
because we had not expected that we would find ourselves again
in the business of directly contracting air charters rather than
using international organisations. We had not expected it because
our practice increasingly had been to fund international organisations.
With the advantage of hindsight, we should have extended or renewed
that contract. We have now done so. When the crisis began we did
so by means of an oral contract with Hanover Aviation and that
worked fine. It was undoubtedly the case we were left without
a contract there. As far as the contract with the Emergency Logistics
Management Team of the Crown Agents is concerned, that situation
is a little different. We recognised that the first contract was
coming to an end. We had re-tendered. The team had been selected
as the preferred bidder and we were starting on post-tender contractual
negotiations when the crisis broke. I would invite the Committee
to agree that it would not have been reasonable under the circumstances
of this particular crisis for us to have called a halt at that
point and said, "Okay, we are going to start all over again."
We simply renewed the contract for a number of different periods
as set out in the Report until the crisis was over, and meanwhile
carried on with the post-tender negotiations. So we were ready
for that one.
4. The air travel aspect left you in a position
of no documentation to demonstrate you had obtained the best price
for the 54 air charters arranged by Hanover Aviation. How did
that come about?
(Sir John Vereker) That was not a consequence of not
having a contract because, as I say, we had an oral contract with
them to continue on the basis of the previous written contract.
The documentation which had been made available to us on two occasions
when we asked to see it in the course of crisis, it turns out
we did not keep. We should have kept it, with the advantage of
hindsight, and next time we shall make sure we do keep it and
I checked before this meeting and we have since had an occasion
to use the emergency air lift for Sierra Leone and we are now
keeping appropriate documentation. I believe the Audit Office
had access to the books of Hanover Aviation and will have seen
themselves that the procedures were followed.
Chairman: That is not the point, is it, in this
case? It is the question of your notes. We will adjourn for a
few minutes. We will not keep you very long.
The Committee suspended from 16.41 to 16.46
for a division of the House
5. My apologies, Sir John. Let us press on.
Others will come back to the issues we have talked about. My next
question relates to paragraph 3.7 and that states that it was
not always clear what criteria you applied to specific grant applications,
what you had done to test the robustness of project proposals,
and how you reached the judgments you made about the amount of
money to award. Given this lack of documentation, how can you
be satisfied about the prospects of value for money in these cases?
(Sir John Vereker) Chairman, the principal protection
that we have are the guidelines that we send out to all of those
who apply for grants from us contained in this document called
Guidelines for Humanitarian Assistance which requires applicants
to set out in very considerable detail the purposes for which
they are seeking the grant, their qualifications, and the outcomes
they are trying to secure. I have personally looked at a number
of these to check that we were getting this kind of detail and,
indeed, we certainly have been. For instance, of the two that
I looked at one was from the World Health Organisation and one
was from Marie Stopes, Marie Stopes for a rather modest amount
of money, less than £200,000. There was a detailed application
running to some 15 pages setting out in very great detail exactly
what they proposed to do and why and what they were trying to
get from it. I have also looked to see how the Department handles
these. We did have a very large number of applications and we
were trying to do quite a lot of things at once. We did not go
through an enormously elaborate or structured process but it is
clear that we did two things. First of all, we looked carefully
at all the data we were getting and assessed it and tried to reach
a judgment on it and, secondly, we took the decisions at the appropriate
level of delegated authority, and indeed the NAO Report says as
much. In the light of what, I repeat, we have found a constructive
report, we have concluded that it would be sensible for us to
somewhat more tightly structure the work we do when we get these
applications. We have now prepared a check list through which
the officers concerned at the appropriate level of delegated authority
should go through before taking a decision and in future that
will be there on file as part of the audit trail.
6. Thank you. The point made was not that there
were not individual cases, which there were, but that the system
in total was not thorough, which from reading again the paragraph
on page 37 you will see. However, I am sure others will come back
on that. Let me move on to paragraphs 4.3 and 4.4 and figure 11
which showto me I say rather worryinglyyou did not
keep the level of funding to Crown Agents under review and the
balance in your non interest bearing accounts did not fall below
£2.7 million. Why was this and what lessons have you learnt?
(Sir John Vereker) Well, Chairman, I have to say that
I am somewhat unapologetic about this, having looked at it carefully.
The truth is that we were dealing with a rather unusual situation
in which the requirement placed upon our contractors was to run
accounts for, among other places, Albania and Macedonia which
have rudimentary banking systems and Kosovo which at the time
that they had to run accounts had no banking system. Cash was
an absolutely vital part of our ability to respond quickly and
our ability to respond quickly was one of the niches which in
this crisis we clearly occupied. The international system was
looking to us to do things fast. I have not been able to persuade
myself, looking at this, that we were wrong to fund this system
in as liquid a way as we did. I should, for the avoidance of doubt,
make it clear that these accounts were held in our name by Crown
Agents Financial Services Limited. They were not amounts of money
passed to someone else. The issue that interestingly the National
Audit Office put its finger on is that because of the average
amounts of these balances there may have been some loss of Exchequer
interest because we were, as it were, drawing down funds which
the Government could have been earning interest on. I also looked
at that carefully and I have talked to my contractors and it is
a noticeable feature of these arrangements that we were not charged
banking fees on these accounts. The reason we were not charged
banking fees was because there was a substantial amount of liquidity
there which made it possible for Crown Agents not to charge us
those fees. A quick calculation would lead me to believe that
were they to charge fees as a result of our having lower balances
the public purse might actually have been worse off. I do not
think, Chairman, but I am happy to debate it further, we have
an open mind about this, there was any loss of value for money
for the taxpayer and there was certainly no loss of control because
the accounts were in our name.
7. Let us deal with these points one by one.
Firstly, the question of liquidity in Kosovo. This £2.7 million
presumably was not all held in Kosovo or Macedonia?
(Sir John Vereker) The £2.7 million which is
referred to in here is, as I understand it, subject to correction
from our colleagues in the National Audit Office, the aggregate
average month end balance from accounts which were held for use
in Albania, Macedonia, Kosovo, an account for procurement, an
account for payment to the United Nations High Commission for
Refugees and one other account.
8. Can we get confirmation of that from the
(Mr Burr) That is correct.
9. Where was the money? Was it in the London
account? Was it in the Kosovo account? Was it in cash?
(Sir John Vereker) The money was held in the UK.
10. That is what I thought.
(Sir John Vereker) In an account operated by CAFSL
regulated by the FSA in our name.
11. Okay. That is the point I want to be clear
on. You are quite right, you were very fast off the mark in this
theatre and we would not want to handicap that, but this money
effectively is on balance in the UK and, therefore, the next question
coming up is why did it need to sit in the Crown Agents' account
at zero interest? We are talking now about something which must
be at least £100,000 per annum in terms of interest charges.
Are you actually trying to tell us you would have been faced with
over £100,000 per annum of bank charges for having a call
down account in your name which is interest bearing?
(Sir John Vereker) Chairman, you might want to address
that question to our contractors.
12. I will in a moment.
(Sir John Vereker) Who will be in a better position
than I am to say what they would have charged.
13. I will get to them in a moment.
(Sir John Vereker) But the National Audit Office calculation
recorded in paragraph 4.4 is that the Exchequer interest cost
might have been £5,000 for each one million transferred in
advance of need. I have not been into the arithmetic of that.
The truth is that the overnight rate would be very, very low indeed,
but no doubt the NAO know how they reached this figure. I would
not be surprised to be paying bank charges which amounted to that
order of magnitude given that the Crown Agents were operating,
I think I am right in saying, at the end of this period 50 different
what we call MIS codesManagement Information System codeswithin
these six accounts.
14. They would have to cost that amount per
month per million, a total of £10,000 a month in bank charges.
I will put the question to them in a moment.
(Sir John Vereker) The main point I want to make,
Chairman, is it is material that there would have been a charge
had we been running at a lower level. There would have come a
point at which we would have been charged bank charges.
15. I wonder if it would have been £2.7
million. All right. We will come back to that. Let us move on.
Paragraph 4.9 shows that there is a potential conflict of interest
in field office staff, who are themselves employees of the Crown
Agents, deciding whether to use the Crown Agents to procure items
which incur transaction fees payable by the Department. What steps
have you taken to ensure that the procurement decisions taken
on your behalf by employees of the Crown Agents are appropriate
and give value for money?
(Sir John Vereker) I have done two things, Chairman,
because I read this passage extremely carefully. It is obviously
a concern to an accounting officer if it is suggested that there
is a conflict of interest which might lead to a loss of value
for money for the public purse. The first thing I have done is
I have looked very carefully at what actually happened. It is
quite revealing that when you look at the pattern of procurement
undertaken by ELMT, the pattern that emerges is a very strong
preference on their part for using local procurement and the most
rapid possible sourcing rather than sending things to the Crown
Agents procurement group because the nature of the contract with
ELMT and all the incentives on them are for rapid effective response.
For instance, there was a large order I saw for electrical machinery
which went to Dubai because it was off the shelf and most quickly
available. I have not seen any evidence in what actually happened
of ELMT behaving as if they were in a position of conflict of
interest. However, recognising that we want this arrangement to
continue because it is effective and fast to have the same contracted
party who are undertaking supply of emergency response services
to us to undertake procurement, we have instructed also our own
procurement team to visit the ELMTthe Crown Agents' emergency
response peoplefour times a year to audit the way in which
they are using their discretion under the procurement arrangements.
So we will have a structured way of telling whether any conflicts
interest are being exploited.
16. That is fine. I take the point, I think
it is rather an important point in this context, that you want
to have a system which will stand up robustly in the face of these
problems in the future. After all, in two years you have had at
least two major emergency responses. Your Department is the one
that has to respond faster than any department, other than the
MoD, and maybe faster than them sometimes, but I will pass by
that. Here you have a situation where in plain English you have
a Crown Agent purchasing from a Crown Agent and you are paying
for the privilege of doing that, so it is important that arrangements
are place. Thank you for that. I am going to move on to Mr Peter
Berry. Others will come back later no doubt on many of these issues
which are open-ended. Mr Berry, my first question to you relates
to paragraph 2.7. That tells us that although the people you employ
in field offices are on short-term contracts, they have not been
given detailed written guidance on matters such a financial controls
and procurement practices. Why is that, and what have you done
(Mr Berry) Thank you, Chairman. The people we employed
were under the terms of our contract experienced people, some
of whom in fact have worked for us for a long time. From that
point of view the staff of the field offices themselves were really
experienced and well-qualified people as the bosses, as it were
and, as the Report also says, a lot of responsibility was centred
locally, as it had to be. We were in three different countries
and it was a very fast-moving situation. They were kitted out
with packs of computers, equipment and so on. On the detail which
the National Audit Office referred to, some of which was obviously
not there on day one because the thing was moving very rapidly,
I wonder if I might bring in Mr Matthews at this stage because
he was responsible directly for the application.
(Mr Matthews) Chairman, we really would have liked
to have prepared our people to the very last detail. I am an ex-military
man and standard operating procedures is what we lived by. The
plain fact of the matter was we did not have standard operating
procedures because it was not a standard operation. We briefed
our people as best we could. As my Chairman said, we selected
the best people we could get. Many of them have worked for us
before. For example, the individual we deployed on day one to
head up the Skopje field office had worked for me in headquarters,
had worked for us in Bosnia for four years, and had worked in
Sierra Leone, so he knew the procedures better than any of us
and was an experienced field man. The same applies across the
other two field offices. We agreed with them that part of their
remit when things settled down was that they would contribute
to standard operating procedures from their own experience on
the ground which, let us face it, is where the lessons are best
learnt. They did that. The administrator of the Pristina office
produced a very substantial set of operating procedures which
we have now incorporated into a major set. If you look at them
I think you will find that they are particularly comprehensive.
17. My only reaction to your initial comment
is that SOPs are most useful when it is a non-standard situation.
They help get most things in control when you were dealing with
(Mr Matthews) We never lost control.
18. Others will come back to that, I am sure.
(Mr Matthews) Surely.
19. Can I move on, Mr Berry, to paragraph 4.5
which relates to this question of the sums involved between you
and the Department and it tells us there were significant delays
in providing the Department with monthly financial statements,
which they need to satisfy themselves that the money you spend
on their behalf you spend properly. Why did you take so long to
do this and what action have you taken to ensure that sums spent
are accounted for promptly in future? Again, either you or Mr
Matthews, we really do not mind.
(Mr Berry) I am very happy to take that one, at least
initially. There are, if I may say so, three different levels
of financial reporting covered by this one line to which I think
you are referring. At all times the Department had a bank statement
showing a financial statement of its balances coded by its projects
and the MIS code so that the banking and cash management was there
at all times. It was in its bank, crudely. Secondly, the contract
requires us to invoice for our own services after the end of each
period of service, each 30 days, so that is covered too. The third
element, which is the one you are really referring to in the Report
(although this sentence covers all three) is the issue of project
management accounts in accounting for and charging off what was
happening to the money on the ground. As has already been said
and indeed is said several times in the Report, this was an extremely
rapid and unexpected change of circumstances. We mobilised, as
the Report says, at the beginning of April. By the middle of May
it was clear that this was not something that was going to be
a very short-term emergency response so in the middle of May we
proposed to the Department we employ a project accountant and
in fact we transferred somebody who had been handling the banking
accounts as soon as we could. He was in post in June but there
was already a backlog because there were 17 projects within six
weeks, but we have got the point and we have taken that on board.