Supplementary memorandum submitted by
the Office of the Deputy Prime Minister
Question 9: The dates on which TDC Board members
were given clear guidance about their responsibilities?
On first appointment, in May 1987, the Chairman was
sent an Instrument of Appointment under Schedule 26 of the Local
Government, Planning and Land Act 1980 and a letter from the Department
that set out details of the length of the appointment, the remuneration
that would be paid, information on expenses, liability to tax
and National Insurance contributions and conflicts of interest.
In addition the Chairman received a personal letter from the Secretary
of State setting out some key points about the relationship between
the Corporation and the department. This included information
on accountability and the financial regime under which the Department
expected the UDC to operate.
On first appointment, and on subsequent reappointment,
individual Board members also received an Instrument of Appointment
under Schedule 26 of the Local Government, Planning and Land Act
1980 and a letter from the Department. In addition Board members
received a Standard Terms of Appointment and the Department's
Code of Conduct for UDC Board members.
When a Board member was appointed, the Department
opened a personal file for them on which copies of correspondence
relating to their appointment was kept. The personal files held
by the Department indicate that on their first reappointment in
1991 the TDC Board members were sent:
copies of the Department's UDC Code
of Conduct, and around the same time;
a note of the responsibilities of
Board members, the legislative background to UDCs and details
of the relationship between UDCs and the Government.
The note setting out the role and responsibilities
of Board members said that:
"Board members should contribute to the
direction of the Corporation to ensure that regeneration is achieved,
while having regard to the need to ensure the highest standard
of regularity, propriety and value for money in the use of public
Amongst the more specific responsibilities of each
Board member were:
Help to ensure that the proceedings
of the Board and the UDC generally meet the highest standards
of propriety and that public funds are used for the purpose for
which they are intended.
Help to ensure that the UDC's activities
conform with legislative requirements and bear in mind the collective
responsibility of the Board for the conduct of UDC business.
In December 1993 the Permanent Secretary wrote to
all UDC Chairmen giving them a more detailed note of roles and
responsibilities and requested that this information should be
brought to the attention of Board members. Also in 1993 the Department
introduced new appointment procedures and from that time individuals
appointed to the TDC Board were given:
A copy of the Board Code of Conduct.
A general note on the role and responsibilities
of a UDC Board member, the legislative background to UDCs and
details of the relationship between UDCs and Government.
Questionnaires to complete on conflicts
of interest and ethic background.
From May 1995 all new Board members appointed to
the TDC Board were sent the new note on roles and responsibilities
as part of the information they received on appointment.
Following PAC hearings on NDPBs in Wales in 1992
and 1993, the Treasury undertook to prepare guidance on the responsibilities
of Board members of executive NDPBs and to consider whether the
approach recommended in the Cadbury Committee's report, The Financial
Aspects of Corporate Governance, published in December 1992, could
be adapted to meet the needs of NDPBs. Following discussions with
Departments the Treasury prepared and issued a model Code of Best
Practice for Board Members of Public Bodies in June 1994.
The DOE Permanent Secretary wrote to the Chairmen
of all departmental NDPBs in August 1994 to draw their attention
to the model Code of Best Practice and to invite them and their
Boards to consider how best to adapt or adopt the Code, and to
report back to him by October 1994. In August 1995 TDC submitted
its own Code of Best Practice for Board members that set out how
Board members were expected to discharge their obligations.
Questions 197 and 201: Did anyone in the Department
draw the Department's concerns about aspects of the Corporation's
financial and business dealings to the attention of the Corporation's
Audit Committee Chairman, Mr Ian Mathieson?
From 1987 to 1994, the Corporation had no Audit Committee
because the Board of the Corporation took the view that there
was no need for it and there was no Departmental requirement that
its NDPBs should have such committees. However the instructions
given by the Department to the Corporation's External Auditors
required that as part of their annual audit, they should produce
a Regulatory Compliance Report and Management Letter. Accordingly
these reports were presented to the full Board for their consideration,
and were copied to the Department. Each year the Department met
with the External Auditors to discuss the issues raised in their
reports and these meetings were then followed up by correspondence
and meetings with the Corporation.
In 1992, following PAC hearings into a breach of
rules by a major NDPB, the Permanent Secretary wrote to all departmental
NDPB Accounting Officers to set out his thinking on the role of
Audit Committees in helping to prevent such lapses. The letter
noted that the Government Internal Audit Manual encouraged NDPBs
to have Audit Committees and at that time half of DOE's NDPBs
had such committees. The Permanent Secretary said that "I
would strongly encourage the remainder to set one up." His
letter asked NDPB Accounting Officers, in consultation with their
Chairman and Board to review their Internal Audit services in
general and Audit Committee arrangements in particular.
In August 1994 the Permanent Secretary wrote to all
Departmental NDPBs to draw their attention to the new model Code
of Best Practice for Board Members of Public Bodies that had been
produced by HM Treasury. Following its consideration of the model
Code, the Board established an Audit Committee on 15 September
From September 1994 onwards the Audit Committee,
including its Chairman Mr Mathieson, must have been aware of the
issues that Price Waterhouse were raising in the Management Letters
and Regulatory Compliance Reports. In accordance with our normal
practice at that time, the Department's concerns about issues
raised in the reports were raised directly with the Corporation's
Chief Executive and Accounting Officer, Duncan Hall rather than
with the Chairman of the Audit Commission. We were entitled to
expect that the Chief Executive would have reported the Department's
concerns to the Board, but we will consider whether a change in
practice is called for in relation to our current NDPBs in the
light of this experience.
Question 255: Is the Department aware of any
letter sent by Richard Caborn after a visit to Teesside Development
Corporation? Did such a letter exist and what did it say?
Richard Caborn wrote to Sir Ronald Norman, the Chairman
of the Corporation, in October and November 1997 in response to
proposals from the Corporation to establish a Teesside Trust for
Regeneration that would carry on some of the Corporation's regeneration
activities after wind-up in March 1998.
In his October letter, Mr Caborn told Sir Ronald
Norman that he should not be pursuing the Trust proposal further
at this stage, and that it was essential that Urban Development
Corporations were wound up in the following March with the fewest
possible loose ends. He knew that, in the case of TDC, this strategy
was based on securing a very high level of receipts and he would
like them to concentrate on achieving this rather than letting
management attention be diverted to other matters, such as the
In his November letter, responding to a further letter
from Sir Ronald Norman pressing the case for the Trust, Mr Caborn
explained why in his view the Trust proposal presented problems
and said that he did not believe it right for the Corporation
to devote further time to this idea. It should concentrate instead
on delivering the exit strategy.
Mr Caborn subsequently met the Chairman, Chief Executive
and several Board members during his visit on 13 November. The
Chairman told him that he was confident that TDC would leave all
matters in good order on the wind-up date of 31 March 1998.
Questions 260-265: Was the Department always
consulted by the Corporation about the Chief Executive's performance
Yes. Performance bonuses were first awarded for the
Chief Executive's performance in 1989-90. The Chairman of the
Corporation was responsible for setting the Chief Executive's
performance targets. The Chairman made an assessment of the Chief
Executive's performance against the agreed targets. He then consulted
the Department on the performance bonus award he proposed to make.
From April 1993 full responsibility was given to
UDC Boards to determine the level of the performance pay award,
subject to consultation with the Department's Permanent Secretary
on the level of the proposed award and on the performance targets
that the Chief Executive would be set in the following year.
The Department could offer comments to the Chairman
on the proposed award, and did so, but was not in a position to
second-guess his assessment.
Questions 273-276: On how many occasions did
the Corporation's external auditors raise the issue of deferred
payments? Why did the Department not feel it appropriate to take
any action over deferred payments when they were highlighted in
the Management Letters for seven years in a row?
The Management Letters for the financial years ending
on 31 March 1993, 1994 and 1995 refer to several payments to creditors
outside contractual payments dates. The Management Letter for
31 March 1994 also refers to a staged payment agreement in relation
to one contractor.
The Management Letter for the financial year ending
on 31 March 1995 refers to deferred payments as a significant
The Management Letters for the financial year ending
on 31 March 1996 and 1997 again refer to payments to contractors
outside the contractual payment dates. In addition the 1997 letter
refers to one deferred payment to a contractor.
The Department did take action over deferred payments.
Each year, following receipt of the Management Letter and Regulatory
Compliance Report from the Corporation's External Auditors, the
Department held a meeting with the External Auditors to discuss
the issues that they had raised, and raised the issues directly
with the Corporation, usually by correspondence with either the
Chief Executive or the Finance Director, but also in meetings.
For example, in respect of deferred payments,
On 9 September 1994 the Government
Office wrote to say that TDC should "ensure that suppliers
are paid by the due invoice dates at all times and that contracts
are managed so as to fulfil this requirement without exceeding
approved external financing limits."
This letter was followed up by a
meeting with the TDC Finance Director on 6 October 1994 at which
the same points were made.
The Government Office wrote to TDC
on 19 December 1994 to say that, "for the avoidance of doubt,
transactions involving any form of payment deferral, unless it
is very clear that deferral is at absolutely nil cost to TDC should
be submitted to the Department for decision."
Following the 1994-95 Management
Letter which again raised deferred payments and suggested that
TDC was ignoring the advice that the Government Office had given
it in December 1994, the Government Office wrote to TDC on 29
August 1995 about the deferral of payments issue and the costs,
for example interest payments, that might arise from this practice.
TDC responded on 13 September 1995
to say that the Corporation "prior to expediting payment
of valuation certificates has such certificates agreed by its
professionally qualified consultants. The consultants are only
able to certify cost on qualifying works, contract variations
and other eligible heads of expenditure. A payment in respect
of interest for deferral is not an eligible head of claim and
therefore not capable of being agreed by the consultant or paid
by the Corporation. The arrangements entered into by the Corporation
therefore preclude interest payments for deferral."
Question 292: Has DTLR taken legal advice
on the actions of the Development Corporation?
The Department has taken legal advice on three matters
that appear to arise from questions asked at the hearing on 4
March. The legal advice that we have received is necessarily confined
to principles; advice on the merits of any action could not be
given without knowing all the facts and circumstances, with evidence,
of a complaint. The following replies reflect the advice received.
Were the individual actions taken by the
Chief Executive, Mr Hall and the Board within the powers set out
in the Part XVI and the related Schedules of the Local Government,
Planning and Land Act 1980?
For the reason given above the Department is unable
to answer this. This was clearly a matter for the Corporation
and its advisers to decide at the time when the Chief Executive
and the Board decided to take the actions referred to in the NAO
Report. It is not possible now for any firm advice to be given
on the lawfulness of decisions taken so long ago.
What are the legal implications of being
in breach of Treasury guidance, specifically of acting outside
the scope of a delegation given under a Financial Memorandum?
This does not necessarily have any legal consequences.
If the Committee are interested in knowing whether any money has
been or will be lost because contracts are ultra vires,
then it is relevant to consider whether the decision or transaction
made in breach of Treasury guidance or other rules was unlawful.
We cannot take any firm view on the evidence available.
The National Audit Office report and the facts and circumstances
known to the Department suggest that the losses identified were
sustained because of the way in which the Corporation exercised
its powers, for example, entering into bad deals, deferring payments
or not getting Departmental approval for schemes. To that extent,
the losses reported by NAO may have been a result of the Corporation
doing things they were "never entitled" to do. But that
does not mean that the losses were a result of entering into contracts
that were outside the Corporation's powers.
What legal remedies might be available
to the Department if action was clearly shown to be ultra vires?
The question here is whether the Secretary of State
could take legal proceedings against the Board or the Chief Executive
for the recovery of any public funds shown to have been misapplied
or for damages for any loss shown to have been incurred. It is
not necessarily the case that the matter complained of must have
resulted in an ultra vires decision or transaction. An
action brought against the members or the Chief Executive would
focus on their breach of rules or guidance specified in the statute
or ancillary documents. There is no reason to believe that personal
liability could only arise for actions and decisions shown to
be ultra vires.
The Secretary of State could in principle bring proceedings
for damages for the tort of misfeasance in public office. He would
have to show a deliberate and dishonest abuse of power; negligence
or inadvertence is not enough. Malicious intent does not require
the claimant to prove that the power was exercised for the purpose
of causing injury. It suffices to show reckless indifference or
knowledge that injury would probably result.
A claim for damages for breach of contract might
be another opinion. This would rest on ordinary principles of
contract. However, officers and staff of the Corporation were
appointed by the Corporation with the approval of the Secretary
of State. The Department had no contractual relationship with
the Chief Executive.
If there appeared to be a good case for pursuing
a claim against the members of the Corporation or its officers,
it is probable that the claim would now be statute barred under
the Limitation Acts. The basic rule is that an action for breach
of contract or in tort should be brought within six years of the
date on which the cause of action accrued, which is typically
the date of the breach or the wrongful act or omission.
Question 380: Did UDCs hold their meetings
The advice that was given to all UDCs in the UDC
Guidebook [paragraph 1.24] was as follows
"Whilst public access to UDC meetings is
at the UDC's discretion, UDCs are encouraged to admit the public
to meetings about planning applications. It is unlikely that UDCs
would want to allow the public access to other board meetings."
The practice was that some, but not all, UDCs did
open their board meetings to the public when planning applications
were being considered. Amongst those holding open planning meetings
were Trafford Park, Black Country, Birmingham Heartlands and Leeds.
Other discussions at board meetings tended to be
"closed" since many commercially confidential matters
were discussed. At Birmingham Heartlands, however, discussion
of non-sensitive issues was open to the public. Trafford Park
also published a summary of board minutes, although confidential
items were excluded. Several UDCs, for example Trafford Park,
Plymouth and Merseyside, held public consultations and meetings
over plans for compulsory land acquisition or major schemes and
All TDC board meetings were held in private with
only Board members and the Chief Executive present. If necessary,
other TDC senior officers attended the meetings, but not very
often. TDC did hold some public meetings about specific issues.
Planning applications where the Corporation was the
planning authority were dealt with at closed Board meetings. Planning
applications were referred to the appropriate local authorities
and this allowed the local authorities and members of the public
to comment on them.
Mavis McDonald CB
Office of the Deputy Prime Minister