Public Accounts

– in the House of Commons at 5:02 pm on 3rd July 1986.

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Motion made, and Question proposed,That this House takes note of the 26th to 38th Reports from the Committee of Public Accounts of Session 1984–85, of the 1st to 14th and 16th to 18th Reports of Session 1985–86 and of the Treasury Minutes on those Reports (Cmnd. 9696, 9743, 9755, 9776 and 9808), with particular reference to the following Reports:—

1984–85:28thThe torpedo programme
1985–86:1stRole and responsibilities of nominee directors
3rdSale of Government shareholding in British Telecommunications plc
8thNexos
11thProposed Defence School of Music
14thNursing Manpower.—[Mr. Norman Lamont.]

Photo of Mr Robert Sheldon Mr Robert Sheldon Chair, Public Accounts Committee, Chair, Public Accounts Committee 5:06 pm, 3rd July 1986

The last debate that we had on the Public Accounts Committee report was in October 1985. It was unusual to have that debate so late in the year. The reason was that we had an extra report that merited special consideration, the De Lorean report, on which we took evidence at much greater length than we normally do.

We come to this debate with fewer reports before us —only 30 as opposed to 51 last time. I assure the House that our enthusiasm has not abated; it is just that the time interval has changed. We had seven replies from the Treasury and we have put before the House six special reports for consideration. Those should form the basis of our debate; but, of course, that does not preclude any hon. Member—and it certainly does not preclude me — from dealing with any of the other matters that we have debated during the year and which form the basis of our further reports.

My first pleasant duty is to thank my fellow members of the Committee. Their assiduity is quite remarkable. I note the presence of the hon. Member for Scarborough (Sir M. Shaw), my hon. Friends the Members for Walthamstow (Mr. Deakins), and for Coventry, North-East (Mr. Park), the hon. Members for Horsham (Sir P. Hordern) and for Rutland and Melton (Mr. Latham) and other members of the committee. They all played a prominent part in the work of the Committee during the year. The task used to be largely delegated to the Chairman, who did all the work while the other members used to come in from time to time. I am happy to say that that no longer applies. The members of the Committee do an immense amount of reading and put many questions to the witnesses that no one person would find it within his capacity to ask.

We had an increasingly busy programme with much hard work and good questioning. I have great pleasure in welcoming to the Committee the Financial Secretary to the Treasury. He has a standing invitation to come to the Committee when he has the time. We do not expect him to be a regular attender, but he is welcome to come before us. We also welcome him to his new post. We were pleased to hear of his appointment.

The Financial Secretary and the Committee have many things in common. It is for all of us to make sure that we get value for money in Government expenditure. Our duty is to ensure that when Parliament votes money for any purpose, that money goes to the persons and to the projects for which it is intended, and that the work is carried out in an economic, efficient and effective manner. There have been a number of instances of that scrutiny, and I shall speak about them in due course.

It is a great pleasure to offer the thanks and gratitude of the Committee to the Comptroller and Auditor General and to the National Audit Office. Their role continues to develop and expand, and the Knight report dealt with some of those matters. We note that the move to the new premises will take place later this year, and we look forward to seeing the development and work of the Comptroller and Auditor General and the National Audit Office.

Before speaking about one or two aspects of that, I should like to thank the Treasury Officer of Accounts, Mr. Judd, the Clerk to the Committee, Mr. Rose, and the Accounting Officers and other witnesses who come before us. We know full well the enormous demands on their time that attendance before the Committee necessitates. We are aware that they devote themselves to briefing sessions before coming before us to enable them to answer most of our questions — some of which surprise even us. The questions are relevant and important and it is right that the Accounting Officers should treat them seriously.

We have expressed concern about the wastage rates at the National Audit Office. It costs a lot of money to train the accountants who work in that office. There are some difficulties in recruiting the correct number of staff of the right quality. The recruitment policy has altered. Many of the staff are recruited directly into the office rather than through the Civil Service machinery. That was a good move and there has been a marked improvement in the quality of the staff. Wastage also concerns the relationship between the certification procedures and getting value for money.

Certification work ensures that money goes to the right places and that it is properly accounted for. That is important. There are many countries in which fraud and corruption are regarded as inevitable. The detection of such fraud must be the first call upon the work of the National Audit Office. Once a number of people in a particular Department regard it as normal to undertake certain actions and procedures, whereby some of the money disappears, demoralisation subsequently occurs and it is difficult to reassert the standards and procedures of incorruptibility. It has been our great privilege to enjoy and take almost for granted that incorruptibility. However, we can never take that for granted, and neither can the National Audit Office. We are rightly proud of our standards, but we recognise that there is a greater challenge to them now than in the past because of problems within the Civil Service relating to pay and so on. Indeed, there is a certain amount of demoralisation. We must not underestimate that; but neither should we exaggerate it. Such demoralisation can have an influence upon incorruptibility.

Photo of Mr Michael Latham Mr Michael Latham , Rutland and Melton

Will the right hon. Gentleman confirm that the work that is undertaken by the Public Accounts Committee is by no means theoretical or inherited from Gladstone? Within this Parliament we have had to address ourselves to and report upon specific examples of corruption.

Photo of Mr Robert Sheldon Mr Robert Sheldon Chair, Public Accounts Committee, Chair, Public Accounts Committee

I am grateful to the hon. Gentleman, because his work is notorious in the Committee. He does his work with great assiduity, and I express my indebtedness to him. The hon. Gentleman is correct. There were one or two cases, especially in the Property Services Agency, where incorruptibility had not been accorded the importance that we attach to it. We have made it clear that public money is not the same as private money. Ira certain amount of corruption occurs in the private sector we may deplore and condemn it as much as we like, but it is different when it occurs in the public sector. When we raise money through taxation, taxpayers have a right to expect that that money will be used for the purposes that Parliament intends. The money may not go efficiently or effectively, but at least it should go for those purposes and not be used to line someone's pocket. That must always be our highest priority.

We aim to get value for money, and that is also an important priority. We hoped that there would be a 50:50 split between the work of the National Audit Office in getting value for money and the undertaking of certification procedures. We thought it was possible to get such a split. Unfortunately, because resources have not been available and because the expansion in the work and staffing of the National Audit Office has not occurred as quickly as we hoped, there is now a one third to two thirds relationship. Two thirds of the work ensures that the money goes for the purposes intended by Parliament and one third of the work ensures that value for money is achieved. We must get a 50:50 basis. To do that we must have the staff we require, and we must retain them.

That brings me to the question of pay. The National Audit Office must have pay scales to enable it to compete successfully with other employers. There is a great deal of wastage. We are aware that a number of people in the National Audit Office have been tempted to the private sector. In a sense, that is a tribute to the work of the office. It is within the recollection of the hon. Members for Scarborough and for Horsham and my hon. Friend the Member for Walthamstow that, at one time, there was no such wastage because the staff were not required by private accountancy firms. It is a mark of the quality of the people in the National Audit Office that they are actively sought by private firms. We discussed all these matters in our report and concluded that the estimates for the National Audit Office were realistic and we believe strongly that they represent good value for taxpayers' money. That is vital.

The Committee has a considerable impact upon those Departments which are called before it. We do not throw our weight around and our task is to improve the standards of administration and the effectiveness of operations. We do not study the policies—it is not for us to decide that — but once a policy has been announced it is for us to ensure that the money goes for the right purposes and that that is done in an economic, effective and efficient manner. Frequently a concession is made to our expected line of questioning even before the Department's accounting officer comes to Room 16 in the Upper Committee Corridor, where we meet every Monday and Wednesday.

An example of such a concession occurred when the Committee decided to examine the charges to private patients in National Health Service hospitals. The Department of Health and Social Security stated that it was commissioning a report to examine these charges and that it would present it to the Committee. The Department had dealt with the matter before our investigations began. We do not complain of that. To a certain extent, the Department has shot our fox. However, we are not in the business of chasing particular Departments but we are interested in results. We look forward to that report meeting some of the criticisms that we have made in our examination of the matter.

How should we evaluate the effectiveness of the work which is carried out by the Departments we investigate? We have a very simple procedure—it is the easiest task in the world: we ask the Department what it is trying to achieve and whether, at the end, it has achieved it. We compare expectation with the outcome; but the work of producing that outcome is more complicated. At the beginning of any programme we want the objectives—the estimates and the financial expectations—set out in some detail. At the same time, we want to ensure that a monitoring exercise is established so the Department can judge how a programme is proceeding. If matters do not turn out as planned, we have the earliest possible warning. As a result of this method, the Committee should be able to compare the performance with the objective. In that way we are able to evaluate the success or otherwise of the programme.

In some cases none of that was implemented for schemes costing many millions of pounds. The classic case is of premature retirement in the National Health Service which we debated last year. There was no clear objective for the number of people who were expected to retire prematurely, and no means of monitoring the number of those retiring. At the end of the day we could not establish how many people had retired prematurely and at what cost. That is a case history of how not to proceed. In the effective grapevine that operates throughout Whitehall the message about these types of assessments and an understanding about what we are seeking to achieve gets through. We are grateful that people with responsibilities understand how we operate and try to accommodate us accordingly.

We have 30 reports and seven replies, and we have selected six because they show some of the more interesting and important lessons that we can best learn and some of the things that went seriously wrong. I shall deal first with the 28th report of the Committee in the 1984–85 Session on the torpedo programme. Some hon. Members, including the hon. Members for Horsham and for Scarborough—indeed, they are my hon. Friends—have lived with this problem for many years. There is also my hon. Friend the Member for Fife, Central (Mr. Hamilton), who is no longer a member of the Committee but who has had long experience of these matters and is as dissatisfied and disgruntled as anybody can be at the progress of this weapon system.

Photo of Mr Peter Griffiths Mr Peter Griffiths , Portsmouth North

The right hon. Gentleman turned away as he made the last part of his comment, but I understood him to say that the hon. Member for Fife, Central (Mr. Hamilton) was "as disgruntled as we are." If that is so, I take the strongest exception. The report refers to historical circumstances, and other hon. Members have had long and close associations with the torpedo programme and would take a different view of the present position from that of the report.

Photo of Mr Robert Sheldon Mr Robert Sheldon Chair, Public Accounts Committee, Chair, Public Accounts Committee

It would be difficult to deny my feelings of disgruntlement at the expenditure of £5,000 million over the past 20 years. I shall come later to the fact that there are signs of some improvement.

Photo of Mr George Park Mr George Park , Coventry North East

The hon. Member for Portsmouth, North (Mr. Griffiths) talked about disgruntlement. Why should we not be disgruntled, having spent millions on torpedoes which do not work?

Photo of Mr Robert Sheldon Mr Robert Sheldon Chair, Public Accounts Committee, Chair, Public Accounts Committee

I shall deal with some of these points later.

The torpedo programme is one of the most important matters that has come before the Committee this year. There are three types of torpedo. The heavyweight torpedo is the major armament of our submarine forces, and it is important for their effectiveness that the weapon be successfully brought into use and integrated into the total underwater weapon system. The lightweight torpedo is the main anti-submarine weapon of ships, aircraft and helicopters, and substantial resources are involved in its development and production. The total estimated costs to the middle of the 1990s of the present three major programmes — the Mark 24 Tigerfish, Sting Ray and Spearfish torpedoes — is more than £5,000 million at constant 1984 prices. We are spending about double that on Trident. Great claims are being made for Trident. Can anything remotely like those claims be made for torpedoes? What do we get for the expenditure of these large sums? The Committee and previous Committees over many years have been concerned about problems associated with torpedo development. They were last considered by our predecessors in 1980, and we welcomed their report as a basis for taking evidence from the Ministry of Defence on the report of the Comptroller and Auditor General.

The Mark 24 Tigerfish development began in 1959 and was eventually taken over by Marconi. When it first began it was expected that it would come into service in 1967, but due to development and engineering problems a limited version with much less capability than that which had been anticipated came into service in 1974 and received fleet weapon acceptance only in 1979, 20 years after the development began. The improved version has been developed since 1972 by Marconi, acting as the principal contractor for production, and it, too, has encountered technical and managerial problems. There were four Ministry of Defence investigations between 1969 and 1982 into the problems. At that time no one person was in charge of the total weapon system. There was no prime contractor to draw the weapon system together in the industry and there were problems in the relationships between the different authorities in the Ministry of Defence, the Navy and industry.

The lightweight Sting Ray was unsuccessful and abandoned by the MOD. Subsequently, they have placed contracts with Marconi for the development and production of a Sting Ray lightweight torpedo. It successfully entered service with the Royal Navy and the Royal Air Force in 1983 on time and within costs. The project is now in the difficult transitional stage between development and production. We questioned the Ministry of Defence about the sense of proceeding with a substantial main production order before all the problems had been solved. The MOD told us that the problems were not serious, that comparatively simple and cheap solutions had been identified, that the problems could be overcome, and that the contract work was to be at a fixed price, so that it would not pay for the contractor's problems. The Committee welcomed the initiative on the Sting Ray. If there are any problems in introducing that weapon, the MOD will not pay for them, but the contractor.

The Spearfish is a heavyweight torpedo which is to supersede the Tigerfish. Its development was authorised in February 1980. The MOD told the Comptroller and Auditor General that current progress on development was generally on schedule, although there had been problems. It did not feel able to assure us that it would arrive on time.

We are happier now that there is to be some competition at sub-contractor level and that there is to be prime contractorship. When Mr. Levene told us about that, we welcomed it and found it encouraging. However, we must set out the context in which this has developed. Paragraph 10 of our report states: We note MOD's assurances concerning the progress made with Sting Ray and Spearfish including the use of fixed price contracts to contain costs, and that Tigerfish is now expected to be a usable weapon. However Tigerfish has been under development for more than 25 years and has cost about £1 billion at constant 1984 prices; further sums in excess of £800 million had been spent up to 31 March 1984 on Sting Ray and Spearfish, neither of which is yet in full production. Taking into account also the earlier torpedo development failures, we are dismayed"— that is about as strong as the PAC gets— at the poor value for money which has been obtained in the past from the surprisingly large resources invested in torpedo development. We thought it right to put our feelings about the matter clearly on the record.

We know about the improvements in prime contractor-ship where one person and one firm will be responsible. The Ministry of Defence told us that many of the past problems with torpedo development had stemmed from the lack of a prime contractor with responsibility for the entire weapons system rather than the committees and the interchange of views which took place before. The Ministry said that in future it intended to deal with industry on a commercial basis and that it must try to ensure that the monopoly supplier acted as the prime contractor with the sort of responsibility which should have been established from the beginning of this sorry tale.

The Ministry of Defence also told us that, although there was no alternative to a monopoly supplier, its intention was that competition should be exercised at the sub-contractor level. That is sensible and it impressed us. We still await the results of that decision, but the way in which it was set out made sense to the Committee. We look forward to examining the progress of those matters in due course.

No one can doubt that the money we spent on that weapons system has been wholly disproportionate to the value even if it had been successful. We considered the possibility of international collaboration on components and modifications, on partial systems, and on a complete new weapons system. We also considered the United States in this context. We are disappointed at the lack of progress on international collaboration and on overseas sales and we look forward to improvements.

Photo of Nicholas Soames Nicholas Soames , Crawley

In congratulating the right hon. Gentleman and his Committee on the extraordinarily great service that they have rendered to the House in drawing its attention to what is, by anyone's standards, one of the greatest procurement scandals of the century, may I ask him whether be believes that, as it is so difficult for the House properly to supervise the spending of public funds in the Ministry of Defence, bearing in mind the £8·5 billion that is being spent on procurement this year and the 100,000 extant contracts, an annual procurement report in the fullest detail should be made available to his Committee and then to the House so that he and, later other hon. Members, may have a better chance of supervising the stewardship of those funds?

Photo of Mr Robert Sheldon Mr Robert Sheldon Chair, Public Accounts Committee, Chair, Public Accounts Committee

The Committee in the previous Parliament did not have the benefit of the National Audit Office which we now have. The standards of the reports that it produces have improved enormously. The report used to be based upon the appropriations accounts. It was necessarily rather brief and did not go into all the details. It was compiled by a body which did not have the confidence of possessing the expertise of the National Audit Office. It is now generally recognised throughout Whitehall, London and the United Kingdom that the National Audit Office has an understanding of those problems which is generally accepted in the auditing world. It deals with the problems with much greater confidence. Our relationship with the National Audit Office is close and continuing. We are building confidences across those areas. The hon. Gentleman is right. We shall be returning to those problems regularly. We have the procedures to do that.

Photo of Mr Eric Deakins Mr Eric Deakins , Walthamstow

Is not the answer to the important point made by the hon. Member for Crawley (Mr. Soames) that by picking out, through the National Audit Office, some substantial contracts where things have gone wrong we and the Ministry together could learn lessons which could be applied over the entire range of much smaller contracts? We are concerned about principles rather than with analysing every contract in detail. There, the National Audit Office and the Public Accounts Committee could do a valuable job for the Ministry of Defence and possibly for other Departments which procure resources from outside.

Photo of Mr Robert Sheldon Mr Robert Sheldon Chair, Public Accounts Committee, Chair, Public Accounts Committee

My hon. Friend is right. Lessons in procurement have been learnt by the National Audit Office and the PAC and they are being learnt by the Ministry of Defence. The relationship between a body which meets twice a week to discuss and examine those matters will bring to bear upon those responsible the outcome which we seek.

We take keenly and strongly our responsibilities in those matters. We shall pursue them not only in this area but, as my hon. Friend the Member for Walthamstow suggested, in other areas.

The first report of the Public Accounts Committee in 1985–86 examined the role and responsibilities of nominee directors. The report stemmed from our report and examination of the De Lorean fiasco. We discovered that the nominee directors of De Lorean were by no means mainly responsible for its disaster. We also discovered that this area had not been examined sufficiently. We considered how the monitoring of the De Lorean venture had proceeded.

Paragraph 72 of our 25th report in Session 1983–84 which dealt with financial assistance to De Lorean Motor Cars Limited, stated: The objective of monitoring was to see that the public funds invested in the project were applied prudently and in accordance with the master agreement and the nominee directors … were one important means of achieving this. NIDA therefore had a responsibility to ensure that its nominees were of the calibre necessary to discharge, amongst other duties, the task of representing the taxpayers' interests to highly professional directors, who were unlikely to be accustomed to the constraints of public accountability. Of course, we had De Lorean himself in mind.

The report continued by saying that the Northern Ireland Development Agency had a responsibility to insist that the De Lorean companies briefed the nominees so that they would be able to participate fully in decision-making. It is our view, that NIDA did not effectively meet these responsibilities in that the nominee directors failed to recognise that certain courses of action proposed by Mr. De Lorean and his colleagues were not in the best interests of either DMCL or the taxpayer. The acquiescence of the nominee directors in DMCL's funding of the total cost of development of the car, and in the making of interest-free loans to DMC"— the American branch of the De Lorean company— are examples of this. N1DA also failed to secure for its nominees the service which they were entitled to expect as members of the Board. The habit of changing the dates of Board meetings and the failure to supply papers in advance are examples of what has been described to us as 'absolutely unacceptable practice'. That was the start of it. We started to consider how many nominee directors we have. How many do we appoint? What are their terms of reference and what is their purpose? In the public sector, we discovered that the term "nominee director" is confined to those cases where the appointment of a director is arranged by a Government Department or a non-departmental public body. That is how they are defined in the Treasury memorandum for which we asked, once we decided that there was a person such as a nominee director about whose tasks and responsibilities we were unclear.

We received a Treasury memorandum which stated that nominee directors were appointed to help Departments. The definition of their work was to safeguard strategic interests, to protect the Government's financial interest in a company, and to provide an independent view of the quality and performance of the company's Board. We were disturbed to learn that no written guidance was available for nominee directors before August 1984 when we took up the matter. However, we were not satisfied that the written guidance issued by the Treasury took full account of our concern about nominee directors, as expressed in our report on the De Lorean venture: The main problem is that the August 1984 guidance note was expressed in such general terms. Today, I received the latest guidance note, which I have not had time to read. It contains an elaboration, and is a recognition, of the importance of the point that we made in the report.

The report continues to discuss the tasks of the nominee directors: We consider it important for regular reports to be made on the progress and financial position of investee companies"— companies in which the Government and the company have invested— including the security of the public funds invested. We were therefore surprised to learn of the relaxed, informal arrangements for nominee directors to report hack to Departments and NDPBs — with only WDA apparently requiring their appointees to submit written reports. Of course, there can be advantages in informal talks with nominee directors, but these should he supplemented by written reports which provide an accurate basis for understanding how the company is proceeding, and how the interests of the Government and taxpayer are being protected.

The four non-departmental public bodies — the Scottish Development Agency, the Highlands and Islands Development Board, the Welsh Development Agency and the British Technology Group—have appointed more than 100 nominee directors. We examined their purpose. They did not do their work in the De Lorean case, and until the De Lorean report there was no written guidance.

There will now be much more developed written guidance, and I look forward to seeing how far it meets the points and the criticisms that we raised in our report. For example, we recommended audit committees, wholly or mainly non-executive, which are required under Canadian law, and for companies listed on the New York stock exchange.

We recognise the helpful attitude of the Treasury in the formation of the new guidance rules, although the answer to our third report was not quite so helpful.

Photo of Mr Eric Deakins Mr Eric Deakins , Walthamstow

Does my right hon. Friend agree that an important issue of principle has not yet been resolved, and, I suspect, it has not been resolved in the new guidance? It is the conflict of loyalty of nominee directors between the firm to which he or she has been appointed and the agency which has nominated them. It is not only a conflict of loyalty; it is a legal conflict. The advice that we received in our earlier investigations from the Treasury, the Solicitor-General and the Attorney-General was that nominee directors are under a legal obligation to the firms on whose boards they sit. Confidential information is sometimes presented to a board of directors, and the organisation that appointed the nominee directors may feel that their legal obligation as directors prevents them from adequately fulfilling their monitoring functions. The Committee may need to reconsider that point later.

Photo of Mr Robert Sheldon Mr Robert Sheldon Chair, Public Accounts Committee, Chair, Public Accounts Committee

We examined the issue and understood that there could be a conflict in some cases. We also understood that there may be a problem as to how far nominee directors deal with a supporting body. But within those limitations, much more could be done, as the Treasury note suggested. We look forward to the written reports, bearing in mind the limitations, but if some of the limitations seem excessive we shall not have an opportunity to see that until we have read the new guidance notes. We may wish to return to them because they are very important.

I was about to discuss our third report, entitled "Sale of Government Shareholding in British Telecommunications plc" in Session 1985–86. Our concern was the way in which BT had been privatised. In our 17th report of 1983–84, we recommended a review of the arrangements to minimise the risk of future sales which have allowed large profits to be made at taxpayers' expense. We suggested that the need for underwriting the new issues should be kept under review, especially in cases where the share price was set at a level intended to offer a firm prospect of full take-up of the shares. We accepted the measures that were taken to get proper advice on the price at which the shares would be put on the market, but we warned against the exceptionally heavy reliance on merchant bank advisers who would have an underwriting interest in the sale. This was a serious matter as so much of the advice came from underwriters who were involved in the sale and who had specific interests in it.

In 1981, the telecommunications business of the Post Office was transferred to the new British Telecommunications. It was considered that the management of BT's business could be conducted more efficiently outside the public sector. The sale of the shares was to be undertaken in accordance with the Government's policy to reduce the size of the public sector. The Department of Trade and Industry had three main objectives in organising the sale: successfully transferring the company to the private sector, maximising the net sale proceeds, and achieving wider share ownership.

In preparing for the sale, the corporation's main accounts up to 31 March 1983 were prepared under the historic cost convention. The auditors had informed the Department of Trade and Industry that they agreed that the changes in the basis of the valuation of the company were necessary to reflect fairly the state of the business and its results. The corporation's accounts stated that if the revised accounting bases had been effective in 1982–83 the profits for that year would not have been £365 million, which were the announced profits, but £1,031 million.

We had no objection to the revision of the figures, which we understood would bring the accounts into line with methods in the private sector, but it is a pity that the changes had to be made. If the revision was necessary, that fact should have been clearly understood from the beginning. I shall return later to how we can ensure that private and public sector valuations remain in line, or could be brought into line.

The main options considered for the sale were a single offer or phased sales in two or more tranches by either fixed price or tender. Convertible loan stock was considered, although I shall not discuss that now. The phased sale was rejected when the feasibility of selling shares by single offer was established. On 16 November 1984, Kleinwort Benson, acting on behalf of the Secretary of State, offered for sale shares representing slightly more than 50 per cent. of the company's ordinary equity.

The report comments on the rates of commission. They were high and covered not only the functions performed in the United Kingdom by the underwriters and sub-underwriters, but the selling role in relation to individual investors. Having seen the costs and results of the overseas sales, the Department of Trade and Industry agreed that for future flotations it would consider whether to place shares overseas case by case and in the light of the size of the issue. That is absolutely right.

We go on to say that when one comes to restructuring the accounts of any nationalised industry, or public body, that is due to be sold on the market, if the nationalised industry finds it necessary to change its accounting policies on privatisation, this raises questions about the basis on which it prepares its accounts. There should be a proper comparable basis. We regard this as important, and we say so in paragraph 24. We regard it as the appropriate provision for asset replacement, and we intend to return to the matter in due course.

We recommend — this owes very much to the hon. Member for Horsham, whose expertise, interest and involvement we very much appreciate — that further consideration be given to the phasing of sales. When I had the honour and privilege of being Financial Secretary to the Treasury, I did what I assume the right hon. Gentleman himself is doing or will do: I took a very close interest in the price at which one sells gilts in the market. I used to make the trip to the City to ensure that the 1 per cent. or whatever it was the finest rate that one could get. After all, we have responsibilities to the taxpayer, and it is up to us to get the highest price possible for the debt that we are selling.

Over the past few years, the amount of Government debt sold has been between £4 billion and £10 billion a year. When one was talking about privatisation involving, say, £100 million, or £50 million, one got the price a bit wrong it was a pity, but it was not serious. We are now talking about privatising to the extent of £5,000 billion a year, in the same area as the amount that one gets for gilts. The rules, the close interest and the disciplines that we have established over many years for making sure that the taxpayer gets the last penny one can devise for the sale of one's gilts now has to be applied—in slightly different circumstances, no one can deny that, but the principle must be to get the highest possible price for the taxpayer. When we are talking about broadly comparable amounts of money, that must be one of the most important aspects of the sale of our assets.

In the two previous reports, we wanted to review the arrangements to minimise the risk of large profits at the taxpayer's expense and make sure that merchant bank advisers with an underwriting interest did not get too much out of the sale, and we wanted to examine the need to underwrite these new issues. We felt that the commission rates were set too high. The proceeds of sale amount to £3.863 million, and we do not think that sufficient consideration has been given even now to the phasing of the sales. This is wrong. Why do we have to sell it all so quickly, as if we are selling uncertain fruit on a Saturday night in the open market? We have time.

People can understand the Government's intentions if they phase it and sell off a tranche at a certain price with the understanding, which can be unequivocal, that they will be selling off the rest in due course. If one gets the price a little wrong, there is still time to sell more. When one sells gilts, one does not unload them all on I January; one takes one's time, one sizes up the markets and one introduces the securities at certain times for certain amounts in different ways in order to get the maximum amount possible for the taxpayer. I am obviously against selling these off, as the House knows, but that is not the point that we are dealing with here. We are dealing with the need to ensure that the taxpayer gets the maximum benefit from the sale.

We have questioned in the report the allocation of shares to certain financial institutions. There is much more to be looked at here. There was money available to the taxpayer that the taxpayer did not receive. These are serious matters, and I hope that they will have the serious attention of the Minister when he replies.

I deal next with Nexos. This company was set up by the National Enterprise Board in 1979. It was part of the British Technology Group, and was set up in January of 1979 to develop a market and office system based on word processors, facsimile machines and voice systems. In 1981 the NEB decided to wind down the company. It was finally put into liquidation in May 1983 with a then estimated loss of about £31 million. An investigation was undertaken by the Department of Trade and Industry. We took evidence on the report in July 1985. We have had a great deal of help from some hon. Members regarding the operations in the company, and I certainly have been grateful for the elaboration of some of the matters that I have received from the Department of Trade and Industry.

The NEB had a strategy for the office equipment industry. It thought that it would develop and produce key elements for office systems of the future. This was at a time when the NEB was a vigorous body receiving Government funds and hoped to establish a new company to take over the marketing and support of office machinery products and to co-ordinate them. However, between then and the subsequent failure, there was a change of Government. The new Government obviously were not quite so enthusiastic about the work of the NEB, and there were resignations from the NEB and a lack of direction at the change-over from which certain problems resulted.

The NEB was going to take a minority shareholding in the company. Between 1979 and 1980 it discovered that the facsimile machines and word processors were relatively inadequate and obsolete, and there was a major shift of emphasis from selling existing products to the development of new ones. It decided to expand at the wrong time, just when there was a lack of interest in this area both by the Government and within the industry. It hoped to make these new products available for sale by July 1980. It had various other schemes in mind. It commissioned a number of feasibility and design studies, and it had other development projects. At the end of 1979—it could not have been a worse time—it started a rapid build-up of a large sales and marketing operations for all these new products.

The investigation that came at the end of it all— I will not go into details, which I am sure will be dealt with by the hon. Member for Amber Valley (Mr. Oppenheim), who has been very helpful—concluded that the principal reason for the failure of Nexos was that its management tried to do too much too quickly, creating a much larger organisation with higher outgoings than was justified either by sales or by the amount of approved funding by the NEB. The comment was made that Nexos had embarked on a business plan which was critically dependent on the early market success of just one product, its word processor, but had failed to recognise and plan for the possibility of unforseen delay in the development of that project, and there was delay. As anybody in this rapidly expanding and growing industry knows, delay in the marketing of such articles can be fatal.

While the Department of Trade and Industry was considering the October 1980 application to increase Nexos funding to £35 million — it was awaiting the outcome of the board's effort to attract private sector finance — the company was provided with drip-feed funding, the worse kind of funding, enough to keep hopes alive but not enough to make the company change the plans to something more realistic.

The Committee went on to say: There is little doubt that the decision to drip-feed Nexos undermined potential customer confidence in the company. It was unfortunate therefore that the DTI took so long to reach a final decision on whether to provide the additional funding up to the level requested by Nexos — it was now clear from events that the Board's monitoring of Nexos was unsatisfactory. Given the drastic changes in the NEB Board over the period of the Nexos investment—four chairmen and three chief executives with an entirely new Board of Directors from November 1979"— few things can be worse than that for a company— and taking account of NEB's other, more important tasks — the rescue operations for British Leyland and other companies—the Department though that the NEB's failure to monitor adequately what was happening in Nexos, though not excusable, was understandable. The Committee added that there was a loss of confidence within the NEB with the high turnover of staff.

Thus the Committee emphasised its concern and was obliged to ask the Department of Trade and Industry to carry out an investigation into Nexos. Although the prime responsibility of the Comptroller and Auditor General is to audit public expenditure, he has no right to look at the accounting and other records of Nexos or the NEB. That is quite unsatisfactory. We took the view that when public funds have been misused Parliament has the right to expect the Comptroller and Auditor General to undertake direct investigations. He should not investigate at second or third hand, but should undertake direct investigations, and report his findings. We said that bodies that are in receipt of public funds must be accountable to Parliament, through examination by the Comptroller and Auditor General.

The PAC would not always want to look at the detailed accounts. The Comptroller and Auditor General should have that power. He represents Parliament and is a servant of Parliament. He was not before, but he is a servant now, as a result of the National Audit Act 1983. As a servant of Parliament, we should afford him the power to ensure that what drips through those various other bodies and organisations is less diluted than it is at present.

I turn to the 11th report of the PAC concerning the proposed defence school of music. From time to time, the subject has caused a certain amount of amusement. I am sorry that the hon. Member for Twickenham (Mr. Jesse]) is not with us because, as Chairman of the PAC, I accorded him a rather special place of privilege when we took evidence. I placed him so that he had an excellent view of the proceedings, and ensured that he was equipped with all the documentation that he required. I think that he was duly appreciative of that, and I know that he would have dearly wished to take part in this debate.

There are 80 bands in the three Armed Services, and they employ 2,600 people. The Ministry of Defence had planned to move the Royal Marine school of music to Eastney, near Southampton, in 1987–88—

Photo of Mr Robert Sheldon Mr Robert Sheldon Chair, Public Accounts Committee, Chair, Public Accounts Committee

I am grateful to the hon. Gentleman for that information.

There is also the Army junior school of music at Kneller hall, Twickenham, in the constituency of the hon. Member for Twickenham. Adult musicians are trained at the RAF's music centre in Uxbridge, where advanced training is also carried out. The cost of running those three schools of music was about £2–9 million. In December 1981 the Ministry of Defence started an investigation into the Service schools. It wanted to see whether it could obtain better value for money through rationalisation and privatisation. I must admit that I never quite understood that. The study group on musician training reported in March 1982 that all the accommodation and facilities associated with it at Deal and Kneller hall were substantially under-utilised.

In 1982, the Ministry of Defence commissioned a study group to look into the various options in order to assess music training and facilities required. Out of three potential sites — Deal, Kneller hall and Eastney — the study group concluded that Eastney was the best option on the basis of cost and the availability of accommodation. In March 1983 the Ministry agreed to the establishment of a defence school of music and asked the study group to prepare plans for the building structure and the courses to be provided, and to cost the three options. Deal was not included, because the married quarters were likely to be insufficient. Eastney was found to be the only suitable site. Kneller hall was considered to be too small, with the cost being too high, and there was also a shortage of married quarters in the area.

In December 1983, it was decided that a defence school should be established at Eastney. In the same month, the Secretary of State endorsed the establishment of a defence school of music, but asked that other locations should be considered, preferably north of Birmingham. The Redford infantry barracks in Edinburgh were considered a possible site, and that was included in subsequently costings. Later, Deal was included as a possible location, following representations by the right hon. and learned Member for Dover (Mr. Rees). At that time, he was Chief Secretary to the Treasury. That raises several questions, but I shall not go into them now.

A report on the cost comparisons between Deal—which had now come into the picture — Eastney and Redford in May 1984 showed that Eastney was still the cheapest option and that Redford was the most expensive. Subsequent work showed that the cost of providing additional married quarters for a defence school of music, and consequently for the RAF, could make the building of the school at Deal significantly the most expensive choice. Ministers concluded that the cost comparisons should be regarded only as "indicative" of the order of ranking rather than as reliable guides to precise costs. They thought that wider issues had to be considered, including the levels of unemployment in the three areas. Having taken account of all such factors, the Secretary of State decided to locate the defence school of music at Deal.

However, having looked at the financial evidence available at the time, the accounting officer with responsibility to the House felt obliged to tell the Secretary of State that the Ministry should not be settling on Deal. He pointed out that the Ministry had not at that point carried out a full investment appraisal, which he acknowledged should have been done in late 1983 or early 1984. At the end of 1984 a new estimate was available to the Ministry for the disposal value of Eastney. The higher the disposal value, the greater the case for moving out of Eastney. It was found that the disposal value of Eastney had increased from £800,000 to £5·5 million.

Photo of Mike Hancock Mike Hancock , Portsmouth South

Would the Chairman of the PAC say that he was happy with the evidence for the change in valuation, and with the way in which it was arrived at? Has the PAC looked further into the source of that valuation and into its sincerity? Has it investigated the source of the original valuation from Portsmouth city council? As far as I can ascertain, no one of senior rank within the city council now acknowledges ever giving such information to anyone.

Photo of Mr Robert Sheldon Mr Robert Sheldon Chair, Public Accounts Committee, Chair, Public Accounts Committee

The hon. Gentleman may know more about these matters than I do, but the increase from £800,000 to £5·5 million was said to reflect the possibility that Portsmouth city council would take a more favourable view of how the site could be developed. I have no further information about any discussions that may have taken place between Portsmouth city council and the Ministry of Defence.

However, in July 1985 the working party reported that its financial appraisal showed that the advantages of establishing a defence school of music were considerably less than originally expected, although a modest saving was still implied. A reappraisal of the extra facilities and complement recommended in March 1985 is now being carred out, with a view to reducing the costs of the defence school of music. The Committee concluded: We are gravely disquieted that the MOD should have decided on a DSM at Deal, which could have entailed expenditure of around £10 million, and would inevitably cause considerable disruption to the present arrangements for training Service musicians, before carrying out a full investment appraisal. We were glad to hear that the Department will now be carrying out such appraisals whenever a financial investment is contemplated and that results will be reported to Ministers before a decision is made.

As to the decision to establish the defence school of music, we note that the Ministers took social factors into account when Eastney had consistently appeared to be the best option on financial grounds. We were concerned with the social factors, and asked the Government what the difference was between social and political factors. Social factors were not reflected in the investment appraisals and, to the best of my knowledge, not announced to Parliament by Ministers before our investigation. Although we recognise that there are difficulties in quantifying such factors, we would have expected the Ministry of Defence to make every effort to do so, especially as they varied from one location to another.

The Ministry of Defence said that its original objective was rationalisation to make financial savings. We are sceptical that this objective will be met. In paragraph 22 we say: In the light of these very material points we have no confidence that the appraisals carried out to date provide justification for the MOD's decision. In this connection we welcome the Treasury's firm statement that they are not happy with the MOD's figures. We were disturbed by the fact that it was not until we questioned MOD on their final investment appraisal that they discovered it was incorrect by a factor of £2·3 million. It is not the task of the Public Accounts Committee to form a view as to whether there should be a defence school of music and, if so, where it should be sited. It is reasonable that there should be a proper appraisal of the finances so that it can be justified and be seen to be justified. I have a great affection for our three schools of music. I like their very diversity. I am not sure that uniformity at one site is something that I would necessarily encourage. This is purely a personal observation. Unless it can be shown that there are substantial financial advantages, I should prefer to leave things as they are. I repeat that they are personal observations that should not intrude on those of the Committee.

The last of the six reports before us is the one on "Control of Nursing Manpower". the 14th report of the current Session. We have looked at the control of the National Health Service manpower on a number of occasions in recent years. In 1983–84, about £3·5 billion was spent on nursing and midwifery, and this represented some 45 per cent. of the total costs and 34 per cent. of the revenue expenditure of the NHS.

The Comptroller and Auditor General found that there was uneven distribution of nursing staff in the health authorities. For example, the number of nursing staff per 1,000 of population ranged from 696 in the Oxfordshire region to 928 in the North-East Thames region. Therefore, we question what action the DHSS has taken to ensure, if not exact equality, the removal of some of the imbalances.

We heard from the Royal College of Nursing that 35 per cent. of nurses in training do not qualify. It considered this to be a significant waste of resources. Against this background, it went on to say, the demographic trends show that the number of young women entering the profession was likely to reduce, so threatening a major shortage of nurses. As nursing manpower planning was an issue for the health authorities we questioned whether the DHSS was concerned at a national level about the intake and the wastage rates of nurses.

As we know, the health authorities have the main responsibility for planning the demand for and the supply of nursing manpower. However, the Department seemed reluctant to admit any responsibility for this, and it concerned us that it does not have the information to say whether there are too many or too few nurses employed by health authorities. We strongly condemned this laid-back policy.

When our predecessors in an earlier Parliament examined this matter, they commented on this, and we find it disturbing that there has been no advance in 17 years. Therefore, it is not before time that the DHSS, we understand, is seeking to ensure that the decision as to the number of nurses will in future be taken within a proper planning framework provided at all levels in the NHS to decide on nursing manpower, planning, performance and needs in general.

The DHSS must not try to control the number of nursing staff in each authority, but it is only it which decides on the overall view of demand and supply and makes sure that the number is adequate on a national basis. We were particularly concerned about the numbers lost to the service because of those who depart during training. As well as the obvious loss of value for money, there is the prospect of a shortage of nurses, both qualified and in training, and this is a serious matter of direct importance to patients. We asked that the Scottish Home and Health Department should take note of the initiative in Wales, where we found an imaginative and potentially beneficial attitude.

Those are the six reports that we have singled out for special mention in the debate. Our work does not end there. We have a number of reports on which we could have gone into as much detail as, and possibly more, those that we have selected. Our task today is to give the House a bit of a snapshot of the work of the Committee. We take our work seriously. We meet twice a week throughout the year. When I first became a member of the Public Accounts Committee, we started in January and finished in July. Now we have sessions in the early spillover part of the parliamentary year, and the enthusiasm of my colleagues remains unabated. I am grateful to them and for the work done by the officials concerned. We hope that part of our agenda will decrease as and when the improvements of the administration increase. We are sceptical of this, and so we look forward, without surprise, to a continuing and heavy work load, acting as we do on behalf of the House.