UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1581-i

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

PUBLIC ACCOUNTS COMMITTEE

FOLLOW-UP OF PAC RECOMMENDATIONS NOT ACCEPTED AND NOT IMPLEMENTED

WEDNESDAY 26 OCTOBER 2011

ROBERT DEVEREUX

URSULA BRENNAN and ANDREW MANLEY

SIR NICHOLAS MACPHERSON

Evidence heard in Public

Questions 1 - 130

USE OF THE TRANSCRIPT

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Oral Evidence

Taken before the Public Accounts Committee

on Wednesday 26 October 2011

Members present:

Margaret Hodge (Chair)

Mr Richard Bacon

Stephen Barclay

Jackie Doyle-Price

Matthew Hancock

Meg Hillier

Joseph Johnson

Fiona Mactaggart

Austin Mitchell

Nick Smith

James Wharton

Michael Whitehouse, Chief Operating Office, Gabrielle Cohen, Assistant Auditor General, Robert Prideaux, Director of Parliamentary Relations, Philip Gibby, Director, Ross Campbell, Director, Joshua Reddaway, Director, National Audit Office, and Paula Diggle, Treasury Officer of Accounts, HM Treasury, were in attendance.

Examination of Witnesses

Witnesses: Robert Devereux, Permanent Secretary, Department for Work and Pensions (Community Care Grant), and Mike Driver, Jobcentre Plus, Finance Director (Community Care Grant) gave evidence.

Q1 Chair: Welcome. This is our first attempt at doing something different, so we are all slightly finding our way. This is the first time we have had a recall system. Questions will be short and sharp, and there will be a vote at 4 pm, so we are trying to be really focused in what we ask. I recognise that, typically, you were not giving evidence when we did the original report on this, which is not an unfamiliar experience. From our point of view as a Committee, we must start by thanking Stella Creasy and Anne McGuire, who have left us, and welcome our new members Fiona Mactaggart and Meg Hillier. Their declaration of interest is on the record. This is their first time at a rather different sort of hearing.

When we looked at community care, the proposition was to transfer it to local authorities. You have since taken the decision to do that. We are concerned about whether you looked at two things: the cost-benefit of undertaking that-it is not clear that you did-and whether you are confident that local authorities can actually do the job.

Robert Devereux: Since you last reported, your colleagues on the Communities and Local Government Committee have had a hearing on devolution and three elements of welfare reform. When they came to devolving elements of the discretionary social fund, essentially they welcomed it; they thought that this was the right direction of travel, provided that it would be properly funded. The reason they arrived at the rationale for devolving it being correct was their strong belief, picked up from the witnesses whom they questioned, that when giving out discretionary grants to people in hardship it is better to be close to them than on the phone miles away. In a sense, if I am entirely frank with you, the cost-benefit analysis rests on the fact that everybody who has looked at this concludes that there are benefits in it, and at the same time I am not spending any more than before because we are simply transferring the Department’s available funding to local government to pay for it.

Q2 Chair: The Communities and Local Government Committee may say that policy-wise, it is a good thing to do, but our job as a Committee is to ask whether it represents value for money for the taxpayer, which is why a cost-benefit analysis and the capability of implementation are important. We come at it in a different way. We are not that Committee.

Robert Devereux: I am still on the first question. I am talking about cost-benefit, because I am asserting to you that others have found there to be a plausible benefit in this. I have not measured the benefit, I agree, but I still think that it is possible to have a qualitative assessment of the benefit from devolution and to be clear about the cost not being increased. I think that is a plausible argument for value for money. It is, as you say, a policy choice that Ministers have made.

Q3 Chair: We are having people back where they accept a recommendation but do not implement it. If what you are telling us today is that you accepted the recommendation but you went away and decided for a policy reason not to do it how you said, you have to be clear with us on that. Part of the purpose is-we will come to other ones later-that we come back to issues time and again and find that Departments have accepted recommendations, gone away and done sweet nothing about them.

Robert Devereux: You clearly would prefer me to have done a different cost-benefit analysis. I have come back to explain what I regard as being that analysis.

Q4 Chair: You have said that there is a benefit, and you have said that the Select Committee endorsed it. What we need to see is a value-for-money assessment, which I think you are admitting to us that you have not done.

Robert Devereux: What I am saying to you is that if benefits go up and costs stay the same, value for money is improved.

Chair: But you do not know.

Q5 Mr Bacon: But from the work that you describe yourself as having done, you do not know that. What you just told us a minute ago was that because your costs do not go up and the benefits have gone up, apparently, ergo things must be better off. It is not plain on its face, however, that costs elsewhere have not gone up. It is possible-I am not saying that they have, and I hope that they have not-that costs elsewhere will have gone up. A bit of analysis of how that might be the case, and why it is not true, if it is not true, would be helpful. I think that is what the Chair is saying.

Robert Devereux: Let me supplement the information. We have talked to 53 local authorities to tell them that this is coming down the track and ask them what they will do with the provision. Almost entirely, their consistent response has been that they will add the funds that we are about to give them to mechanisms that already exist locally, and that they did not propose to set up a brand new thing that requires either IT or estate to be paid for. Their sense of the sorts of costs that they would be talking about is certainly in the same order of magnitude as ours, if not way lower.

Q6 Mr Bacon: I hope that you are right and that the costs would be lower. Can I ask about ring-fencing? I know that the money is not ring-fenced, and of course local governments are under huge financial pressure at the moment. If they are going to add that money to their existing activities, that is great news, but they are plainly going to come under pressure to do completely different things with it. Talking to those 53 local authorities, what sort of sense did you get about their different plans? Might some of them be looking at doing different things with the money, or will it all go into the same purpose for which you were using it?

Robert Devereux: I am not familiar with what they said in respect of that question. What we know from our work with local government generally, which I am familiar with, is that the way in which vulnerable families are dealt with is a pretty key, critical consideration for local government. I would not imagine that local authorities would set out deliberately to move that money elsewhere.

Q7 Chair: Will you monitor that?

Robert Devereux: That is a really interesting question when all local government wants to be free of-

Q8 Chair: Will you monitor it?

Robert Devereux: I am not going to ring-fence it.

Q9 Chair: Will you monitor whether as many grants are given out to individuals under the future arrangements as there have been in the past?

Robert Devereux: That is unlikely.

Q10 Chair: So we won’t know, really?

Robert Devereux: Well, for the simple reason that monitoring is tantamount to ring-fencing.

Q11 Mr Bacon: No, it is not. You can do something quite different and much lighter-touch-a little look around every so often-that would not cost anything like as much as the structure you might need to make sure the money was all spent exactly as you hoped it would be.

Robert Devereux: Suppose it is not cash-based?

Mr Bacon: If you see a trend emerging, you might choose to do a bit more. There is a spectrum of monitoring that you could do, isn’t there?

Q12 Chair: They will give out grants within the rules. The rules will exist, people will apply within the rules. At some point people are going to have to account for this, aren’t they?

Robert Devereux: The point of devolving it is for local governments to make their own decisions about how best to support vulnerable families.

Q13 Chair: We understand that. Will you monitor it? That is a different issue.

Robert Devereux: The rules will not be consistent across the piece, because local government will make their own choices. The questions are: what rules? What data shall I collect? If local authority A decides to provide reconditioned furniture from a furniture charity it has been working with for the last five years, and local authority B decides to hand out cash, what metric would you like me to use? It is not self-evident how to monitor in a devolved world.

Q14 Chair: Phil, do you want to come in?

Philip Gibby: There will be no single scheme. It will be up to each local authority how to move forward.

Q15 Chair: So we will not have any idea whether poor people who need emergency grants will get them.

Robert Devereux: When my Minister appeared in front of your colleagues, he made it clear that the Government’s view of why devolution is right is that accountability for the way vulnerable families are treated will fall with councillors.

Q16 Nick Smith: You said that there will be no increased IT or estate costs. Do you think there will be any extra administrative costs? How are going to divvy up the money across the country?

Robert Devereux: What I said was that none of the people we have talked to felt as if they were going to make major investments in order to start to spend the cash, because virtually all local government has already got systems in place for dealing with vulnerable adults.

In terms of divvying up the money, there are two different streams of cash. There is a substantive amount, the amount for the community care grant, and there is the small element of crisis loans, which will be given through the revenue support grant arrangements. We will tip this into the top of the hopper there. We already have a system in place that is trying to align the costs that they are going to incur of an administrative variety. That is why we are having the conversation with the 53, to find out what sort of administrative burden we are adding. We have committed to provide the cash for the substantive grants and such administrative funding as is necessary for them to achieve it, in their devolved way.

Q17 Chair: There are two follow-up questions. We found in our inquiry that you are spending a disproportionate amount on administration. I can’t remember, but I think it was £19 million.

Robert Devereux: Yes, I have got some good news on that.

Q18 Chair: Are you cutting that? Presumably you are.

Robert Devereux: Yes. It is down to £15 million in 2012-13, which is a 20% reduction. You also criticised us for 12% errors, which are now down to 4%. Two-thirds of the errors on missing papers have gone away. All of the errors on decision-making have gone away.

Q19 Meg Hillier: Given what you said about not monitoring it and how you allocated it across the country, have you reviewed how you are going to make that funding allocation, to ensure that areas get what they need?

Robert Devereux: You asked us last time to change the basis on which we distribute the funding while it is still with DWP, and we have done that. We allocate the money quarterly. At the start of 2011-12, we started to allocate it on the basis of the total amount of money that was sought, as opposed to the total amount paid.

Q20 Meg Hillier: Not on the basis of need, but on the basis of the number of customers.

Robert Devereux: Essentially, we are trying to approximate need, by looking at the number of people who ask for grants.

Q21 Meg Hillier: In my constituency, I could name groups of individuals who would find it hard to know about the system in the first place for all sorts of language and other access difficulties. There may be areas where people are under-asking and, therefore, under your approach to changing the funding formula, may be losing out.

Robert Devereux: Yes. That is quite possible. When working out exactly the demand from vulnerable people across the land and trying to arrive at a formula, based on very little information, the best we can do at the moment is at least take account of the facts we knew. We were not previously, which is why you criticised us. We are now at least doing it on the basis that, for those people who apply, the chance of success will be the same, wherever they live. Previously it was entirely dependent on the historic pattern. To be clear, so that you do not catch me out, we have not changed it in one move, because some of the changes will be very substantial. We are changing it over the next seven quarters. By the time we get to the point at which we hand this over, people’s experience on the ground will be of a level of spending that is the same consistency as other areas.

Q22 Meg Hillier: So, if an area with high need managed locally to administer it and reach the people, it could find it had to provide reconditioned white goods, while another area might provide fewer but more expensive ones. That is to give an example of how, without monitoring, you will not know what is going on at local level and whether people are getting value for money.

Robert Devereux: If they make a local decision and the local councillors think that is the best way to do it, the local councillors will account for it.

Q23 James Wharton: I assume that if you have reviewed the way that resources are allocated, there have been changes. Which region has gained the most and which has lost the most as a result of that process? Can you give us an idea of the proportional change? If you lose 90% of your funding, that is significant. If you lose 5%, that might be more manageable.

Robert Devereux: I do not have the data by region, because it is not a regional distribution. Here are some examples: Inverness social funding area will have a budget reduction of 13% by April 2013, while Bradford will have an increase of 22.5%. If you like, on the challenge that you put to us, which was to try to make it equitable, those are examples of a winner and a loser in that arrangement. If you want regional numbers, I will see if I can calculate them and I will let you know.

Q24 James Wharton: I would be interested if you could, just to get an idea of what the impact of the change is. In terms of the way that you are now allocating this funding, which you said was based on the requests that you are getting from each area, how are you-building on points that have already been discussed-monitoring consumer/customer awareness in each of the areas that are applying? If we are concerned that this is not being promoted effectively in some areas, so they may not be making an appropriate number of applications for funding and are therefore getting less funding than they might be entitled to, what are you doing to combat that and to find out in which areas awareness is weak?

Robert Devereux: The answer my predecessor gave you was to point to some of the things that we are doing, particularly around pensions with our local pensions service, where we have some staff who are out of their offices talking to pensioners day-in, day-out, trying to ensure that they are aware of their entitlements to a range of things.

Q25 James Wharton: It is not about what you are doing to raise awareness. What are you doing to monitor the variations in awareness? If you have an area where that is going well, you will have lots of people engaged with it, who will apply for a lot of funding and get a lot of funding. You might have an area where need is just as great, but because of problems with awareness, for whatever reason, they are not getting the funding to that area. What you are doing to assess whether people in Bradford are more aware than people in Inverness, not because of need, but because someone is doing a better job of making them aware?

Robert Devereux: The only changes that we have made are the ones that I have described. We do not have the sophisticated level of data that would tell me what level of lack of awareness there is in Inverness to enable me to adjust the figures. One of the reasons why the Government are of the view that this should be devolved is precisely because making those judgments from here is a difficult thing to do. We are down to not very many individual families, which is up against the fact that we have a particular amount of cash for this. Some £140 million went into the community care grant system in the last four years of the previous Government, and that is the same for this Government and into the future. That is the amount of money that Governments have put into this, and we are trying to distribute it in the best way that the data allow.

Q26 James Wharton: I understand that entirely. My concern is that you are devolving this and saying to local authorities, "It is your responsibility to go out and raise awareness and spend the money and bid for it," but you are basing the amounts that you give them on the applications that you receive. You do not, however, appear to be doing much to monitor awareness in those local authority areas or to compare whether this is distorting where funding is going. Is that correct?

Robert Devereux: Not area by area, no.

Q27 Chair: Finally, last time we found that nearly half of the decisions that went to the tribunal were overturned, so the initial decision making was poor. Has that changed?

Robert Devereux: Yes, it has. What you were picking up last time was that for decisions that went to the independent review service-the second tier-about 46% of those were changed. The proportion getting to the independent service is itself small. The overall figure is that something like 92% or 93% of all awards are not changed, having been made.

Q28 Chair: That is a different way of looking at the stats. If you look at it the way we did, of those that go to the tribunal, half get overturned. Is that still true?

Robert Devereux: Last time you met, it was 46%.

Q29 Chair: This time?

Robert Devereux: This time, it is 42%. At the first review, last time it was 40% but we are advised that this time it is 35%. In both cases, the amount of review that is happening is reduced from when we were last here.

Chair: Thank you very much indeed.

Examination of Witnesses

Witnesses: Ursula Brennan, Permanent Under Secretary, Ministry of Defence (MOD Estates) and Andrew Manley, Chief Executive, Defence Infrastructure Organisation (MOD Estates) gave evidence.

Q30 Chair: Mr Manley is new in position-we always see new people at the Ministry of Defence too-and poor Ursula Brennan appears here more than she would like.

When we looked at this issue before, we felt that you were not assessing what you really needed in terms of assets and you were not getting rid of assets as quickly as you need to, particularly in relation to the gap you have between your commitments and your expenditure. There is a £38 billion gap. That was of concern. Since you were last here, have you sold anything?

Andrew Manley: We have an ongoing asset disposal programme, as you are aware.

Q31 Chair: Have you sold anything?

Andrew Manley: We have sold about £50 million-worth of assets this year.

Q32 Chair: £50 million, and that is on the basis of a £20 billion asset base. Let me ask you another question. Out of the £36 billion or £38 billion that is your gap, how much do you expect to get from sale of assets?

Andrew Manley: We are committed under the SDSR settlement to dispose of half a billion pounds-worth of assets in the rest of this CSR period and £1 billion worth of assets in the next CSR period. So, in total, we will dispose of £1.5 billion worth of assets over the next eight years.

Q33 Chair: But over the next four years, you will reduce your overall number of people by 20%?

Ursula Brennan: Yes. The reason why the assets don’t come down at the same speed is because this is a bit like moving a house, or any of those things where you have the domino effect. We are bringing people back from Germany. In order to bring people back from Germany, we sometimes go into vacated RAF bases. You have got to get the RAF out of the base and then you might have to convert it to take tanks or whatever, as well as the housing for the people coming back. So, although we are shrinking in people, it takes time for that to knock through to the sales. That is one thing.

Q34 Chair: I understand that, but our concern last time was that the basis on which you were taking decisions to dispose of assets just seemed to be, "Is it occupied, or isn’t it?", rather than there being any assessment of the cost of keeping things going, the intensity of usage, the value of the asset and all those other issues. You promised us last time that you would report back within six months on progress towards developing a rather more sensible framework for taking decisions about what you dispose of. Have you done that?

Ursula Brennan: We have-we have made changes there.

Q35 Chair: So can we see your framework and your data systems? Can we see them?

Andrew Manley: There are three levels to this, Chair. First, since this subject was last raised before your Committee, we have made a valuation exercise of our top 200 sites. Behind that, there is part of what is called the next generation of estates contracting programme, which is to recontract the provision of hard facilities management across the entire estate. We are doing an asset verification exercise of 166,000 assets, which are the individual buildings that sit on our asset base, to provide the data for establishing those contracts. We have completed 100,000 of those verification data points. We have another 66,000 to complete by the end of next year.

Then, the third tranche of this process is that we have started a major transformation exercise of the Defence Infrastructure Organisation since it was stood up on 1 April. An inherent part of that is a revisit of the whole operating model of defence infrastructure. That has three elements to it: the first is to get clarity around the business processes that the organisation is running; the second is the technology; and the third is the actual number of people that we need to run it. In the technology space, we have done a specific piece of work to identify what investment we require, not only in software, but more specifically, in data migration, to ensure that we have the full suite of data that we require to manage that asset base going forward. If we work to the current plan, that will be in place fully by April 2013.

Q36 Stephen Barclay: To clarify what the Chair just asked, you said around £50 million has been sold this year.

Andrew Manley: In this year, yes.

Q37 Stephen Barclay: Last year, from memory, in your annual accounts you booked about £44 million. That would suggest you need to increase your disposal by four times for each of the remaining years to hit your target. Is there any contingency set aside for missing that target, or will that have to come from elsewhere in the MOD budget?

Andrew Manley: That is the subject of a piece of a work we are doing at the moment. On 18 July, the rebasing of the Army from Germany into the United Kingdom was announced, and as the permanent under-secretary mentioned, that removes 20% of the Army in total. However, what we have been holding is that the slow-down in the disposals programme-we have to actually look at the asset base that we hold in this country, because effectively, the estate that we are disposing of first and foremost is estate rented from the German Government.

Q38 Stephen Barclay: I get the point about slimming the Army and the amount of people you have in Germany. If you are holding estate for those coming back from Germany, that is one size, and if you have fewer troops because you are reducing it, the amount you need will be less, so there is something in that. However, I take it that that was a yes-you are going to have to increase the rate of savings by four times.

Andrew Manley: Well, you did not let me finish my answer, and I would have gone on to say that we are doing a piece of work to establish what is the lay-down of the Army in the United Kingdom over the rest of this decade. As a result, we are expecting to then identify a secondary wave of disposals that we will be able to make, starting from the middle of next year onwards, when we will complete the rebasing study. We have already published, on 5 October this year, the interim disposal strategy for the Ministry of Defence, identifying a core group of assets that we will dispose of during the rest of this CSR period. Then, there is a secondary list that should emerge as a result of the rebasing.

Q39 Stephen Barclay: I am just conscious of time. What I was driving at was that if there is £50 million this year, and £44 million last year, with a £1.5 billion target over eight years, that struck me, on the maths, as being an increase in the savings of around £200 million a year.

Andrew Manley: Yes, and we are planning to achieve that.

Q40 Stephen Barclay: There does not seem to be any contingency there.

Can I ask about a governance point? If you sell land, it is often common practice that there is an uplift value. If that land does not have planning permission attached and planning permission is granted, the value of the land obviously increases exponentially. Are there any circumstances, and who would be the accountable person, if that uplift value were waived?

Andrew Manley: I am not sure that I understand the last part of your question.

Q41 Stephen Barclay: In other words, is there any circumstance in the last couple of years in which the MOD has waived the option of uplift value on land it has disposed of, and who would be the accountable officer for such a decision?

Andrew Manley: The SRO for the sale of land is myself. Historically, the MOD has sought planning permission for land that it is selling for disposal as a pre-step to its making such disposals. I am not aware and cannot answer the latter part of your question, but obviously I will make sure you have an answer.

Q42 Stephen Barclay: If the uplift value had been in the terms that were discussed with initial bidders, and that was then varied, that would require your sign-off?

Andrew Manley: To my knowledge, yes.

Chair: We have 10 minutes left and there are four people.

Q43 Matthew Hancock: Sticking to governance, I want to come back to the recommendations about the centralisation of control. First, you said that if we hit the plan, the 166,000 items in the defence estate will all be under central control by 2013. Is that right or am I muddling two different things?

Ursula Brennan: The central control is now all under Andrew Manley.

Q44 Matthew Hancock: And that is already in place?

Ursula Brennan: Yes.

Q45 Matthew Hancock: So you are responsible for every item of defence estates already?

Andrew Manley: That is correct.

Q46 Chair: Are you on the books or are you on a contract?

Andrew Manley: I am sorry. I am not sure that I understand you.

Q47 Chair: Are you employed on a fixed term?

Ursula Brennan: On a fixed term. Mr Manley was our commercial DG and we moved him across into estates.

Q48 Chair: A full-time civil servant? Staying in his job for how long?

Ursula Brennan: He is on a fixed-term contract.

Andrew Manley: Until 2013 at the moment.

Chair: Dear, dear. If somebody comes back after that, he isn’t responsible.

Q49 Matthew Hancock: The 166,000 items you mentioned-as far as you are aware, is that the complete list of defence-owned items in the UK?

Andrew Manley: Yes. We have an asset-management information system in place already. My observation would be that verification of that is the key objective in this exercise because some of that data require upgrading, and that is the purpose of what we are doing at the moment.

Q50 Matthew Hancock: You said, "If we stay on plan, then we’ll get this done by the middle of 2013". Can you commit to us now that you will do it by then? Perhaps we can have you in just before the end of your period in order to hold you to account to this time.

Ursula Brennan: Those 160,000 assets range enormously in value. Some of them are worth huge sums of money, and some of them are almost worthless. As we work our way through, we may decide that it is not value for money to pursue the same level of detail for roadside verges as we do for areas that we can sell for an enormous amount of money. I want to reserve the right to discuss with Andrew, as we get close to getting to the bottom of that list, whether pursuing the same level of data verification is worth while for assets that are virtually worthless.

Q51 Matthew Hancock: Okay. That caveat is very helpful, but if you could answer the question: are you on plan to get everything into the database in whatever level of detail is appropriate-I take the caveat-by 2013 or, by caveating it, were you indicating that you are concerned that you won’t hit that deadline?

Andrew Manley: No, I am confident that we are on plan, but the permanent under-secretary is correct in her caveat, which is that, in the case of some of the more exotic assets that we hold, such as remote fields, radio masts and verges, it may not be value for money to do asset verification on them.

Q52 Matthew Hancock: Finally, what other Departments are you working with to ensure that your assets are used effectively across the public sector, as opposed to only in the Department?

Andrew Manley: That is a question that hasn’t many answers.

Matthew Hancock: You mean none.

Andrew Manley: No, we are contributing very much to the Cabinet Office-run initiative on the disposal of properties at the moment, which is the principal drive that the Government has around their house building programme, so we are very much joined up on that. As we get through the back of the rebasing exercise, we will look to see if any of the assets that are redundant have alternative uses because obviously, at the end of the day, we have to look at what is best value for money-whether it is to dispose or to find alternative uses.

Chair: I am delighted to hear the words "best value for money".

Q53 Austin Mitchell: I must announce that I am the only person old enough here to remember Crichel Down. Not many people in the room can say that. The incentive there was clearly to hang on to the land for ever. There was no incentive to get rid of it. How are you incentivising people now to sell? Who gets the money-the Treasury or the defence Department? Why can’t you give the money and hence the initiative to discover sales, and perhaps introduce the grand design team to turning barracks into bijoux residences? How do you incentivise the individual services to sell?

Ursula Brennan: There are two stages to it. Trying to incentivise the individual services, which was something that we had difficulty with, and which the Committee criticised us about previously. The thing that we have actually done is to say that those decisions on disposal will be taken by a central team that works for Andrew Manley-a strategic asset, management and programme team, which actually goes through and says what are the operational needs, what is the value of money for the disposal and a whole raft of things, such as what is the condition of the estate and what other use could it be put to. That is where the decision gets taken. We don’t any longer allow the individual services to say, "I want to hold on to this". The second thing is-

Q54 Austin Mitchell: But would it not be better if you incentivise them to sell?

Ursula Brennan: The way that we are incentivised to sell is because we have within our baseline the receipts that we are intending to get out of these sales. We have a relentless programme and the Cabinet Office regularly calls Mr Manley over to check with him on how we are doing on those sales, because it is crucial to our baseline to make sure that we deliver them.

Q55 Meg Hillier: Just to pick up on that, because I think that has answered some of it, are there any holy cows out there, things that have a lot of emotional attachment? For instance, I can think of the Honourable Artillery Company, a TA unit-

Ursula Brennan: Which they own. We don’t own that. It’s one of the most fantastic pieces of real estate, but they own it.

Meg Hillier: Okay. That’s fine.

Q56 Chair: I was going to ask you what is happening to the old War Office building, which has been empty for ever?

Ursula Brennan: We are planning to move people out of the old War Office building.

Chair: I thought they were all out.

Ursula Brennan: No, they are not all out yet.

Chair: Nearly all out, then.

Ursula Brennan: The issue there has been the cost needed to put the appropriate security arrangements in the main building.

Q57 Chair: I understand that. What are you going to do? Flog it?

Andrew Manley: We are currently working with the Government property unit because it is a central city estate. As the permanent under-secretary mentioned, the big issue there is about the cost of cleaning it up. There is a significant asbestos problem in the building and you have to clean it up.

Q58 Chair: Who bears that? You or the Treasury?

Andrew Manley: The question is, what is its best value for money in terms of recycling it? I think its use as an ongoing Government property is probably unlikely to represent value for money, given its development potential.

Q59 Chair: So when are you going to take a decision on that?

Andrew Manley: We are planning to move people out of the building by the end of next year, and then it will be left vacant. The Government property unit will then assume responsibility for recycling.

Q60 Chair: The other thing that I remember is that the Red Arrows have their own airfield, which seemed a bit excessive, much as we all love watching them.

Andrew Manley: I don’t make decisions about how the RAF deploys their aircraft. I have to work with the RAF in terms of making decisions.

Chair: But it’s not good utilisation.

Andrew Manley: That ultimately is a decision for the Chief of the Air Staff as to how he feels he can best provide military output from the full defence-

Chair: We were just told that you take the decisions.

Ursula Brennan: I was going to say: except that the strategic asset management team is working its way through the assets, analysing what the priority is for them regarding value, operational need, safety, business advantage, basing the military in the vicinity of-

Q61 Chair: So who takes the decision? I am getting a bit muddled. Who will take the decision on the Red Arrows, for example?

Ursula Brennan: The decision on what happens to that estate is taken by the central team that works for Mr Manley.

Q62 Fiona Mactaggart: My hearing is not great. Did I hear you, Mr Manley, say that you were issuing a central procurement of facilities management across the whole estate?

Andrew Manley: We contract out the hard facilities management through what will be four regional contracts-covering roughly one quarter of the United Kingdom each-one will cover the training estate and another will cover accommodation.

Q63 Fiona Mactaggart: One of the reasons why I am asking that is because the Committee’s previous report suggested that the way in which the estates were operated was biased towards keeping estates. Actually, the decision about how you procure facilities management is key in that. What mechanism are you building into that procurement to ensure that you do not make it less cost-effective to dispose of an asset than it would otherwise be?

Andrew Manley: Part of putting the Defence Infrastructure Organisation together was establishing what is called the strategic asset programme team. We are taking a central look at the efficient use of assets. On the Chair’s previous observation about the Red Arrows, we might provoke a conversation with the RAF about whether there is a more efficient way to base the Red Arrows. Ultimately, the judgment rests with the defence board as to the balance of interests between military output and the efficiency of driving the estate. On the specific point about how we challenge ourselves, we are proposing, as part of the transformation, to bring the private sector into the structure of DIO to provide us with some private sector skills in looking at how the estate could be more efficiently managed, and drive decisions such as the one that you are referring to.

Ursula Brennan: Just to clarify, the next generation estates contracts, which are about the management of the estate, are not the same as decisions that we take about disposal. The next generation estates contracts are about whole regions and are not site-specific.

Q64 Fiona Mactaggart: I understand that, but if you make a decision that loads costs on particular regions or estates, that can affect whether you are more likely to be able to dispose of them, because you’ve got a continuing cost commitment. What I am asking is, what steps are you taking in that procurement to ensure that you do not get that unintended consequence? I haven’t heard.

Andrew Manley: All our contracts are driven by volume, which gives us the right to put property into any hard facilities management contract, or take it out. I don’t see that as biasing our decisions. If we decide that we want to sell something, we can take the decision to remove it from the contracting base that supports it.

Q65 Mr Bacon: You have mentioned that the old War Office building is likely to be sold, given the costs of doing it up. Do you not-[Interruption.] I will keep asking this question, because we have eight minutes to vote. Do you not accept what Simon Fraser said about some of our embassies overseas-some of our famous embassies that we got for no money, such as the British embassy building in Paris, which could be sold off commercially for a huge fee but we do not do that-that these buildings are national assets? If you sell them off to be turned into a hotel or flats, at some point in nine years’ time, or in 12 years’ time, someone will say, "If only we had that building." Is it not incredibly short-sighted, given its location, to do anything other than keep the War Office in the central Government estate? You cannot get more central than that.

Ursula Brennan: May I just clarify? In relation to that Whitehall estate, the Government Property Unit is taking the lead on that. Those people are developing the policy about what do with Whitehall. We will vacate that building, and then we will be part of a Whitehall-wide initiative-at one point, there was a view that that was the Crown jewels, and what we needed to do was to move people into that estate across the whole of Government. That is happening at the moment, and other Government Departments are coming into Whitehall. That will not be our decision, however; that will be a Government Property Unit decision.

Q66 Mr Bacon: And the central property unit: that comes under the Treasury?

Andrew Manley: Yes, it does now.

Mr Bacon: Fortunately, we have got Sir Nicholas coming in just a minute, and we can ask him about it.

Q67 Meg Hillier: May I just ask about regimental assets such as the HAC? Do they come into this procurement process?

Ursula Brennan: In terms of the assets in the UK, there are things that we own, things that we rent and things such as the HAC that belong to individual regiments. What they do with that is their business.

Q68 Meg Hillier: That is entirely their business?

Ursula Brennan: They can do whatever they like with it.

Matthew Hancock: We have three RAF bases in west Suffolk, and I am sure that we would be delighted to see the Red Arrows more often.

Sitting suspended for a Division in the House.

On resuming-

Q69 Stephen Barclay: Three quick things from me, I just seek some reassurance. If Scottish independence were to go ahead, can you reassure us that any disposals would be looked at? I am particularly driving at naval assets, or disposals that, within a number of years’ time, we find we either should have retained or would have found useful. It may seem an unusual idea to talk of Scottish independence, but there is a majority Government in Scotland.

Ursula Brennan: Defence is not a devolved matter at the moment.

Stephen Barclay: So is it part of your contingency planning or not?

Chair: Quick, next one.

Q70 Stephen Barclay: The second one concerns the Red Arrows. If you decide that you do not need the base from a Red Arrows point of view, but the FCO does need it, would you still be able to push it across to them or would you have to retain it because of usage from another Department?

Ursula Brennan: We do not have to retain things because other people want them. We would take a value-for-money judgment, and if it was a value-for-money judgment that we had booked a receipt, say, in our accounts, and it was better value for money for the Government as a whole not to do that, we would have a discussion with the other Government Department about ensuring appropriate transfer.

Q71 Stephen Barclay: You are picking up the full cost. Is that right?

Ursula Brennan: We are picking up cost for bases that we are predominantly using, yes.

Q72 Stephen Barclay: The final one is if we are going to reduce our number of tanks, what sort of cost savings are you expecting to get in terms of operations in Canada?

Ursula Brennan: We have a study currently being undertaken by the Army about the implications of the change in the return from Germany and the size of the Regular and Reserve Army, and that is exactly the space that they will be getting into.

Q73 Stephen Barclay: So, there is no target figure. What is unclear to me is how many estates in the UK we are provisionally retaining for what is coming back from Germany and whether we have oversupply and are retaining more than we need. Obviously, there is the estate in Canada, which is a training estate. If there are going to be significant reductions, I assume that the usage would fall. Again, if you have this target of £1.5 billion, to what extent are you expecting to pick that up from less requirements in the UK for the troops coming back from Germany, balancing that against any subsidy the German Government give for troops that are located in Germany and also making savings in Canada? I just do not get a sense as to how that cost benefit is fitting together?

Andrew Manley: As I said, Canada will be an operational saving. It will not represent a disposal for us because we do not own the estate in Canada.

Q74 Stephen Barclay: But you are paying the fee each year.

Ursula Brennan: Indeed. Because it is a very complicated plot, the thing we published in July, which was the first go at basing, is being refined through the work that the Army are doing on the implications of the change in the Regular-Reserve balance and on the coming back from Germany. Clearly, that will feed into use of training estate, but it applies to a lot of our estate. We will have to have a think about things, such as do we want not to use the estate in Canada. If we have to re-provide some of it here, that might give a cost. We are just working our way through that.

Chair: Thanks very much. These are short and sharp, but it does look as if some progress is being achieved. We will keep looking at the matter.

Examination of Witness

Witness: Sir Nicholas Macpherson, Permanent Secretary, HM Treasury (M25, Ofcom, MOD Major Projects, Asset Protection Scheme, Financial Stability of UK Banks, Public Service Pensions) gave evidence.

Chair: Right, welcome. This is a rather longer session.

Mr Bacon: We saved the best till last.

Q75 Chair: Because of the topicality of it, it makes sense to start on the two reports on the asset protection scheme and on the financial stability of the UK banks and then we will move on to the others. Clearly, when we last looked at this matter, we were in a different economic situation. Given the current uncertainty, do you think that you will have to repeat the exercise and bail out some banks again?

Sir Nicholas Macpherson: That is a very good question, which is difficult to answer. To put it in a wider context, the European Union is going through a process right now and there may be announcements later today. It would be inappropriate for me to go into the detail right here and right now, but it is fair to say that informed analysts are currently taking the view that British banks will not need to be recapitalised on the basis of the EU criteria.

Q76 Chair: All we can look at is what we read in the press. Some are taking that view, and I assume that it depends whether Italy goes into the frame or not. Some are taking a rather contrary view.

Sir Nicholas Macpherson: I think that the British banks, as far as Europe is concerned, are in a reasonable place. Obviously, they have an exposure to Ireland because Ireland and Britain are very integrated; RBS owns Ulster Bank, which is a leading bank in the island of Ireland. At this stage, on the face of it, British banks are reasonably well capitalised. I would not expect us to have to put more money into them in the immediate future, but the world is very uncertain at the moment.

Q77 Austin Mitchell: Are they heavily exposed to Greece?

Sir Nicholas Macpherson: Far less exposed than, say, the French banks, the German banks or, in particular, the Greek banks.

Q78 Austin Mitchell: Far less, but is it still a serious problem?

Sir Nicholas Macpherson: No, their exposure is perfectly manageable.

Q79 Mr Bacon: What about their exposure to the insurance-the credit default swabs-if there were a credit event that affected French and German banks?

Sir Nicholas Macpherson: This is where it all becomes very complicated. It is in the nature of banking crises that, when they happen, it’s the exposure, the counterparties. There are a number of removes from the source of the problem. You will recall with Lehman’s that the wider implications were considerable. That is why I am being cautious in what I am saying, because you never know absolutely what will happen. Banks ultimately depend on confidence. They need to fund themselves. At the moment, they are funding themselves, but it is a matter of public record that banks are finding it more difficult to fund themselves than they were six months ago. That is largely because US funding has dried up. As of this minute, it is okay, but we are having to keep a very close eye on the situation.

Q80 Chair: Last time, one of the issues that emerged was the lack of understanding of the asset base of the banks, which is why you had to then get letters of direction. Were it to happen again, is the Treasury now in the position that it has a more complete understanding of the asset base so, were it to intervene, it would not have to seek letters of direction?

Sir Nicholas Macpherson: We have a very much better understanding of the asset base. We have actually used the asset protection scheme to use the Treasury’s influence to encourage RBS to have a better understanding of its assets. I am confident that we are in a better place there and, as I said earlier, the exposures to eurozone are limited and, on the face of it, manageable. Just so you understand, a large amount of contingency work is being carried out on a day-to-day basis. The Treasury is working very closely with the Bank of England and the FSA. If a crisis were to emerge, I am confident that we are in a much better place to deal with it. We have the expertise.

Q81 Austin Mitchell: Do you now know what assets are subject to fraud or criminal activity? You didn’t last time.

Sir Nicholas Macpherson: On the face of it, that has been dealt with. Through the asset protection scheme and other mechanisms, we have gone through the assets so we have a far better understanding. Although even now there are a few instruments where there is still some doubt about what their true worth is, the figure associated with that is much smaller than it was. I think that we are down to £150 million of assets.

Q82 Austin Mitchell: Why do you say, "On the face of it"? Why do you put it that way?

Sir Nicholas Macpherson: Actually, not on the face of it. I withdraw "On the face of it". They are. It is a matter of record. We recorded it in our accounts. The year before it was £250 million. It is now down to £150 million.

Q83 Nick Smith: I want to ask you a few more questions about British banks’ exposure to Greece. I understand that we are the fifth biggest lender there. I am not sure how much money that is, and if any particular banks have big exposure there.

Sir Nicholas Macpherson: Our exposure is small, primarily because Greece is a small economy. One of the frustrating things about the eurozone crisis-inevitably, with the benefit of hindsight-is that had Greece been addressed firmly at the beginning, we probably would not be waiting on today’s Euro Council with bated breath. One of the issues with Greece is its relationship with other countries. It has a close relationship with Cyprus, and the exposure of the Cypriot banking system to Greece is considerable. For example, there are Cypriot banks in London because of a big Cypriot community. It is getting a handle on where the money is flowing and who the counterparties are. Coming back to the British banks, for which we are responsible, the orders of magnitude are small.

Q84 Joseph Johnson: The asset protection scheme was put in place originally to enable the Government to avoid having to fully nationalise various UK banks. It created a large contingent liability as opposed to 100% shareholding. There is perhaps a growing possibility of the need for further capital injections that may push up the Government’s shareholding in RBS from 83%-if we need to put in further equity capital-closer to 100%. In hindsight, do you still think that that was the right way to go?

Sir Nicholas Macpherson: I think that the asset protection scheme was the right way to go at that time. It exposed the Government to a smaller degree than if they had just nationalised the bank. I am cautious about the effect of nationalisation and the way that nationalisation can destroy value, but obviously there is a point at which nationalisation is the only answer.

If I look back at the last time that I was in front of the Committee, none of us anticipated how a recovery, which appeared to be getting underway across the world, has petered out in recent months. Germany is a good case in point; it was really growing very rapidly through the end of last year and the beginning of this year. In the wider economic context, the sovereign debt crisis in the eurozone and the relationship between the banking system and the eurozone are all creating greater nervousness in the market. The fact is that the whole of the European banking system is trading its share prices considerably under book value. All of that give grounds for caution.

Q85 Joseph Johnson: Given the difficulties that the Treasury is having holding the banks to deliver on Project Merlin and really making sure that they sustain the flow of lending to businesses, and the need to embark on the very sensible policy of credit easing and now taking Project Merlin to a new stage, as it were, do you not in hindsight think that it would have been better to have gone directly to a model of full nationalisation, whereby you could actually direct the flow of credit directly yourself?

Sir Nicholas Macpherson: I remain cautious about nationalisation. We all have our views on how private bankers have performed in recent years, but certainly looking at the Mitterrand Government in the ’81 to ’83 period, nationalising banks does not necessarily give you the results. Indeed, whatever happened to credit easing, ideally you would want people who understand credit risk making the lending decisions. All my experience of working in government is that Governments are not equipped to be successful bankers.

Q86 Chair: However, just to go back to the credit guarantee scheme, when we looked at it, we thought that there was an excessive subsidy running into probably tens of millions of pounds, in terms of the fees that you were levying. Were you to have to do that again, or were banks to refinance their debt through you, would you be charging a higher fee, so that we get better value for the taxpayer?

Sir Nicholas Macpherson: I am very conscious of the Committee’s views on this and, indeed, when we were considering a mechanism to allow banks to repay early, we spent a lot of time considering what the right fee to pay was. I largely agree with what the Committee has said on this, and I think that there are lessons for us to learn. One reason why I would not immediately say that I completely agree is that, if we were to reach a situation where the market completely dried up and the whole system was falling apart, charging banks a commercial fee might actually add to the downward spiral, if that commercial fee was the prevailing market rate. One reason why the Government have to intervene in these circumstances is that the market has ceased to function. We are very mindful of the Committee’s conclusions, and we will have to take a decision in the light of prevailing conditions.

Q87 Chair: Picking up on what Jo said, I suppose that the final thing is that none of the UK banks has issued any long-term debt for some time now. Again, in terms of the impact that that would have on us, have you contingency plans there?

Sir Nicholas Macpherson: We have a lot of contingency plans. They are far better funded. We are not anywhere near the state we were in during October 2008, when there were literally days before they would cease to be able to fund themselves. They have a lot of funding well into next year, but we have to keep this under review.

Q88 Mr Bacon: Can you remind us how much money the Government have put into the European Investment Bank so far? I read in the newspaper the other day that we had put in a number of billions, and that we were potentially on the hook for another £35.9 billion, which struck me as a rather large number. Is that correct?

Sir Nicholas Macpherson: The European Investment Bank?

Mr Bacon: Yes.

Sir Nicholas Macpherson: I cannot tell you offhand, but we are big shareholders within it.

Q89 Mr Bacon: But we had put in quite a lot of extra capital already, and we had pledged, if required, another £35 billion. If you cannot tell us now, could you write to the Committee summarising the position?

Sir Nicholas Macpherson: I would be very happy to write to the Committee. It is for that reason that we are quite cautious about using the EIB for innovative ways of supporting the eurozone.

Q90 Nick Smith: Thanks for the update on Greece’s and Cyprus’s banks. Do we have a clear picture of sovereign debt and commercial debt in Italy?

Sir Nicholas Macpherson: We do have a clear picture. We continue to review the exposures of our banks, both commercial and sovereign, to all the main European players.

Q91 Nick Smith: Can you tell us more about Italy specifically?

Sir Nicholas Macpherson: Italy is a much bigger country, so you would expect our banks to be more exposed to Italy, but even in relation to Italy, the exposure is reasonably containable. When you look at Italy and Spain, it is usually France, in particular, and Germany to a lesser extent, that are most exposed-apart from the sovereigns themselves. One of the problems for Italy is the feedback loop from the sovereign to the banks, and from the banks to the sovereign. It is the banks in Italy that are most exposed to the Italian sovereign. Italy is an interesting country because, on the whole, Italians save a lot. Perhaps unwisely, they lent a large amount to the Government. Italy, as a whole, does not have some big external deficit, but there is an interesting relationship between the private and the public sector there.

Q92 Mr Bacon: Can we go back to Italy and Spain for a second? About nine months ago-whenever the Irish crisis was happening, followed by the Portuguese one-there was a lot of comment that fixing that situation was one thing, but the real fear was what would happen if Spain-or, even worse, Italy-came under threat. The consensus opinion in all the newspapers-I issue the caveat that you cannot necessarily have faith in what you read in a newspaper-was that the problem would be that Spain and Italy were too big and we could not afford it, yet here we are, nine months later, talking about creating a fund of several trillion dollars or euros, as if we could now cope with it and afford it. When the last but one part, or part 93, of the last iteration of the crisis-handling happened, and they created a €750 billion fund, it seemed like a lot of money to me-I’m a simple man. The idea of creating a fund of €3 trillion that could cope with Spain and Italy was not on the cards; now it seems to be something that we are contemplating and can cope with. Were all the commentators wrong then, or are they wrong now? What has changed?

Sir Nicholas Macpherson: I think the commentators were right to point out that this was a very large sum of money, and to be slightly sceptical about whether people would step up to the plate and fund it. Fortunately, Britain will not be a direct funder of this vehicle. Ultimately, the German taxpayer is the group that will probably make the biggest contribution. I am not an expert on day-to-day events in Germany, but it appears that it is proving quite a political challenge for the German Government to get a consensus behind that level of intervention. Certainly, from reading newspapers, that appears to be the obstacle to progress, which is associated with the German traditional concern about printing money, the European Central Bank, and its experiences in the ’40s and after the 1918 war.

It is all quite challenging, but I guess the other thing that is beginning to concentrate minds is the consequence of a wholesale unplanned euro break-up, because that, too, would have very big consequences. Perhaps China and the United States will regard that as such a threat to the global economy that they will want to be part of the solution-whether working through the IMF or through an IMF vehicle.

The last big country that went to the IMF was Italy, in the late ’70s, following on from Britain’s going to it in the mid ’70s. The IMF has been able to cope with big countries, but the problem for the eurozone is that Spain and Italy are very big indeed. The Governor of the Bank of England is more eloquent than I am on this, but we must also think through how an intervention would work. Historically, when the IMF comes to call, a country will have a massive devaluation and will suddenly become quite competitive. The IMF helps it to fund itself as its economy begins to recover, and then they all move on. That has been a very successful form of intervention. The problem for Greece and others is how they become competitive if they do not have their own exchange rate. Ireland is showing that you can do that if you have a flexible economy and the political will. I think that deep in the Irish psyche is a desire to remain independent from British economic policy. Ireland will pay a very high price to ensure that it maintains its economic independence. I have not seen quite such enthusiasm in Greece.

Q93 Mr Bacon: They have been rioting in the streets. The reason this is interesting to us is that, although you are right, in that we have limited British taxpayers’ involvement, we are not completely immune. Money has gone, first, through the IMF; secondly, through the EIB; and thirdly, through the agreements that have already been reached. We, as taxpayers, and you, as an accounting officer, are therefore already on the hook for a system that, to most people’s eyes, has no chance of delivering what is required, precisely because of the problem with Greece that you allude to. We do have riots in the streets, and the obvious thing for the Greeks to do would be to default and then devalue. To say that it is quite a challenge is an understatement, but I am looking for some assurance-that is the remit of this Committee-in relation to the British taxpayer’s money that has already gone in.

Sir Nicholas Macpherson: I would like to give you considerable assurance that the Treasury is working night and day to minimise the cost to the British taxpayer, and to maximise the chances of economic growth. It is not right for Britain just to opt out of all this; it is very important to use our influence where we can to inform a better outcome in the eurozone. The present Prime Minister and Chancellor are working very hard to do that, just as the previous Prime Minister and Chancellor did in 2008. Britain can have an influence, but these are very uncertain times, and we are inevitably carrying more risk than we were a year ago. That is totally beyond our control. We are a relatively small and very open economy. We are a free-trading nation-50% of our trade is with mainland Europe. We are in this, whether we like it or not, but the challenge is not to do anything silly and, on the whole, to try to do things sensibly to minimise taxpayer exposure.

Q94 Chair: I am going to move us on from probably the most important issue of the day to other issues on our agenda. First, on pensions-I think you were expecting this, Nick-the obvious question will not surprise you. Last time, we said that you had to benchmark and sort out what is affordable. We see absolutely no evidence that you have done that bit of work. When are you going to get to grips with it, please?

Sir Nicholas Macpherson: I think we are very focused on this. Indeed, the Chief Secretary to the Treasury, Mr Alexander, is meeting the trade unions on a fairly regular basis at present to try to get a settlement, not just in the short term, in relation to increasing contributions, but a settlement for public service pensions that will last. One of the points made by the Committee was that, if you want to have a sensible pensions system, for God’s sake do not keep changing it every other year.

I do not want to give a running commentary on those negotiations, but it is a matter of public record that the Chief Secretary has set for all the trade unions a ceiling within which those public service pensions should be funded. Indeed, he set out very clearly a base case of a pension scheme-around an average salary scheme, with a retirement age linked to the state retirement age-all of which is designed to put pensions on a sustainable footing.

Fiona Mactaggart: Are they not sustainable at present?

Q95 Chair: That is the whole point. We have all seen what is happening, but what is it based on? Our report from the NAO suggested that it was pretty sustainable at 1% of GDP and at 2% of public expenditure, so on what basis have you taken a lower figure and decided that that is the only one that is sustainable?

Sir Nicholas Macpherson: There are a number of issues at stake. First, there are some very big, long-term demographic pressures on the British economy, to do with an ageing population, which are not coming through so much on the public service pensions side, although they were, before it started being reformed under the last Government and the present Government. There are a lot of pressures in particular on the state pension, which, because of the so-called triple lock, is set to rise more quickly than it did in the past. Long-term care, which I do not think any Government have ever quite funded to the degree required, will get worse. It is perfectly reasonable, therefore, for the Government to look at the long-term pressures and think, "Well, if we are going to be spending more on this and that, should we be spending the same amount on the other?"-in this case, public service pensions.

You are absolutely right, and I certainly recognise that. If you look at the long-term projections by the Office for Budget Responsibility, public service pensions are being brought under control as a percentage of GDP, but what informed Hutton and the Government’s response to Hutton was a sense that public service pensions were very generous in relation to private sector pensions. That does not mean that you want to have a race to the bottom, and it is important that we have a thriving private pension market. However, even in its own terms, you pay people in order to recruit, retain and motivate them, and in my experience, having worked for over 25 years in the public sector, pensions are a very blunt instrument for motivating and retaining people, because most workers discount the value of their pensions; they tend to think about them later.

Even after all these reforms, we will still have a very generous public service pension scheme. Average salary pensions for many people will be more generous than final salary pensions, and there will be certainty-they will be inflation-linked-but the previous schemes that had retirement at 60, final salaries, and so on were very generous and becoming increasingly expensive.

Chair: We understood that. We were taking it from the basis that there had already been the changes in-I cannot remember-’07 or ’08, and that was when we came to 1%.

Q96 Fiona Mactaggart: I was speaking a couple of hours ago to two teachers from my constituency, one of whom said to me that, following the proposed changes, she will stop paying into her pension. One of the things that I can see no evidence of you having done, despite the Committee’s recommendation, is assess the impact of people not paying into public service pensions because of this. Why have you not assessed that?

Sir Nicholas Macpherson: We have been focused on this, and indeed, in costing some of our changes, we have made an assumption of how many people will opt out.

Q97 Fiona Mactaggart: What is your assumption?

Sir Nicholas Macpherson: Our assumption is that 1% of workers will opt out.

Q98 Matthew Hancock: Going back to the sustainable level point, which was where we started, a recommendation of the Committee was that you set out a way to work out what is a sustainable level. May I push you on the cost question? You expressed the cost as a proportion of GDP. Could you also set out the cost of public service pensions in real terms? We usually look at things in the Committee in real terms-that is our way of assessing future cost-rather than as a proportion of GDP, especially given the uncertainties over future GDP.

Sir Nicholas Macpherson: We can certainly do that. Another way of doing it, which is also relevant in comparing the public and private sectors, is through the contribution rate that is necessary to fund the pension. One of the problems in the old scheme was that it was getting higher and higher, and it was the employer-namely the taxpayer-who was picking up an increasing amount, relative to the employee.

May I make a correction? I said that I thought 1% of people would opt out. What I should have said is 1% of the pay bill, which is slightly different, but it is broadly the same concept.

Q99 Matthew Hancock: You said that you want to get back to us on the cost in real terms, as opposed to the cost as a proportion of GDP.

Sir Nicholas Macpherson: If I have the information, I will be happy to get back to you.

Q100 Matthew Hancock: On whether you can find an objective way of setting a sustainable level, can you set out your response to the Committee’s recommendations? Is it possible to have an objective measure? Is it just a part of the broader management of the public finances?

Sir Nicholas Macpherson: Pensions have evolved in all sorts of ways, reflecting custom and practice, different circumstances and different industries. I really do not think that there is any simple answer to "What is the right replacement rate in retirement?". In relation to state pensions, there is a certain point where the state has a legitimate role, but after that, individuals should be planning their own retirement.

There is a reasonable view on what the aggregate contribution between employee and employer should be to pension saving. The Government are having a negotiation on that, which is not completed yet, but I hope that we can make progress through the autumn. At the point when we reach agreement with the trade unions, we will be able to point at a contribution rate, whether it is 20%, 22% or 18%; it will be that sort of territory. Then there is the issue of how much is paid by the employee and how much by the employer. Then-I think this is most important of all, in terms of the cap on pensions into the future-how do you deal with risk to do with longevity and so on, looking into the future? The Government need to be able to answer those questions, and I think they will. As those negotiations are still going on-negotiations themselves are a form of social choice, of sorts, because the taxpayer is represented by the Government and the members are represented by their unions-an outcome will be reached, and when that happens I will be very happy to share more of the data underlying it with the Committee.

Q101 Matthew Hancock: But you will send the other stuff before then?

Sir Nicholas Macpherson: If there is something that I can give you that gives you more information, I will send it, but I am not an expert on the details, so I will have to go back. It is quite a delicate part of the negotiations.

Q102 Austin Mitchell: I think that that proposal would turn it into a political game, because you would have a Labour sustainable level of investment in public sector pensions, and a Conservative level, and I do not think the twain would meet all that much. We are putting the emphasis on public sector pensions, which are only part of the argument, and over which the Government are negotiating like a man who is deaf, blind and dumb, as far as I can see. We asked you in the previous meeting to set out the costs and benefits of Government support for occupational pension schemes-tax relief and the rest of it-and to show who benefits from such support. Why have you not done that?

Sir Nicholas Macpherson: I thought we had done our best. We were clear that the total cost of pensions tax relief was £28 billion in 2009-10, but if you netted out the tax on the pensions in payment, the net cost of the relief was £19.7 billion. Successive Governments have been conscious that increasing amounts of the benefit of tax relief have been going to the higher-paid. It is a fact that 70% of the relief was going to higher-rate taxpayers, which is why successive Governments have sought to address tax relief at the higher end. The Government have recently announced an annual allowance that will cap the contributions into a scheme. There is also a lifetime allowance-you can only have a tax-relieved pot of up to £1.5 million-and a series of measures that try to ensure that tax relief is better targeted, but you will always have some tax relief.

If you think about it, you are paying into a pension scheme out of taxed income, so if you were to tax the contribution and the pension at the end of it, no one would put their money into a pension, because it would be treated even worse than ordinary savings out of taxed income. One can get excessively hung up on the tax relief. There is a lacuna with the tax-free lump sum, and I do not want to get into the tax theology but, as a matter of principle, I guess that the tax treatment of ISAs seems to be fair; you have saved out of taxed income, and then you build up your savings with a degree of tax relief.

Q103 Fiona Mactaggart: Your amendment to what you said about 1% of the pay bill was a reflection of the fact that you realised that the people who were most likely to opt out were relatively low paid, I think. It strikes me that we have not seen the evidence about the cost to the public purse of all this, because if the relatively low-paid public servant is the person who opts out of contributing to their own pension, they will be the person whom we pay means-tested benefits to out of our taxes when they retire. Have you done what I think the Committee recommended in its report, which is to work out the cost-benefit to the whole national budget of the changes? I have not seen any evidence that that has been done. It seems to me that, in relation to low-paid public servants, a problem is being built up by the changes.

Sir Nicholas Macpherson: We went back to look at this further, as the Committee recommended, but we remain reasonably confident that public sector workers who opted out would still have a post-retirement income that would take them above means-tested benefits. Why? Because if you opt out, you automatically get contracted back into the state second pension. If you stay in a state second pension over time, which you will recall was the successor to SERPS, that should still lift you above income-related benefits. Obviously, if you have a patchy employment record, nothing will necessarily lift you-

Q104 Fiona Mactaggart: So it will be women who lose out?

Sir Nicholas Macpherson: But if you stay in work, are contracted into the national insurance scheme and have a full working record, you should be free of the pension credit. You will recall also that-I think it started under the previous Government following the Turner report-there will be further reforms to the state second pension, and I think this Government are planning just to move to an enhanced flat-rate pension. I think that, too, is envisaged as being above income-related benefits, so I remain pretty confident that there will not be a cost, in terms of social security. Also, opt-out rates are pretty low in the public sector.

Q105 Fiona Mactaggart: At the moment.

Sir Nicholas Macpherson: They are pretty low, and even if there is some additional opting out, I am confident that that will not translate into higher spending elsewhere.

Q106 Chair: We have dealt with issues relative to the Treasury and we will now move to other Departments. I am going to ask a general question: we get from you a Treasury minute-this is all new to us, Nick; we haven’t done this before-that tells us the recommendations that have been accepted and the ones that have not been. What responsibility does the Treasury feel for ensuring implementation of what are always value-for-money recommendations-those that would save the taxpayer money, which is your job as well as ours?

Sir Nicholas Macpherson: I do not want to be unnecessarily sycophantic, but I am going to have a go at it. One of the good things is that I think the work of this Committee and the way you have slightly changed your focus over the last 18 months is both strengthening your influence and the Treasury’s influence. The idea of coming back and following recommendations is a very powerful one that will concentrate people’s minds. My understanding, Paula-she’s nodding-is that we are producing a composite report.

Paula Diggle: We are going to do reports twice a year on how far Departments have followed up recommendations so that you will be able to see what has happened.

Q107 Chair: We’ll do our bit and shout at them, right. Will you do your bit and make sure that it happens within the machinery of government? We are Back Bench MPs, a really important, powerful group, but at the end of the day that is what we are. You are in there. You are Treasury.

Sir Nicholas Macpherson: I certainly will be encouraging the spending side of the Treasury to take a much closer interest.

Q108 Chair: So it’s the spending teams?

Sir Nicholas Macpherson: Yes. At a time like this you simply cannot afford not to be focused on VFM. The Treasury and the PAC have a capacity to annoy Departments and my mandarin colleagues, but I think it is a positive influence. I do not want to be disrespectful to the old Treasury minutes, but they had got slightly stale in places. People would say, "Yes, we agree" and then know that there were no consequences. It is incumbent on the Treasury to reinvigorate the process a bit. Preparing for this event I was quite positively impressed by how the Treasury seemed to understand the issues and be on the case.

From time to time your reports make recommendations about what the Treasury should be doing. We need to think those recommendations through. There is a balance to be struck. The Treasury is a small institution. We cannot second-guess everything that Departments do and I would not want us to because that would undermine responsibility and people would then say, "Oh well, the Treasury did not tell us." There is a balance to be struck. I know you have made suggestions, for example on the defence equipment programme and so on. We just have to try to learn from those and move to a better system.

Q109 Chair: The defence equipment programme is a classic. There is you and there is the Major Projects Authority sitting around in the Cabinet Office. Would you today never allow the carrier decision to be taken? Would the Treasury intervene?

Sir Nicholas Macpherson: I think all of us feel a bit uneasy about how the defence equipment programme played itself out over-

Q110 Matthew Hancock: Are you not going to be a little bit stronger than that?

Sir Nicholas Macpherson: I would be tempted to, but the last time I made-

Mr Bacon: Nobody’s watching.

Sir Nicholas Macpherson: The last time I made a comment about the defence programme, it kept being replayed to me. The critical thing is why we get to this problem. The problem was that we had a long-term programme that no one would ever acknowledge was unaffordable, so it kept moving to the right. That was inefficient in its own way. But those of you on the Committee who have served in Government will know that at the end of the spending reviews, from time to time, you get a settlement that the parties will have formally signed up to, but some of the parties will think, "Well, okay, we’ve signed up but we’re just going to carry on as normal."

Defence is a very sensitive area and I can understand why no one wants the Treasury running the defence programme because, as I have said before, the Treasury would probably have been opposed to the second world war. It is opposed to everything. Sometimes you need leadership. That is why the Prime Minister has a special role in relation to defence, the chiefs of the defence staff and so on. Having said that, real progress has been made. This Committee has been influential. The gap in terms of affordability, which at one stage was very big indeed, has been reduced to a very small amount. It is still a positive amount-

Q111 Mr Bacon: The real question is how it got that big, because Bill Jeffrey, as accounting officer, could have asked for a direction on a number of occasions in relation to the carrier and other things and he explicitly did not. His second Permanent Secretary at the time, responsible for money, was Ursula Brennan, who is now the Permanent Secretary. The gap got bigger and bigger, and the real issue is that you are a small institution, but you are a finance Ministry, and you are signing off on budgets that are ultimately unaffordable.

I accept the reluctance to get involved in second-guessing and the need for people to be responsible, but the other day-apropos of armoured vehicles, which we did on Monday-I asked the Permanent Secretary of the Ministry of Defence who has paid the penalty in the MOD. I had to ask the question about five times, but the answer ended up being no one. In terms of accountability and responsibility, therefore, it does not appear to work. At the same time, however, we have a finance Ministry that is handing over the money and not checking that the gap is not growing-it was-so the finance Ministry is not doing its job either. The system is not really working properly, is it?

Sir Nicholas Macpherson: The finance Ministry was doing its job throughout much of this period, but there are some times when, whatever officials say, they do not get the traction they should.

Mr Bacon: That is a very delicate way of putting it.

Sir Nicholas Macpherson: That is one of the problems of working at the Treasury. You always think that you are about to get to the promised land, but you never get there.

Let me say two things, because you made a very serious point, and I just wanted to show how the Treasury has sought to improve things, reflecting your recommendations. First, on accounting officers, we have revised the guidance, and it is very clear that accounting officers are expected to use resources on an affordable and sustainable path. That was a revision to the guidance, reflecting your recommendations. The Chancellor would never ask me to do something that was not sustainable, but if he did, I would expect to have a direction. That is my first point.

Secondly, we need a more coherent set of assumptions underpinning the defence programme. We have made real steps on that. There is effectively a 10-year budget now, because we have told the MOD that it should be able to plan on the basis of 1% real growth a year in its programme beyond the spending review period. That gives them a very clear budget. The National Audit Office is now involved in auditing it, and I would expect the NAO to apply pretty tough criteria in carrying out that audit.

All those things are improvements. We are not there yet, because it will only get there when you can look at the programme and see that over a period of time it has been delivered within budget and without endless reserve claims and so on. These are all good steps in the right direction, and this is something that people are acutely aware of. It has not been Whitehall’s greatest success story over the recent past, and the Treasury must take its fair share of responsibility for that.

Q112 Stephen Barclay: I am puzzled by your comments about revising the guidance for accounting officers. First, on Richard’s point about accountability, if you look at a programme such as FiReControl, the accounting officer for five years-2005-10-was Sir Peter Housden, and it was a disastrous programme. His was also the worst-performing Department for the CSR 2007-11. Less than 5% of his efficiency targets were met at the interim stage, but he has been promoted to be the top official in Scotland, so there has been no accountability there.

In a hearing last week, we heard that there are 54 change programmes in HMRC. They could not even tell us how many of those 54 programmes have started or how many need to go wrong for someone to be actually accountable. It is not clear who is accountable.

We actually had an exchange back in January when I raised the issue of accountability for foundation hospitals that are outliers. You promised to write to me, and you did. You wrote to the Committee in April; you then wrote again in June and you wrote again on 18 October, describing it as a thorny subject. But where you have significant outliers, it has still not been resolved whether the accounting officer, who is giving the money out, is going to be fully accountable for that, or whether it is the local boards. We get the same issues time and again on these Committees-whether it is fire control or the new HMRC change programmes-where the accounting officer is on long-term sick but at some point, presumably, will be coming back to be held accountable for some things. Yet although we have had this issue on the table with you since January, we have still not had a clear answer. Why is it that the revised guidelines do not provide us with adequate comfort on this?

Sir Nicholas Macpherson: To be fair, on foundation trusts, my understanding is that you are having a session with the accounting officers for health and education in the reasonably near future.

Chair: We’re waiting. Health has yet to produce its accountability statement.

Sir Nicholas Macpherson: The idea of producing an accountability statement is, in principle, a positive one, but you will have to satisfy yourselves whether the Treasury will be doing its best. Paula is involved with the statements, and she is trying to produce statements that resolve the interesting tension between centralisation, devolution and Parliament’s ability to satisfy itself that money is being well spent.

Your wider point on the length of tenure is a good one, and it comes up over and over again. As I enter my seventh year in my current post, the issue is concentrating my mind because I think it is fair to say that if anything happens in the Treasury, I should be accountable for it. I am biased because I have been in the Treasury a long time. There is a benefit in permanent officials doing their job for a reasonable length of time, especially if there is a rapid turnover of Ministers. I am glad that under this Government ministerial turnover seems to have declined considerably, because I think that such issues of accountability are important.

In terms of your wider point about consequences, this is something you have to continue working on. We introduced a system of performance-related pay, whereby weaker performers were identified. I do not want to get into individuals, but you will be pleased to know that there will soon be a new head of the civil service and a new Cabinet Secretary. I am far more junior than those people, but I will seek to use my influence from the Treasury to ensure there is stronger accountability.

Q113 Stephen Barclay: Can we bring that to life? Individual accountability is one thing, and as Richard suggests, I do not see that changing. To give you an example, you were saying, "Well, the Treasury is following up the recommendations of the Committee and driving a culture change." To take the example of Ofcom, which I flagged in advance, the NAO found that Ofcom, in its view, was double-counting. We as a Committee made a recommendation stating that Ofcom is double-counting its savings. That, I am sure, is not particular to one arm’s-length body. The cumulative spend of arm’s-length bodies is significant, yet in the Treasury minutes you say, "Well, their existing methodology is compliant with Treasury principles." On the one hand, you accept the recommendation that they are double-counting, but on the other hand, you say that their approach is compliant. They will continue to do it in the same way.

Sir Nicholas Macpherson: There are two issues here. One is pure double counting, which is clearly silly and wrong. I would not want to see double counting in any aggregation of efficiency savings. The second issue is that one of the techniques they used for deriving savings was to discount future savings and produce a net present value. That is a perfectly respectable technique for identifying savings, and it is something that the Treasury does the whole time in investment appraisals, and so on. Double counting is wrong. The Treasury does not support it. We no longer produce long aggregated lists of efficiency savings. The Cabinet Office does, but only on the efficiency and reform group programme. My understanding is that it got quite a good clean bill of health from the NAO in its latest assessment of savings.

Q114 Stephen Barclay: It failed its accounts in a particular way, and we made a recommendation saying that we did not approve of that. Its accounts this year have still failed in the same way; it is still exaggerating its savings.

Sir Nicholas Macpherson: I am happy to go away and explore that, and to get the Treasury to explore that. If it is doing it wrong, we-

Stephen Barclay: You are saying, "This is compliant with the Treasury", so there is enough room in the Treasury guidelines. There is a contradiction here: on the one hand, you are saying, "We accept your recommendation," and on the other hand, you are saying "But the way it does it currently is perfectly fine," and those two statements are inconsistent.

Chair: To take this forward-because Steve will not give up on this-the most sensible thing is if, when you go away, you write us a note within a week about whether there is a conflict.

Q115Stephen Barclay: My point is less about Ofcom and more about, in microcosm, the fact that the spend-this goes back to the accountability issue-of arm’s length bodies is huge. When an issue arises, often the people they contact are Members of Parliament, yet we have little grip on those savings. There are no common definitions in how their accounts are being failed, which is a major issue. It is hard to compare arm’s length bodies, and there is not much drive from the centre to standardise data in a form that allows us to identify outliers. My point is less about Ofcom specifically, and more that there is spending by arm’s length bodies that is deliberately misleading. Even when it is pointed out, little seems to be done about it.

Sir Nicholas Macpherson: That goes back to the earlier point. Maybe our response in the Treasury minute needs to be a bit sharper. I will take this issue away.

Q116 Matthew Hancock: May I follow on from precisely that point? Earlier, you said that sometimes in the past the Treasury minute might have been written saying, "We agree with you", and then nothing happened. The Committee hopes that this type of hearing holds people’s feet to the fire a little more, which should help you, too. It was notable that Robert Devereux came to the Committee with several answers containing concrete things that had happened as a result of the recommendations, which was very heart-warming.

May I pick you up on one further point? The PAC’s fifth recommendation in the "Major Projects Report"-it is on page 10 of our notes, I should say to the Committee-was that the Treasury should ensure that there is enough governance and control over the defence spending programme, which we were talking about earlier. The Government’s response was to agree with that. The Treasury’s part of that response was that it would continue to offer a robust challenge. There was nothing new in there. It was not that the Treasury would do anything differently; it was that it will continue to do its job. As you say, however, that job has not been done perfectly in the past. Perhaps you can give us a more detailed response than saying that the Treasury will continue to offer a robust challenge, when this was clearly a significant failing, which needs to be put right.

Sir Nicholas Macpherson: I could give you a speech now on all the things that the Treasury is doing on defence, but if your point is asking for the Treasury to be a bit more forthcoming about what it is doing, I am happy to log that.

Q117 Chair: It is generally the spending teams. All the spending teams tend to stand back from this a bit. We are seeking much stronger engagement.

Sir Nicholas Macpherson: To be fair, on the defence side, partly because of what has been going on in recent years, the Treasury defence spending team is very engaged indeed. We had one of our best officials working on it through the spending review, but sadly he has gone off to the Cabinet Office to be director of cyber-security. This is really important: we have to be proportionate. The Treasury has finite resources. It would be tempting to concentrate on every single arm’s length body, but you have to concentrate on the biggest risks and the biggest Departments. We have to get the balance right. I want to see a system where we delegate more to good performers and reduce delegations where Departments are performing badly.

Q118 Matthew Hancock: On the specifics of this one, we have heard in the past about how the MOD was consistently over-optimistic. You have just run through how the gap is only small but positive, within a 10-year settlement. That is exactly the sort of statement we might have had from the MOD any time while I have been on this Committee or, indeed, in previous Parliaments, but it would have been delivered on the basis of over-optimistic assumptions. Can you assure us that the over-optimism in the defence budget has been put to rest, or that the Treasury is putting on pressure to ensure that?

Sir Nicholas Macpherson: I can assure you that the Treasury has put on a lot of pressure. We are-famous last words-much more confident about the affordability of the programme than we have been at any stage since I have been in a senior position at the Treasury. That does not mean that it is all going to be fine. There are always huge risks; these are really big projects, and there is a nuclear one going on in the background separately. We have put a hell of a lot of work into it, as has the MOD. There are some quite serious people now at the top of the MOD. No. 10, the Treasury and the MOD have put a huge amount of effort into this over the past few months and we are in a better place, but there is still more to do.

Q119 Meg Hillier: A lot of these problems arise from procurement in the first place. I am aware that across Whitehall and non-departmental Government bodies there are different ways of procuring. For all the Treasury rules and boxes that have to be ticked, there are very different ways. I have seen some good examples, where someone reasonably senior has taken direct control and managed through every layer of staff that needs to be involved. What is the Treasury doing to try to stop things happening in future? Are you looking at it from the point of view of people’s skills, and helping Departments to skill up, or are you still looking at a tick-sheet approach? I paraphrase with the term "tick-sheet", but you know what I mean.

Sir Nicholas Macpherson: There are two angles. There is a genuine issue around what is good practice, and we are clear in our guidance on procurement that people should do sensible things. For example, I was told that you might raise the issue of the M25-that there was not sufficient innovation.

Mr Bacon: We have not got there yet. That is page 11.

Sir Nicholas Macpherson: That is a good example of-

Chair: Stupid procurement.

Sir Nicholas Macpherson: Our guidance is now very clear on project approval, and the sort of things that need to be done. That guidance has no doubt been informed by your recommendations in the past. There is a second issue about people. A lot of errors in Whitehall are pretty much all about people. There are two aspects to that. One is the perennial problem that someone who is any good disappears after five minutes. I cannot talk, as I have staff turnover running at a rate of 28% in the Treasury.

Q120 Mr Bacon: Where are they going? How much of that is out of the service?

Sir Nicholas Macpherson: We have a high rate of resignation that reflects national pay scales. We are a very market-facing Department. People can go off to the City or management consultancy firms and earn a lot more. Equally, my challenge is to make the Treasury such a gripping place to work that people want to stay. There is an issue about retaining good people. There is also a matter on which quite a lot of progress has been made of late: developing skills. The new efficiency and reform group under Ian Watmore at the Cabinet Office is getting a bit of traction. The major projects review group is almost a procurement academy, developing and hanging on to the best people and deploying them sensibly. There are some success stories out there, as this Committee occasionally identifies. The Olympics are a good example of something that has gone well. There have been others, both privately and publicly financed. That must be a priority.

Q121 Chair: Is that 28% higher? Is it on an upward trajectory?

Sir Nicholas Macpherson: I do not want to get you too worried. The Treasury business model very much relies on getting a lot of young people in. I was going to use the word "exploit", but that would be bad.

Q122 Chair: Firing them up.

Sir Nicholas Macpherson: It is rather like an accountancy firm. You get a lot of people in, and a lot of them will not stay the course, so you expect a lot of people to leave. In an ideal world, I would like to see turnover more in the 15% to 18% range. Turnover has risen. I think that is partly because of relative wages. It is partly because, for a while, people did not think that they would get promoted because of the cuts. Actually, they are getting promoted. We have not had to have any redundancy programme at the Treasury because we can draw our 30% cuts through natural wastage. It has risen. It is too high. I am confident that it will start coming down now, as the environment stabilises. I still think that the Treasury is a good place to work.

Q123 Meg Hillier: I am interested in what you say. Clearly, people are absolutely vital to this. I remember saying to one civil servant, "You have done two great projects now that have been delivered ahead of time, under budget. I hope you are writing the manual and you know about the next one." "Oh well, I am moving on, because my career will not progress unless I change completely the area of work that I am dealing with." That is not uncommon. Do you think that the civil service model of career progression really benefits good procurement? The crucial question is: where does the buck stop? Clearly, the permanent secretary and Ministers have to take responsibility. We all know, don’t we, that there are people in the civil service who make bad procurement decisions or have a part in that, who have very long, happy careers? Perhaps they move around a lot, but they are still getting a salary.

Sir Nicholas Macpherson: I think that the civil service has got better in valuing those skills, certainly compared with the civil service I joined. These people were seen as poor relations in the civil service that I joined. The people who were really valuable were the clever policy advisers who sat usually in No. 10 Downing street-

Q124 Meg Hillier: The fast stream?

Sir Nicholas Macpherson: Indeed. The Treasury does not have a fast stream; it just recruits people. Those issues are important, and rewarding and motivating people in this area is important. When I say "rewarding", it is not about giving big pay increases; it is about recognition. I still think there is more to do, but again I think there are things which Departments themselves can do. You were talking about lessons in expertise. I know that a lot of people who worked on the banking interventions will probably leave in the long run. There may not be another banking crisis for very many years, but it is really important to record the knowledge. Indeed, following recommendations from this Committee, only the other week we started a review into the Treasury’s management of the financial crisis so that we can really log the lessons.

Q125 Fiona Mactaggart: My sense is that the civil service has excellent mechanisms to reward people who succeed in doing their job well, but it does not have mechanisms to reward people who take risks. The system suggests that you should not. I can think of a hospital chief executive who went ahead, at risk, with building an intensive care unit before it had been properly approved by the right committee because she guessed correctly that it would approve it. Have you looked at whether there are systems that can reward sensibly taken risks within the public service, because it would make our service better?

Sir Nicholas Macpherson: We are very focused on that, too. We want people to take risks, but you want to manage those risks. It is incumbent on all of us- the Treasury, No. 10, even the PAC-to identify areas where someone did take a risk and managed it. Sometimes, it succeeded, in which case we can all say, "Well done. Congratulations", but sometimes projects will fail when a risk has arisen and was well managed. That is the time when the accounting officer comes and gives a really good explanation of something that falls into that category. It is tempting to say that everyone always claims that they have managed it well, but if the NAO could find an example where something failed, but it was a reasonable risk and the people involved managed it, that would be quite a good lesson. If the PAC then said, "You failed, but you managed it quite well," that would be quite an interesting message.

Q126 Mr Bacon: We are looking for such a case. After 10 years on this Committee, I have been thinking and looking at different cases, and so often I think, "Where was the Treasury at an earlier stage?". Things were in newspapers about things going wrong, and it took such a long time for the spending teams to catch up. We will have to look out for that example, Sir Nicholas. I have two quick questions. First, you mentioned Departments being on a looser rein, and being given, in effect, greater freedom when they are doing well. Can you give me an example of the sorts of Departments that are doing well, and that you feel merit not no oversight, but a looser oversight?

Chair: He won’t answer that.

Sir Nicholas Macpherson: This is really difficult. An example of a Department that, certainly in the recent past, has actually done a pretty good job is the Department for Transport. I cannot say that for certain, but it has hugely improved capacity, in terms of both corporate finance and project management. It is not a Department where I would want the Treasury to be signing off every £100,000 tranche of expenditure.

When I joined the Treasury, my first job was approving investment appraisals for, among others, the Forestry Commission, and if it built a hut in the Lake District for £15,000, it came to me in the Treasury. That is not a good use of Treasury time. That does not mean that we should just let everybody get on with it, and there have been times in the past where, on defence for example, we have had to review the delegations. From time to time, you get those issues, but I am not going to tell you which Departments are the worst.

Q127 Mr Bacon: You are not going to tell me that?

Sir Nicholas Macpherson: No.

Q128 Mr Bacon: In that case, let me move on to my final question, which relates to something that Mr Manley said in his very impressive evidence. It was quite heartening, just like Mr Devereaux’s evidence, to hear and see Mr Manley, because he is obviously making a lot of progress. Apropos of the old War Office building, he did say-you were sitting here at the time-that he thought it unlikely, given the costs of sorting it out and the asbestos and so on, that it would be retained in the Government estate.

When Simon Fraser was here, we asked him about expensive embassies-the ones that are worth a lot, not necessarily the ones that cost us a lot-and he said that they are national assets. You could make the case that Mr Manley made about the old War Office building for many of the buildings in Whitehall, including the Admiralty, which has a lovely view of Horse Guards parade. There is a room there that has a fantastic wind indicator, so that you can see which way the wind is blowing. I am sure that you could sell off the flats there for quite a high premium. There is also a nice view of St James’s park. Indeed, the same is true of the Treasury and Foreign Office buildings, but we do not make the same case, and we do not even think about it. Why not? Because, in Simon Fraser’s words, these are national assets.

The old War Office building’s location is such that if we were to turn it into a Marriott hotel or sell it for flats, it is almost inevitable that in seven, nine or 12 years’ time, somebody will be hitting themselves on the head thinking, "If only we hadn’t done that, we would then be able to implement the following plan"-I cannot tell you what it is yet, because we do not know-"but we cannot, because we have sold the building." Would it not be better, given where it is, to say, "You might have been right, somewhere else"? You could take all the people and put them out in Slough, and there might be one or two MPs who would be glad to have the extra members of staff and the employment and so on-

Meg Hillier: Hackney would welcome them.

Mr Bacon: You know what I am saying.

Sir Nicholas Macpherson: I do, Mr Bacon. Despite coming from the institution that knows the price of everything and the value of nothing, I am a bit of a traditionalist when it comes to these matters. I think there is a heart of the Whitehall estate that you might as well face up to and accept will remain part of Government. We are sitting in perhaps the most prime bit of the Whitehall estate, in its widest sense-the Westminster estate. We have a nice riverside view, but no one would contemplate selling off the mother of Parliaments, not even the Treasury.

Mr Bacon: That will get replayed.

Sir Nicholas Macpherson: When we got our spending settlement, I thought of sitting down with the Chancellor of the Exchequer and saying, "What about replaying the plan than we had in the mid ’90s to move south of the river into one of those blocks"-I think it is called Camelford House-"that the Treasury was going to move into?" Then I just thought, "I could do that, but I don’t think the Chancellor would be hugely attracted to that any more than Gordon Brown was in 1997." What really put me off it was that I was thinking purely in a departmental sense. I knew perfectly well that the Treasury is a very expensive building to maintain.

Q129 Matthew Hancock: Is that the PFI deal?

Sir Nicholas Macpherson: Funnily enough, the PAC gave that PFI deal a reasonable bill of health.

Q130 Mr Bacon: Actually, the only thing that we gave a clean bill of health to was the competition for the financing-the NAO is nodding-not the building itself.

Sir Nicholas Macpherson: You can go with that, if you want. My point is that we would then have had to let it out. It would have been quite hard to find people to let it out to. I think we should try to focus on the core: there is Downing street, the Cabinet Office and the Foreign Office. It may well be that the War Office forms part of that. Interestingly, the outlying bits like Admiralty Arch, which the Cabinet Office has vacated, could turn into, if not a Marriott, then a reasonably upmarket hotel. Just a bit more of a strategic approach to property in Whitehall I would certainly support, even if we might not be able to fund it.

Chair: Thank you. We are going to reflect on how well this process has worked, I think. Thank you very much for your contribution to it.

Prepared 28th October 2011