Examination of Witnesses (Questions 60
WEDNESDAY 24 JANUARY 2001
CB AND MR
60. In terms of financial risk management, can
I put to you a very simple, basic case? Suppose you have a project
which you could complete for £100,000. You know that you
can do it. There is no real risk involved in obtaining the objective
by spending £100,000. Then you hear that there is some innovative
way in which you could attain the same objective which you believe
they could get to you for 80,000, say, but you assess that there
is only a 50 per cent chance it will be effective and, if it goes
wrong, you will have to spend 140,000. If you have a 50/50 risk
between 80 and 140, would you accept that the effective cost to
the public sector is the average of those two because half the
time you will get it for 80 and half the time you will get it
for 140? Therefore, the effective cost is more or less the average
of 110 and it is not worth it against an absolute certainty of
spending 100. Is that how you would assess financial risk?
(Mrs McDonald) If they both only provided you the
same result, you would take a different view than if a more innovative
approach gave you some other added value which the innovation
itself produced for the project. It might be worth taking the
risk as opposed to going for certainty.
61. All other things being the same, as far
as you can see, you get it equally fast and there is no added
value out of the extra innovative approach. That is the way you
would assess risk?
(Mrs McDonald) Yes.
62. I am interested because we had a case with
Fazackerly Prison the other day in which they had accepted an
extra risk. I forget whether it was a reduction in the price of
the contract or whatever. They claimed a reduction in the price
of the contract, even though they accepted that they had accepted
extra risk. They claimed that the reduction in the price of the
contract was a benefit to the public sector of that value and
that there was no offsetting value, if you like, in terms of the
extra risk. Despite the amount they had got back from the public
sector was calculated, it was calculated according to the value
of this extra risk. I was trying to put to them that they had
not gained anything from the public sector and they were very
unwilling to accept this. It seemed to me that, particularly in
that organisation, there was a lack of understanding of the financial
(Mrs McDonald) The guidance makes it plain that there
are trade offs there. You can weigh up but you have to be looking
for the positive added values at each stage. It does not dictate
whether you go for price or not. I do not know the particular
63. It is not fair to ask you about that, but
it is just the general point. I am delighted that you seem to
accept what I would have thought was the normal way of assessing
financial risk. Clearly, if you have a potential risk and you
know roughly what you assess the chances are, you can give a financial
valuation to that. They seemed quite unwilling to accept that,
which worried me and I was concerned that perhaps the guidance
on this sort of thing was coming from your two organisations,
rather than from
(Mr Glicksman) The guidance would be the Treasury's
Green Book on investment appraisal, which has quite detailed,
technical guidance on analysis of investment appraisals. I do
not know anything about the case and I would not like to comment.
64. Can I take you to the question of not taking
risks and be a little philosophicalunusual for this Committee,
perhaps. Do you think there is any case for saying that, in the
public sector, we ought in some senses to be taking rather greater
risks than you might ever want to do in the private sector in
the sense that, perhaps very much for the reasons you were talking
about just now, there may be extra benefits to the public in just
trying out innovative solutions. You may find things which are
nothing to do with the direct objective which you are aiming at,
but which may have some general, public benefit which could be
part of your pay-off.
(Mrs McDonald) You would have to work out what the
trade off was between doing that and whether there was some underlying,
immediate priority that was a very positive benefit to the public
that you could get without taking a risk. You are going to be
taking judgments about the trade offs at any particular point
time. I do not think you should look at the trade off and just
go for the safe option if, by being innovative, you can get added
65. Does the training that the Treasury is now
providing for departments in how to manage risk include any advice
about how they should try to assess any external benefits which
may be nothing to do with their department? For example, you may
have a defence project which is to make some piece of armament
but, in so doing, there may be a chance that they will invent
some new material which may have spin-off benefits to British
industry. It may be nothing to do with the Defence Ministry; it
may bring back no direct value in financial terms to the Defence
Ministry, but it may in general have a benefit to British industry.
Is that the sort of thing that you would expect the MoD to take
into account and do you tell them they should?
(Mr Glicksman) Departments are entitled to take into
account a wide range of benefits in doing their investment appraisals.
I am not sureI just do not knowwhether the Treasury
provides training on matters quite as detailed as you have just
mentioned but certainly the Office of Government Commerce is trying
to develop better systems for procurement and to learn lessons
right across Whitehall so that lessons from departments that do
things well are disseminated to other government departments.
It may be the sort of thing that you are referring to would be
part of that process. I do not really know. There are other areas
where it is accepted that the public sector is rightly more risk
averse than the private sectorfor example, in financial
management in the risk of fraud and so onwhere I think
we tend to take a much more risk averse approach for perfectly
66. Finally on your training, this is to do
with a subject we were discussing only yesterday in another forum.
It is the question whether one can break down projects at all
in order to make the risk smaller for each individual part of
the project going wrong, something which has been concerning this
Committee for some time. I wonder if there is not an argument
for doing some training along those lines, with particularly those
who are using high IT content in some of their projects. The problem
also comes back to the potential transfer of risk because it seems
to me, as the Chairman was indicating a moment ago, the risk of
total failure of a project is something that the public sector
simply cannot stand. The private sector might but if a project
totally fails very often the public sector will have to take it
back on board and pay for the whole thing all over again. Transferring
a risk of total value is almost impossible. That being the case,
is there not a strong case for trying to tell the partners they
ought to be breaking down that project into smaller chunks to
make it easier to transfer the risk to the private sector.
(Mr Glicksman) Going by memory, one of the recommendations
in the government's White Paper on successful IT was indeed that
modular approaches should be looked at to avoid some of the problems
that have occurred in the past.
(Mrs McDonald) Certainly on the IT side we have followed
that up. The gateway challenge project that the Office of Government
Commerce is developing is very much asking those questions up
front. They will use that methodology to promote that thinking
67. Management goes through its various fashions
and shibboleths. I have a feeling this is the current shibboleth.
Look at the Home Office case referred to in figure five by my
colleague. When you are talking of early release of prisoners,
the Home Office does such remarkable things as think about whether
they might break their curfew, whether they might reoffend, whether
the equipment needed monitoring to make sure it was working and
whether the contractors might fail on their delivery. This is
just a basic project evaluation, is it not? There are two areas.
One is the identification; the other is the communication and
implementation. What is common sense to the person drawing the
project up is infiltration. The understanding of the person who
devises something is not then transferred down to the people who
are going to operate it. The bigger the organisation, if that
is correct, the less likelihood there is that risk management
is going to be effective. Lord Sharman referred to this yesterday
in another context. Breaking down into small chunks, as far as
that is practicable, is perhaps the optimum way of achieving an
effective risk management. Does that make sense or is it a load
(Mrs McDonald) I think that makes sense. Once you
have done the analysis and you are having to decide what you are
going to do, you may well be wanting to take very different decisions
about what you want to do, about different risk or different elements
of risk or different weight you associate to different risks.
The point about the Home Office is not just that they thought
about it, which one would hope they would have done anyway, but
they engaged a much wider range of stakeholders in discussing
what the risks were than they might have if they were just traditionally
developing a policy. They have done a kind of cross-cutting analysis
and tried to power through the thinking in terms of thinking about
what the risks were too. They had called in other people's perceptions
of what the risks were as well as their own. That is an area where
the whole promotion of greater stakeholder engagement in policy
development and all the things that go with it is helpful in terms
of improving everybody's perception of risk. This area of transfer
of risk is something where there is quite a bit more thinking
to do. It comes up in the Phillips Report. Quite often, perceptions
can be so different that if you are not talking to each other
handling smaller issues is probably an easier way to get some
kind of consensus of what counts.
Chairman: Could the witnesses keep the answers
68. I am awfully sorry. This is one of the difficulties.
This is something that demands discursive discussion and, at the
same time, the Committee structure does not lend itself to it.
It is not discourtesy to you and not disinterest. In a way, you
are a victim of the system. You have been deluded into thinking
you have joined a system in which sanity and normal business rules
can be applied. That is a grave delusion, if I may say so. Your
problem is that it is not a business; you are not a business.
You are not run by businessmen or people who are thinking even
like businessmen. You are run by people and ministers, whichever
party is in, who have a completely different set of objectives.
The politician is the short termer. He has to get quick results
to get promotion. He does not probably think all that much beyond
the next two and a half to three years. To get that next promotion,
he has to get results in that time. Then he has to bear in mind
the election is possibly in four to four and a half years. Chairman,
you will remember that when we were dealing with the rail privatisation,
there was one mess after another. What was the predominant consideration?
Speed. Not the right decision, but getting it done quickly at
any cost. That is why I feel sorry for you. I do not mean that
in any unpleasant sense; I genuinely do, because you are somehow
going to try and impose a rational system where you will be thinking
long term and where ministers will start contracts, cancel contracts
and alter contracts and so on. Is it not going to be infinitely
more difficult ever getting a meaningful comparison between the
level of achievement on risk control in the public sector as compared
with risk control in the private sector? I do not know who wants
to risk their career by answering.
(Mrs McDonald) I agree with you. I do not think you
can draw direct parallels for a variety of reasons. The person
to whom the business manager is accountable is fairly clear. It
is the shareholder, but in government there are a number of different
interests which have to be brought together in some kind of consensus
at various points in time. We are trying not to say that everything
is going to be perfect because of this, but there are ways in
which we think we can approach the way the Civil Service and the
public service addresses some of these issues so that it is more
aware of what it is doing and, in the advice it gives to ministers,
it can give them better advice on what the likely impacts might
be. There are always times when things happen very, very quickly,
when it is much more difficult to do that. One could say that
if you had a culture which is more used to thinking about risk
in relation to innovation as well as risk in relation to financial
management controls and so on you might tune up the general level
of performance so that, even in the short term, immediate hits
that ministers look for, you can give a better quality of advice.
At the end of the day, somebody is going to take some judgments
and some decisions somewhere and your systems, methodologies or
cultures will not remove that element in what actually happens.
69. From your point of view, what a minister
should want of you is that you have gone through this process
and you give advice based on these systematic analyses. I quoted
this before and I remember Tony Crosland, who was a singularly
bright man. I remember him saying on one occasion that all governments
commit their biggest mistakes in their first six months and spend
the rest of their term in office trying to undo them. There is
a lot of basic, fundamental sense in that. When you have been
in Opposition for some time and you are coming into government,
you have not had experience of running things. You have in your
mind predetermined views. I see it with this government; I saw
it with your government. The biggest disasters that predetermined
the economic destruction of our manufacturing industry were made
by Howe, nice man that he is, and by Keith Joseph in the first
12 months. You are dealing with politicians who are, in a way,
risk blind. The only risk they are aware of is to their own careers.
You are trying to educate those who work within the machine to
think as if they were working in industry, which is a logical
objective, but unfortunately the environment in which you are
operating makes it exceedingly difficult ever to achieve it. It
is a message of despair. I am not saying it is not worth trying,
but I do not want you to be too disillusioned when you fail.
(Mrs McDonald) Maybe we should think hard about the
language we use because I do not think we are trying to make people
think that they work in industry in the private sector. We are
trying to learn from the private sector what is relevant. There
is always that stopping point in that the government cannot walk
away. It cannot close its business down in key areas of activity.
You are in a very different framework. Things like risk transfer
and so on become much more important.
70. PFI is a case in point. We have had two
different stories. It was to avoid things going on the PSBR. A
while ago in one meeting, one of the ministers said, "That
may have been the case originally but it is all about transferring
risk." I told him, "In that case, we are your best allies."
If PFI is about risk, it has been a dismal failure. You said that
too much risk was transferred in the case of armouries. That we
will have to decide when we see them but having scanned through
the report the conclusion I came to was it was as stupid putting
the armouries in Leeds as it was putting the Dome in the Greenwich
Peninsula. Neither could succeed, however they were run, because
of the sites that were chosen. These were just flawed policy decisions
in the first place.
(Mrs McDonald) There are discretionary activities
that people can choose to do or not in the first place. I was
talking about things which government could not walk away from.
It is their responsibility, say within regulatory frameworks for
health and safety, which are widely accepted as government activities,
to lean on and to be responsible for setting standards on. It
would be very difficult for government to close down those kinds
(Mr Glicksman) What you say is true. A lot of the
cases that appear before this Committee, although there may have
been a ministerial input at some stage into that process, quite
often some of the things that have gone wrong in those projects
have gone wrong at the management level. The initiatives that
we are taking here to improve risk management ought, we hope,
to have some impact on the way in which projects like that are
71. We did the hearing a while ago on the windfall
profits that were made out of refinancing in the case of Fazackerly
Prison. We had both the Treasury telling departments and Lazards
telling their customers that it was none of their business what
might happen about whether refinancing took place or not. The
risk that the taxpayer would not get a share of any windfall profits
was ignored completely on the advice of the Treasury, who told
departments they should not think about it, although in the case
of the Channel Tunnel DETR had, years back, and ceased to in all
their subsequent contracts. Lazards, of all peopleof course,
they had given advice originally on financing so they probably
felt very vulnerable and exposed because the taxpayer lost and
did not have a sharesaid, "It is none of your business
whether there is a profit to be made or not." This is not
a problem of risk identification that was within your control.
You went out to consultants there, did you not, and Lazards gave
you bad advice. The Treasury also has given you bad advice.
(Mr Glicksman) I am afraid I do not know the details
of the project.
Chairman: Teasing apart, Mr Williams has a very
interesting point in terms of this question of political impetus.
It might be worth giving some thought to whether that has implications
for the way letters of direction are sought. If a policy looks
perfectly sensible but is being over pressed for whatever reason
and that changes the risk, that might have an implication for
the way we devise the rules in that situation.
72. Can I ask the extent to which this is just
an ever more sophisticated way of saying no to things by magnifying
and analysing difficulties? How do you ensure that innovation
is encouraged and not discouraged in this process?
(Mrs McDonald) There is something about the underlying
culture which I referred to earlier. I will not repeat that. You
can do it in a number of other ways. We have a joint programme
which is about innovation. It is looking for projects which take
forward new ways of thinking about delivering services, doing
things together, which would not have happened without the kind
of gearing given by the programme. That provides good practice
examples for us. That we have evaluated independently and that
is very positive. There are a number of ways in which we can promote
what we think is best practice, things like the kind of pilot
approach for more innovative developments of policy.
73. It is demonstrable that this has assisted
(Mrs McDonald) Yes.
74. Can I ask about the emphasis on the quantifiable?
One of the things that concerns me about a number of issues is
the extent to which the risk, the assessment and how they are
measured has all the emphasis on the quantifiable and not so much
on the unquantifiable. To what extent does this take account of
(Mr Glicksman) The guidance on investment appraisal
that the Treasury produces specifically draws attention to the
need to look at non-quantified items as well. It is always very
difficult to add up apples and pears and at the end of the day
you have to take a judgment on how much weight you give to the
items that you cannot quantify. It is certainly not the intention
that we should only concentrate on those items that we can quantify.
75. Particularly when some of the non-quantifiable
items would be giving political gain to the government. Do you
feel you are equipped to assess that?
(Mr Glicksman) Ultimately, the decision lies with
76. Yes, but if you are giving them recommendations
based on assessment?
(Mrs McDonald) The kind of guidance we have put out
to people in drawing up the risk frameworks and the more detailed
planning the Treasury puts out is about setting out the store
and different ways in which you might or might not attribute numerical
value. It works both ways. Sometimes, it is very obvious that
you would do a cost benefit analysis for an ordinary appraisal;
at other times you might try and find methods which enable you
to attach value to risk so you can take some comparator when weighing
up what options you want to follow. Our guidance is intended to
enable people to give a mutual picture of the different benefits
and disbenefits of pursuing particular routes.
77. The concern for me is the extent to which
you have a mechanism which does not take account of the sort of
issues that are important to politicians. There is therefore a
division between the two. You are not working to the same agenda.
It is the issue that the Chairman alluded to about process taking
over. I am not sure the extent to which this means more forms
have to be filled in, more reports have to be written, more assessments
have to be made and the whole thing is much more complex than
it was before, so that it becomes a game. If you can fill the
forms in properly, then you get the grant or the project gets
the okay, irrespective of the underlying merits of what is there.
(Mrs McDonald) We are trying to ensure that what we
do is not an add on and that we are promoting better business
planning so that it becomes part of what you do to plan your business.
We also have, in the statement of internal control, a new framework
to go with resource accounting and budgeting. It is not going
to be an add on to the existing internal accounting and audit
responsibility. We are trying to embed it into where we are moving
anyway. Picking up your point about the kind of issues that might
be of broader interest to ministers, there is a whole area on
growing understanding about public perception of risk. There is
quite a lot of academic work which we have not assessed properly.
There are things about how you communicate risk and handle the
communication. All of these are factors which might play in a
decision which is made about the way to proceed in any one particular
set of circumstances. On those two, we think we need to do a little
(Mr Glicksman) The point you draw attention to is
an important one. I think the NAO report describes this as a risk
of a tick box culture. People just feel they have to fill in a
few more forms and they have done what is necessary. In the training
that we are providing and in our orange book, we are trying to
emphasise the importance of embedding it in the management of
the organisation, thinking about risk rather than just thinking
about filling in forms and having meetings with committees.
78. To what extent is this methodology going
to be adaptable to the particular situation? I am thinking in
particular in relation to working with communities, which is completely
different to working with private industry. You do not have the
same coherence of purpose or the same organisation. There is a
much greater risk of money going missing and of failure. If there
is a rigorous assessment process, it can surely much more likely
than not result in projects that might be immensely valuable being
turned down because so many things are unquantifiable and the
risks are so much higher. If you do not do this, particularly
in areas of multiple deprivation, and if you do not take fliers,
you are not likely to achieve anything.
(Mrs McDonald) The approach taken in the neighbourhood
renewal strategy which engages local communities in thinking about
what their priorities are is being associated with an attempt
to develop something which is a local public service agreement,
which tries to pull together all the various interests and make
them think about what they want to achieve locally and then tie
the back-up frameworks to that. It is not something that is set
nationally but it can be developed locally using the same kind
of approach as we have developed in the main PSAs. That is quite
a new development because it brings together local authorities
and other agencies as well as the community bodies that might
be taking a lead in any particular area.
(Mr Glicksman) We have taken every opportunity to
try and place these risk management initiatives within the context
of supporting innovation. The NAO themselves have entitled their
report, "Supporting Innovation in the Management of Risk."
We are trying to make sure that the message that goes across to
departments is that this is part of helping them to innovate successfully.
It is not trying to close down or eliminate risk; it is part of
managing risks sensibly.
Mr Davidson: Once this culture has taken place,
officials should be able to advise ministers on matters of risk
so that, if one minister wants to phone another minister on a
passport application, a civil servant will say, "That is
a bit risky, Minister".
Chairman: I do not think you have to answer
79. Can I go back to the risk averse culture?
You have commented on that in answer to a number of questions.
When I read through the report and in some of the questions and
answers that we have had here this afternoon, you get to some
extent the impression that we may be scratching the surface in
what you are doing, in terms of changing that culture so that
civil servants will take a new view of managing risk. How would
you comment on that? Do you think we are getting to the heart
of the issue in terms of dealing with risk, rather than monitoring
(Mrs McDonald) It is very difficult when you just
talk about risk as one whole thing, because there are different
risks associated with different kinds of activities. I do not
think we want people to be much more risky about financial management.
We want them to be cautious about financial management. We want
them to know what the options are but we do not want them to suddenly
lose lots of money because people have suddenly decided it is
all right. You can take a risk without knowing what you are doing
in some way that you would not have done before. If you are thinking
about different ways in which you carry out the business or you
handle thinking about policy development and you want to try out
something new, there might be much more opportunity therefore
you to be much more innovative. What we are trying to do is to
say to people, "You should not be put off from thinking because
you work within a framework which is in the public sector."
There are high levels of accountability. What matters is that
you can think about what you are doing, why and what the impacts
are going to be and understand where the risks lie. As earlier
reports have shown and the report on IT projects showed, that
is quite clear. Some of the reason why things went badly wrong
was because that kind of analysis was not done enough up front
and followed through on a regular basis. The steps we are taking
to try and put that in place would help that. Nobody wants people
to suddenly say that it does not matter about living within your
budget as a result of being more innovative. There is a balance
here and, depending on what you are handling, what you want is
for people to choose the right kind of approach and be aware that
that is what they need to do and relate it to the circumstances
they are dealing with.