Volume One

Public Accounts Committee

Measuring the Performance of NI Water
and
Procurement and Governance in NI Water

Volume Two

Together with the Minutes of Proceedings of the Committee Relating to the Report
and the Minutes of Evidence

Ordered by The Public Accounts Committee to be printed 27 January 2011
Report: NIA 37/10/11R Public Accounts Committee

Ordered by The Public Accounts Committee to be printed 3 February 2011
Report: NIA 40/10/11R Public Accounts Committee

Session 2010/2011

Fifth and Sixth Report

Membership and Powers

The Public Accounts Committee is a Standing Committee established in accordance with Standing Orders under Section 60(3) of the Northern Ireland Act 1998. It is the statutory function of the Public Accounts Committee to consider the accounts, and reports on accounts laid before the Assembly.

The Public Accounts Committee is appointed under Assembly Standing Order No. 56 of the Standing Orders for the Northern Ireland Assembly. It has the power to send for persons, papers and records and to report from time to time. Neither the Chairperson nor Deputy Chairperson of the Committee shall be a member of the same political party as the Minister of Finance and Personnel or of any junior minister appointed to the Department of Finance and Personnel.

The Committee has 11 members including a Chairperson and Deputy Chairperson and a quorum of 5.

The membership of the Committee since 9 May 2007 has been as follows:

Mr Paul Maskey 5 (Chairperson)
Mr Roy Beggs (Deputy Chairperson)

Mr Gregory Campbell MP 16
Mr John Dallat
Mr William Irwin 14
Mr Trevor Lunn
Mr Patsy McGlone 2 & 8
Mr Mitchel McLaughlin
Mr Adrian McQuillan 15
Mr Stephen Moutray 12
Ms Dawn Purvis

1 Mr Mickey Brady replaced Mr Willie Clarke on 1 October 2007

2 Mr Ian McCrea replaced Mr Mickey Brady on 21 January 2008

3 Mr Jim Wells replaced Mr Ian McCrea on 26 May 2008

4 Mr Thomas Burns replaced Mr Patsy McGlone on 4 March 2008

5 Mr Paul Maskey replaced Mr John O'Dowd on 20 May 2008

6 Mr George Robinson replaced Mr Simon Hamilton on 15 September 2008

7 Mr Jim Shannon replaced Mr David Hilditch on 15 September 2008

8 Mr Patsy McGlone replaced Mr Thomas Burns on 29 June 2009

9 Mr David Hilditch replaced Mr George Robinson on 18 September 2009

10 Rt Hon Jeffrey Donaldson replaced Mr Jim Wells on 18 September 2009

11 The Lord Browne replaced Rt Hon Jeffrey Donaldson on 19 April 2010

12 Mr Stephen Moutray replaced Mr Jonathan Craig on 19 April 2010

13 Mr Jim Shannon resigned from the Public Accounts Committee on 1 August 2010

14 Mr William Irwin replaced Mr David Hilditch on 13 September 2010

15 Mr Adrian McQuillan replaced The Lord Browne on 13 September 2010

16 Mr Gregory Campbell MP was appointed as a member of the Committee on 13 September 2010

List of Abbreviations used in the Report

C&AG - Comptroller and Auditor General

DRD/the Department - Department for Regional Development

GB - Great Britain

IWRP - Independent Water Review Panel

PC10 - Price Control

NI Water - Northern Ireland Water

the Regulator - Northern Ireland Authority for Utility Regulation

OPA - Overall Performance Assessment

TOA - Treasury Officer of Accounts

Table of Contents

List of abbreviations used in the Report

Volume 2

Appendix 9:

Correspondence up to end of Summer Recess 04 June – September 2010

Appendix 10:

Correspondence September 2010 – 3 February 2011

Appendix 11:

NIAO Examination of Procurement Breaches in NI Water

Appendix 12:

List of Witnesses

Appendix 13:

Other Papers Submitted to the Committee but not published in the Report

Appendix 9

Correspondence up to end of Summer Recess
04 June – September 2010

Clerk's request for pre-hearing update

Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX

Tel: (028) 9052 1208
Fax: (028) 9052 0366
E: pac.committee@niassembly.gov.uk
aoibhinn.treanor@niassembly.gov.uk

04 June 2010

Mr Paul Priestly
Accounting Officer
Department of Regional Development
Room 702
Clarence Court
10 -18 Adelaide Street
Belfast
BT2 8GB

Dear Paul,

PAC inquiry into Governance in NI Water

Thank you for confirming your attendance at the Committee's evidence session of July 1 2010.

The Committee is aware that progress may have been made since the Department's IRT report was published, and therefore you may wish to take the opportunity to provide an update on developments in the interim.

I would be grateful for a response by 11 June 2010.

Aoibhinn Treanor

Public Accounts Committee Clerk

Accounting Officer's letter of update

Room 701
Clarence Court
10-18 Adelaide Street
BELFAST
BT2 8GB

Telephone: (028) 9054 1175
Facsimile: (028) 90 54 1120
Email: paul.priestly@drdni.gov.uk

Your reference:
Our reference: PSDRD 157/10

Aoibhinn Treanor
Public Accounts Committee Clerk
Room 371
Parliament Buildings
BELFAST
BT4 3XX 9 June 2010

Dear Aoibhinn

PAC Inquiry into Governance in NI Water

Your letter of 4 June refers.

I am happy to provide the Committee with an update on progress on actions taken to address the issues identified in the IRT's published report. A joint NI Water/DRD Action Plan (further attachment) was developed very quickly after the report was published and progress against the plan is being monitored on an ongoing basis.

I would draw the Committee's particular attention to the following:

• NI Water has developed a procurement manual for the use of all staff with clear process maps, business case templates etc;
• the further "deep dive" audit work and a detailed exercise mapping procurement governance failures to individuals have been completed (Laurence MacKenzie is adhering to policies relating to fair employment disciplinary processes in bringing this to a conclusion);
• a training programme for all managers and staff involved in procurement has been developed and is currently being rolled forward (target date for completion of this tranche of training is 30 June 2010);
• the selection process for the appointment of a Procurement Compliance Officer is already underway;
• DRD secured the agreement of the Commissioner for Public Appointments NI to enable a deviation from the normal appointments process (subject to the full appointments process being followed in due course) in order to get interim non-executive directors appointed to the NI Water Board as soon as possible (it is hoped that announcements will be made in July); and
• the Director of the Shareholder Unit now attends NI Water Audit Committee meetings.

I hope the Committee will find this helpful.

Yours sincerely

Paul Priestly

03.06.10 IRT report actions update at 3 June 10

Independent Review Team Report – Further Action Required by the Chief Executive of NI Water –
Progress Update 3 June 2010

Independent Review Team Report – Further Action Required by the Board if NI Water

Independent Review Team Report – Further Action Required by Drd as Shareholder

Chairperson's letter to Regulator

Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX

Tel: (028) 9052 1208
Fax: (028) 9052 0366
E: pac.committee@niassembly.gov.uk
aoibhinn.treanor@niassembly.gov.uk

Jo Aston
Director of Water Regulation
NI Authority of Utility Regulation
Queens House
14 Queen Street
Belfast
BT1 6ER 25 June 2010

Dear Jo,

Public Accounts Committee Evidence Session on Measuring the Performance of NI Water

Thank you for your participation in the Committee's evidence session on this inquiry.

As agreed in the course of your evidence, I would be grateful if you could provide the following information to the Committee.

To approve NI Water's compliance with condition F1 of the consolidated licence, what information was received from the company by your office, and when was it received?

The Committee Clerk will be of assistance should you wish to discuss any of these points.

I should appreciate your response by 9 July 2010.

Yours sincerely,

Paul Maskey

Chairperson
Public Accounts Committee

Letter from Mr Peter Dixon, Phoenix Gas

Letter from Regulator

Northern Ireland Authority
for Utility Regulation
Queens House,
14 Queen Street,

BELFAST, BT1 6ED

T: +44 (0) 28 9031 1575
F: +44 (0) 28 9031 1740
W: www.uregni.gov.uk

Our Ref:W//007/PAC/482

Mr Paul Maskey
Chairperson
Public Accounts Committee
Room 371
Parliament Buildings
Ballymiscaw
BELFAST BT4 3XX 7th July 2010

Dear Paul

RE: Public Accounts Committee Evidence Session on Measuring the Performance of NI Water.

Thank you for your letter of 25 June 2010, asking for details of the information we received from the company and when it was received to allow us to approve compliance with condition F1 of the consolidated licence.

In my response below, I have:

• Itemised the detail of the information received from the company and the reporter in respect of Condition F1 of the consolidated licence.
• Provided some observations on the requirements of Condition F1 of the consolidated licence.
• For ease of reference, I have also enclosed a copy of Condition F1.

Under Condition F1 of the Licence, NI Water must provide the Utility Regulator with the following:

• A "Procurement Plan" every 18 months from the 1 September 2007.
• A "Procurement Activity Report" annually at the same time it submits its regulatory accounting statements (around the 15 July).

Each report submitted by the company is accompanied by a report from the Independent Reporter.

The areas to be addressed in each report submitted by the company and by the Independent Reporter are set out in Condition F1 of the Licence.

Set out below is the sequence of reports received from the company. I have also included the initial notification from the company that it had uncovered an issue relating to the governance of one contract which may breach its licence and informing us that it was investigating to see if there were other similar issues.

28 August 2007 A Procurement Plan issued by the company which was rejected as inadequate.

18 December 2007 Letter from the Reporter on initial audits carried out on the company's developing Procurement Plan.

25 January 2008 First Procurement Plan issued by the company.

25 January 2008 Independent Reporter's report on the first Procurement Plan.

11 July 2008 First Procurement Activity Report issued by the company.

12 July 2008 Independent Reporter's report on the first Procurement Activity Report.

15 May 2009 Second Procurement Plan issued by the company.

18 May 2009 Independent Reporter's report on the second Procurement Plan.

22 July 2009 Second Procurement Activity Report issued by the Company.

06 August 2009 Independent Reporter's report on the second Procurement Activity Report.

20 November 2009 Company notified the Utility Regulator that it had identified one contract which was causing concern.

We expect the company to submit its third Procurement Activity Report in July 2010 and its third Procurement Plan in September 2010.

The company has kept us updated on its internal investigations into the governance of procurement, provided briefings on its findings, shared copies of their investigatory reports and action plans for remedy. In view of the detail of these investigations, the transparency adopted by the company in sharing findings together with a commitment to update us on progress being made we decided not to consider further regulatory action until after receipt of their closure report on their action plan.

Condition F1 of the Licence covers a wide range of obligations on the company including maintaining competitive markets, to ensure that the company maintains control of its assets, and to ensure that the company obtains all necessary information from its contractors to allow it to comply with its Licence (including providing information to the Utility Regulator and the quality regulators). The Licence Condition was initially introduced in England & Wales for Welsh Water which was in the process of out-sourcing its whole operational and capital programme to a limited number of contractors while retaining a small core staff to manage these contractors. The Condition addresses the concern that letting major bundles of work will limit competitive markets, particularly when these works are re-tendered. It also addresses the concern that by out-sourcing major bundles of work the company will lose control of its assets and will transfer responsibility for the performance of its business to its major contractors. We understand that in 2006, when the licence was being drafted, there may have been an intention for such large bundle outsourcing to occur in relation to NI Water, and hence the inclusion of this Condition in the licence. We understand that this licence condition is not generally included in the English and Welsh Water company licences other than Anglian and Welsh water. In interpreting this Condition F1 for NI Water we have aimed to address the same concerns relating to major bundles of work such as the PPP concessions, the capital programme framework Alliances and the emerging bundles of operational contracts.

Each submission under Condition F1 of the Licence is subject to audit by the Independent Reporter who submits a report of their findings to us. These reports recognised some the weaknesses in the company's procurement procedures, in particular the ability in the early stages to provide a complete report on the contracts it had issued and the status of these contracts. The requirement for a Procurement Plan exposed these weaknesses and has prompted the development of and improvement through the company's contracts database which now allows more detailed investigations to be undertaken. However none of the reports received identified issues relating to the extension of contracts or the use of single action tenders which are the main issues identified in the company's recent deep dive audits.

In respect of contract extensions beyond the initial contract period we will seek further information from the company to determine whether they could have been identified by a more detailed reporter audit and consider what lessons can be learnt.

In respect of single action tenders, these can be a legitimate approach to tendering subject to suitable governance. Condition F1 of the Licence does not cover internal company governance as this could lead to unwarranted interference in the day to day management of the company by the Utility Regulator. This is a distinction which the company also recognises in its reports to us where it limits potential breaches to the Licence Condition to contract extensions which are potential breaches of procurement law and does not include single tender actions in this category.

The Reporter forms his opinion on the audit of a limited sample of contracts. Subject to limited comments, the reporter concluded that the contracts covered in his sample audit had been procured competitively and the company was complying with the other licence conditions in respect of retaining control of its assets and ensuring the provision of information. It is not possible for the Reporter to audit all contracts. It is not possible for the Reporter, nor do we expect him, to provide absolute assurance that all contracts entered into by the company are correctly procured and best value for money achieved; this remains the responsibility of the company and its management and shareholders.

While recognising the weaknesses in the governance of NI Water's procurement practices, it is important to set this in the context of the deep dive audits which have exposed weaknesses in contracts representing less than 5% of NI Waters procurement over PC10 and the action being taken to address them.

Yours sincerely

J Aston

Director of Water Regulation

CC I Osborne

Letter from Mr Gerry Loughran, CEO of Pheonix Gas

197 Airport Road West
Belfast BT3 9ED
Tel: 08454 55 55 55

John Dallat MLA
SDLP
3 The Mall
Newtowne Square
Limavady
Co. Derry
BT49 0AD 14th July 2010

Dear Mr Dallat

I am replying to your letter of 7 July.

In preparing to do so, I have studied the transcript of the PAC hearing on 1 July and other relevant material and have also discussed these matters with Mr Dixon.

I wish to state my belief that the PAC members were pursuing perfectly legitimate questions and, in doing so, were drawing on evidence available to the Committee. The questions asked by you, by Mr McGlone and by Ms Purvis were reasonable and evidence-based. I am sure that you do not need any statement of mine to acknowledge that this was a proper line of questioning by the Committee but it is important that I record this on my own behalf and on behalf of Phoenix Gas.

Mr Dixon was aggrieved by what he interpreted as unfair critical comments. He has very limited knowledge of the Assembly's accountability processes and in particular the work of the PAC. I have now explained all of this to him and he wishes me to acknowledge that, in light of his better understanding, the terms of his letter dated 5 July 2010 are not justified and he wished to withdraw the letter. He will be writing to the Chairman of the PAC to do so.

Mr Dixon undertook the assignment of the independent review on a purely personal basis. In Phoenix we encourage senior staff to undertake public and civic duties and his agreement to be a member of the review team reflected this ethos. The formal letter of invitation from the Department to Mr Dixon to join the team was addressed to him here at PNG headquarters. For that reason, Mr Dixon thought it was permissible to issue his letter to the Chairman of the PAC from the same address. He now understands however that by so doing he may have inadvertently created the impression that the letter represented a Phoenix view. He did not intend this and wishes me to confirm that the letter was personal and reflected his personal views which, of course, he has now revised.

I hope this letter answers your questions. I am taking the liberty of copying it to Paul Maskey.

Yours sincerely

Sir Gerry Loughran

Chairman

c.c. Paul Maskey MLA

Letter from Mr Peter Dixon in personal capacity

Letter from the Chairperson to the Accounting Officer

Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX

Tel: (028) 9052 1208
Fax: (028) 9052 0366
E: pac.committee@niassembly.gov.uk
aoibhinn.treanor@niassembly.gov.uk

15 July 2010

Mr Paul Priestly
Accounting Officer
Department of Regional Development
Room 702
Clarence Court
10 -18 Adelaide Street
Belfast
BT2 8GB

Dear Paul,

Public Accounts Committee Evidence Session on Governance of NI Water

Thank you for your participation in the Committee's evidence session on this inquiry.

As agreed in the course of your evidence, I would be grateful if you could provide the following information to the Committee.

1. A copy of the internal audit report relating to the single tender award to Contracting Out LLP, and details of the relationship of this contractor with the company.

2. Details of the £20,000 contract to a company whose Chairman was a non-executive director of NI Water, and how this relationship was addressed and recorded.

3. A list of all staff substitutions, by number, value, company, posts held and length of tenure since the establishment of NI Water in April 2007.

4. An analysis of the estimated additional costs incurred as a result of using contract staff against full-time employees in these posts.

5. Copies of the correspondence received from members of the board of NI Water when you wrote to them "expressing the fear that [they] did not understand the seriousness of the [governance] matter", and your response subsequent to the acquisition of legal advice.

6. Copies of the correspondence sent by the Minister to the board members detailing the assurances sought relating to the independent review team report and copies of the responses received from each member of the board.

7. Whether the Chairman of NI Water was included in the quorum of the audit committee while he was acting Chief Executive.

8. A summary of the reference checks made by the Department pertinent to the appointment of Mr Chris Mellor and how past performance was addressed in the interview and appointment process.

9. A list of the public appointments currently held by Mr Mellor.

10. The breakdown of the costs relating to the appointment of the Independent Review Team (IRT) including secretarial support costs.

11. A copy of the original Independent Review Team draft report and of the letter submitted to the IRT detailing your comments and changes to it.

12. All correspondence and papers about the appointment of the IRT.

13. Correspondence between DRD and DFP about the governance implications for DRD and NI Water of re-classifying the company

14. Whose was the signature put to the confidentiality agreement; and a list of officials involved in the approval to withhold the internal audit reports conducted by Ernest and Young from the Comptroller and Auditor General.

15. A paper setting out the original governance arrangements between DRD and NI Water and any changes subsequently made to them.

16. A summary of the freedom of information requests received by the Department relating to the governance of NI Water and, where information was withheld, the rationale behind it.

17. A copy of Mr McKenzie's declaration of his relationship with Mr Dixon made prior to the appointment of the Independent Review Team.

18. A copy of the procurement plans and update reports submitted to the Regulator by NI Water to the present date; and the feedback received.

19. A copy of the contract compliance audit issued in September 2009.

20. The rationale for the decision not to have a DRD representative on the audit committee of NI Water.

21. The deep-dive report on invoice slicing and, in confidence if necessary, the report of the mapping exercise setting out executive responsibility.

The Committee Clerk will be of assistance should you wish to discuss any of these points.

I should appreciate your response by 02 August 2010.

Yours sincerely,

Paul Maskey

Chairperson
Public Accounts Committee

Letter from the Chairperson to the Regulator

Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX

Tel: (028) 9052 1208
Fax: (028) 9052 0366
E: pac.committee@niassembly.gov.uk
aoibhinn.treanor@niassembly.gov.uk

Jo Aston
Director of Water Regulation
NI Authority of Utility Regulation
Queens House
14 Queen Street
Belfast
BT1 6ER 15 July 2010

Dear Jo,

Public Accounts Committee Evidence Session on Procurement Governance in NI Water

Thank you for your letter of 7 July.

I would be grateful if you could also provide the following information to the Committee.

Have procurement governance issues at the other utilities been reported to you? If so, who was in charge and how were they dealt with?

The Committee Clerk will be of assistance should you wish to discuss any of these points.

I should appreciate your response by 2 August 2010.

Yours sincerely,

Paul Maskey

Chairperson
Public Accounts Committee

Letter from Mrs Felicity Huston

Statement from Contracting Out LLP

No 1 Larne Rd
Carrickfergus
Co. Antrim

BT38 7EW

T. 02893365421
E. j.holmes@contractingout.biz

Aoibhinn Treanor
Clerk of the Public Accounts Committee
Room 371
Parliament Buildings
Ballymiscaw
Stormont
Belfast
BT4 3XX 21 July 2010

Sent by email and fax. Original to follow by recorded post.
Strictly to be opened by the addressees only.

Statement from Contracting Out LLP To: The Clerk of the Public Accounts Committee and all Members of the Public Accounts Committee.

Re: Submission to the PAC in regard to the PAC Hearing 1 July 2010 in respect of Northern Ireland Water.

Having reviewed the transcript of the above-mentioned hearing, it is evident that the evidence given by both Mr L. Mackenzie and Mr P. Priestly contained material errors both of commission and of omission.

On behalf of myself and my company I have highlighted these errors below and provided where pertinent the relevant supporting evidence.

We hereby request that the contents of this letter and its annexures are considered by the PAC panel when reviewing the evidence given by Messrs Mackenzie and Priestly at the hearing and that they are also reflected in the final report.

Errors of Commission

1. Mr Mackenzie states:

"In my world, "recovered" is different from "identified" – page 9 of the Public Accounts Committee - Official Report (Hansard) - Northern Ireland Audit Office Memorandum on Governance of Northern Ireland Water - 1 July 2010 ("Official Report").

"… and, in particular, for the success fee, that is, savings that were identified in the particular contract but not delivered" – page 10 of the Official Report.

• The Northern Ireland Water ("NIW") General Counsel (and Company Secretary) in a letter dated 5 February 2010 (See Item 1a) states NIW's position in respect to the bonus clause which is the exact opposite to that position given in evidence to the IRP in January and recently to the PAC by Mr Mackenzie i.e. NIW position as stated is that the bonus is based on savings achieved. Mr Mackenzie and Mr Priestly were made aware of this disparity in a letter dated 16th of March 2010 (See Item 1b) following the IRP report but it appears from the PAC evidence he continues to disagree with his General Counsel.
• Further, the Contracting Out Invoice (submitted Dec. 2009 and attached as Item 2) making claim under the bonus clause was based on savings achieved not on savings identified otherwise the invoice amount would have been considerably larger.

2. Mr Mackenzie states:

"At that point in time, the individual told us that they had identified savings of £23 million." – page 10 of the Official Report.

• Mr Mackenzie did not meet any member of my company except myself and that was not until late October 2009 – a pre mediation brief.
• Contracting Out reports were issued in May and October 2009. The May 2009 report (which would have been referenced by NIW in Aug. 2009) identified that NIW had, in whole or part, paid in error, Steria invoices to a value of circa £40m, some circa £28m of which resulted from Contract Change Requests! This is public record.
• Due to the total lack of proper documentation available by either NIW or Steria in respect of these payments claimed and paid, the total amount of the overpayment had to be recalculated from first principles using the Contract, financial models, bank statements and vast quantities of emails and unsorted documents found in various desks, cupboards and other sources. The full Contracting Out team was nearing completion of this work when our contract was terminated. Therefore, no such number could have been so stated by my company and certainly not in August 2009.

3. Mr Mackenzie states:

"If you multiply £23 million by 6%, you get a very large number." – page 10 of the Official Report.

• Contracting Out had already agreed with NIW Commercial Director in October 2009 that in view of the unexpected and astounding findings of the Steria Commercial Review that the bonus clause should be capped. A figure of £200k was proposed by NIW 16th of October 2009 and agreed by Contracting Out: we were informed this had been approved by DRD.
• Contracting Out only pressed its claim in respect of the bonus clause (See Item 2) when NIW failed to meet its commitment to pay the £200k within 14 days of the agreement in October 2009.
• On presentation of our claim under the bonus clause December 2009 NIW reverted to the previous agreement to cap but then required Contracting Out to fabricate timesheets that would exactly match the offer agreed. See Item 3.
• Contracting Out refused to be party to such improperness. NIW then made it clear the offer would not be honoured. See Item 4.
• Contracting Out continued to pursue its rightful claim under the contract.
• Letters in respect of this improper request were written to the NIW Chairman in Feb. 2010 (see Item 5) and the PS DRD Mr Priestly in March 2010 (see Item 6a and Item 6b) as the most senior official in respect to such whistle blowing matters.
• It is understood that the capping offer agreed in October 2009 was shared with the Independent Review Panel ("IRP") but this testimony was not published. The published IRP report only referred to the unpaid invoice in respect of our claim under the bonus clause. Why would the IRP be selective on the information published?

4. Mr Mackenzie states:

"When I did the arithmetic, more than £100,000 did not seem to me to be good value for money." - Page 10 of the Official Report.

• This was opinion given without any evidential basis, benchmarking, calculation, reference to services provided and benefits received by NIW.
• Are we to understand that all consultants who are paid a rate equal to or greater than this amount are now considered not to be value for money and if so why were these consultants not also subject to Mr Mackenzie's evidence and opinion?
• When questioned on the rates paid to the IRP Mr Mackenzie had the defence of those rates readily to hand both of which were higher than those of Contracting Out.
• What the PAC was not told was that Steria, the contractor to whom the overpayments had been made by NIW, submitted an FOI request for the Contracting Out contract shortly after NIW's successful injunction of Steria.
• It is not unusual for investigating companies to be singled out for attack by miscreants. In this case our findings ensured we were likely to be targeted by both parties to the contract and possibly DRD on whose watch these overpayments occurred.
• Despite Mr Mackenzie's expressed concern (at the PAC hearing) at our daily rate he nevertheless increased our scope of work on the existing contract in September 2009 by requiring we provide support to the external legal advisors for the Steria Mediation process which rather contradicts his comments on value.

5. Mr Mackenzie states:

"That contract was originally let on 10 April 2007 to someone who had previously been on secondment from the Strategic Investment Board (SIB) to advise NI Water on PPP contracts. When that arrangement came to an end the then chief executive of NI Water entered into a single tender action with that contractor. The chief executive had a financial delegation of £250,000 and, therefore, she was quite entitled to enter a single-tender action. The Department should have been approached before the expenditure exceeded £250,000 in May 2008, and approval sought for the contract to continue." – page 22 of the Official Report.

"I then became aware of further potential irregularities with the same individual, whereby a success fee had been negotiated for work that the individual was doing on another contract." – page 10 of the Official Report

• This contract was not let to an individual ("someone") as stated by Mr MacKenzie.
• Mr Mackenzie gave evidence that Contracting Out was retained using a single contract that was incorrectly extended and for which the appropriate internal approvals were not secured – this is not correct as Mr MacKenzie is aware.
• Contracting Out was retained by NIW to provide specialist advisory services by way of a number of separate contracts. Each having its own scope, price and terms and conditions, commencement and expiry dates. Some had fixed prices, others had a rates basis, all had different deliverables. A common set of conditions links these contracts but the individual contracts take precedence in the event of a conflict – see the legal comment at Item 7.
• Mr MacKenzie's reference to "another contract" in his evidence to the PAC contradicts his claim that the contract with Contracting Out was a single contract that was extended.
• None of these separate contracts were ever extended by NIW as claimed by Mr MacKenzie.
• None of the total payments made under each of these separate contracts exceeded the threshold which required DRD approval (as quoted in the evidence of Mr Mackenzie) except the Steria Commercial Review contract for which Mr Mackenzie signed the approval of the ~ £240k (incl. Vat) and extended the scope for mediation by which amounts the contract exceeded the limit for approval, in March 2010.
• There is no doubt these contracts were all requested by NIW as STA's. However, as stated by Mr Mackenzie in his evidence other major consultants were also the recipients of more than one STA but their rates or value has not been brought into question nor their names impugned but perhaps the relative size of their companies is their saving grace here.

6. Mr Mackenzie states:

"Strictly speaking, no. However, to answer the question directly: the principal of Contracting Out LLP had been a member of Water Service's management board and carried the title of PPP director. Although that individual was on secondment from SIB, she carried all the influence that an employee might have had." – page 25 of the Official Report.

• My contract with SIB explicitly stated that I was not an employee of SIB or Water Service and expressly excluded all rights due to an employee under the Labour Act.
• Further all actions and recommendations were subject to approval by the PPP Programme Board which included very senior officials of DRD, DFP, SIB, DOE, and the SRO (WS CEO).
• Any HR issues were handled by the SRO or Director HR due to my lack of employee status.
• This would have been evident to any enquirer intent on a proper and unbiased investigation.
• It is interesting to note that Mr Priestly interjected Mr Mackenzie's evidence to state that there was a perception of wrong doing.
• It is clear Mr Priestly was using the privilege of the PAC hearing to make a statement that would be subject to a defamation suit in any other forum – this is neither the action of an unbiased accounting officer nor in keeping with the Nolan principles.
• On a lighter note had proper enquiries been made, both men would have found that I was intensely unpopular with most senior staff including the Directors and the CEO of WS because I was openly critical in respect of the shocking lack of data, process, procedures and control in WS at that time and have remained so to date. Had Mr Priestly been better informed he would not have embarrassed himself with such a remark.
• The Alpha and Omega projects were the first WS/NIW projects ever to receive "Substantial Assurance" status from DFP using internal and external auditors. This assurance is a matter of public record.

7. Mr MacKenzie states:

"Around a month later, we essentially found that a single-tender action had been awarded to that individual."

"…, either for the £600,000-odd of expenditure that had been incurred by that individual and, in particular…"

• First, no STA or any other contract was awarded to myself or any individual of Contracting Out LLP and certainly the amount to which Mr MacKenzie refers or any amount was never paid to me by NIW as NIW records will clearly show.
• Second, any contract with NIW was with Contracting Out LLP which is not a single individual as Mr MacKenzie and even Mr Priestly is well aware. His constant reference to an "individual" either demonstrates his total lack of information at a fundamental level or his abuse and misuse of PAC privilege in an attempt to defame and damage me where I have no possibility of redress.
• Contracting Out LLP is a small Northern Ireland firm to be sure but nevertheless brings together a team of highly experienced international experts in the fields of: financial modelling, forensic computer investigation, forensic accounting, commercial analysis, dispute resolution, negotiation, project management, commercial contract review, etc. as needed to suit a project. To imagine these are incorporated in one individual is ridiculous!

Errors of Omission

Neither Mr Mackenzie nor Mr Priestly can be considered unbiased commentators in respect to Contracting Out. The following information had it been made available would I believe have made the situation clear.

8. Contracting Out was very concerned that not only they had they been asked to fabricate time sheets to fit the NIW offer but that the removal of both the Commercial Director, Contracting Out and the Chairman and even most of the NIW Board left no one with a detailed understanding of the Steria findings and action or the motivation necessary to take it forward and prevail. This was supported by the fact that the NIW case which had achieved success in its first stage was abandoned in favour of defending an action brought by Steria. This strategy would typically weaken NIW's position and narrow the opportunities for recovery.

9. Contracting Out followed the DRD protocol with respect to guidelines on whistle blowing in respect of improper behaviour in a related government entity and approached the PS DRD – see Item 6a. Instead of investigating the situation and making sure we were not victimised for expressing our concerns Mr Priestly contacted Mr Mackenzie directly and shared the letter with him advising us to provide the documentation required by NIW. See Item 8. Only after the issue of a second letter (see Item 6b) was the requirement for fabricated documents dropped by NIW at a meeting requested with myself by Mr Mackenzie. However, the concerns with regard to the Steria action were not responded to and they should remain a concern.

10. NIW however insisted (March 2010) that the offer made by NIW must be the subject of a confidentiality agreement the text of which was provided by NIW. On the Monday (28 June 2010) before the PAC hearing I was informed by David Gordon of the Belfast Telegraph that information (most of which was the subject of the confidentiality agreement) had been made freely available to him by NIW. See Item 10. In addition, NIW had provided Mr Gordon with details of my contracts despite the separate express confidentiality provisions of these contracts and previous employment details in WS which, is also in contravention of the Data Protection Act. As Contracting Out nevertheless saw itself bound by the confidentiality agreements it had signed it could not properly respond. The article timed to create greatest impact the day before the PAC hearing, berated Contracting Out for the monies paid and approvals that had been not been obtained when the truth was that Mr Mackenzie had made the offer and approved the expenditure which was the basis of the threshold being exceeded for which approval would have been required. Contracting Out wrote to Mr Mackenzie (30 June 2010) to request an understanding of this breach but to date we have not received a response despite a substantial passage of time. Sadly, Contracting Out has been left with no option but to make the matter the subject of a libel suit and a suit for breach of confidentiality.

11. Late last year Contracting Out was retained by another NI Government body to provide a commercial review in a matter that also comes under Mr Priestly's control. The investigation identified material problems, which have led to further investigations and questioned information provided to another IRP. Coupled with the findings in respect to the Steria Contract which, if they see the light of day will certainly reflect on the Contract Management team, the internal and external Audit functions and possibly DRD, it is evident that his comments in respect to myself and Contracting Out cannot be reasonably expected to be unbiased. Any damage that can be done to Contracting Out will ensure such findings can be undermined particularly as government through the press seems to be the order of the day.

12. Interviews with the press in respect to myself and my company continue to be provided by Mr Priestly and Mr Mackenzie; the latest I understand was to discuss pursuing Mr Priestly's perception comment made at the PAC hearing. If firms like mine who are used to provide independent investigation skills and expose problems are not protected from those who it may find wanting, the job of bringing efficiency to any area of government will be defeated by those who court the press for their own ends. Contracting Out has provided the service requested for the price agreed. It has set aside its rights to a substantial bonus when it appreciated that the size of the problem was far larger than anyone imagined at the time the clause was agreed. Our fees have already been more than recovered by the savings made to date and this can be evidenced.

We look to the PAC to set this matter straight and permit a proper balance to be brought to the evidence.

Yours Faithfully

Sue Holmes

Regulator holding reply

Northern Ireland Authority
for Utility Regulation
Queens House,
14 Queen Street,

BELFAST, BT1 6ED

T: +44 (0) 28 9031 1575
F: +44 (0) 28 9031 1740
W: www.uregni.gov.uk

W/07/PAC/JA/487

Mr Paul Maskey
Chairperson
Public Accounts Committee
Room 371
Parliament Buildings
Ballymiscaw
BELFAST BT4 3XX 22nd July 2010

Dear Paul

RE: Public Accounts Committee Evidence Session on Procurement Governance in NI Water

I refer to your letter of 15 July and confirm that a full response will be forwarded within the requested timeframe of 2nd August.

I note your query relates to procurement governance issues at other utilities and as my responsibility relates to Water only, I have therefore forwarded your query to the Director of Electricity and the Director of Gas. The response will be co-ordinated and issued by Iain Osborne as CEO.

Please do not hesitate to contact me if there are any further issues, particularly related to Water where I might be of assistance.

Yours sincerely

Jo Aston

Director of Water Regulation

cc: Iain Osborne
Shane Lynch
Brian McHugh

Regulator further evidence letter

From the office of the Chief Executive
Northern Ireland Authority
for Utility Regulation
Queens House,
14 Queen Street,

BELFAST, BT1 6ED

T: +44 (0) 28 9031 1575
F: +44 (0) 28 9031 1740
W: www.niaur.org.uk

Mr Paul Maskey
Chairperson
Public Accounts Committee
Room 371
Parliament Buildings
Ballymiscaw
BELFAST BT4 3XX 5 August 2010

Dear Mr Maskey

RE: Public Accounts Committee Evidence Session on Procurement Governance in NI Water

Thank you for your letter of 15 July 2010. You asked the following questions:

• Have procurement governance issues at any other utility been reported to the Utility Regulator, and if so,
• Who was in charge and how were they dealt with?

In addition to water, the Utility Regulator also regulates the electricity and gas industries in Northern Ireland. We are not aware of any procurement governance issues in the gas industry. One issue did arise at NIE plc relating to the procurement of legal and other technical consultancy services, and I have set out details of that below.

The Utility Regulator's role

As a preliminary, a word on the Utility Regulator's roles in relation to procurement in electricity. Our principal objective in electricity is to protect consumers by, amongst other things, ensuring value for money. Wherever appropriate we do this by promoting competition, but sometimes we regulate directly; in either case, the aim is to ensure that prices do not cover inefficient costs. That is to say, we ensure that any excess costs are borne by shareholders, not reflected in consumer prices. Thus, the directors and shareholders of a company are in principle free to act inefficiently, so long as it is their own money that is wasted.

This contrasts with the responsibilities of a company's board of directors, who are in general responsible for the overall running of the company. This includes ensuring that money is not spent without proper control, as well as insuring that in other ways the company complies with the law. The directors are thus accountable to the shareholder for sound governance, and the regulator should not act in a way that dilutes this accountability.

I have included as an annex to this letter more information on the energy licence provisions relating to procurement.

Issue at NIE

In March 2010 the Utility Regulator instructed consultants to carry out an audit of current cost claims by NIE incurred on projects initiated during the price control period commencing April 2007. The total claim audited was £4.1m across 12 projects. The scope of this audit was:

• To verify that the costs being claimed represented genuine additional costs to NIE, and
• To review and comment upon the cost controls and procurement practices in respect of these projects, to ensure value for money was received on behalf of electricity customers.

The audit findings confirmed that NIE T&D has a formal procurement process which requires that all contracts above a defined threshold are put out to competitive tender and the auditors concluded that this process was followed with respect to the procurement of goods and services. However, the audit also identified shortfalls in regard to the procurement of legal and other technical consultancy services. The audit report noted that "in respect of professional fees and some consultancy services (and particularly in relation to legal services) competitive tendering is the exception rather than the norm". We had indeed written to NIE in March 2009 highlighting a failure to tender for legal services on a previous occasion.

Following receipt of the draft audit report we immediately wrote to NIE on 17 June 2010 to highlight our concerns about this issue and suggested that they take appropriate corrective action as quickly as possible. The draft audit report had recommended that a competitive tendering process should be applied as per NIE's standard procurement process for these services. We also advised that it was unlikely that we would be able to approve any further costs of this nature unless NIE could demonstrate that a competitive tendering process had been undertaken. NIE responded stating that any future claims in respect of new projects initiated would not include legal or other consultancy costs where these services have not been competitively tested, unless the Utility Regulator has given its prior approval. We are continuing to discuss this issue and the other findings of the audit report with NIE.

Our intervention in the case of NIE illustrates our role and how we add value. NIE were free not to tender legal services and other technical consultancy services… but we declined to allow them to charge the consequent costs to consumers. This obviously presents the company with unacceptable commercial risk so, as a result, NIE have now altered its operational approach.

We could have undertaken a similar intervention in the NI Water case. However, Laurence MacKenzie notified us immediately of a potential breach of the licence, and provided a detailed proposal of actions including a full internal audit investigation of the issues. Following receipt of the Independent Review Panel's report and the accompanying matrix of actions we have taken the view that all reasonable actions to address the risk of future breaches of licence had been identified. Consequently, we cannot see that further formal intervention by ourselves would add value at this time. We are however monitoring closely NIW's progress in improving its procurement processes and governance.

Please do not hesitate to contact me if you require any further information.

Yours sincerely

Iain Osborne

Chief Executive

Annex – Energy licence provisions relating to procurement

I describe briefly below the nature of procurement rules included in energy licences.

Price control procedures will typically include allowances for some cost items and pass-through for others. For the latter, costs must be reasonably incurred if they are to be approved for charging to customers. This implies that they should be necessary and procured at the best price possible. This is reflected in Condition 42 and Annex 2 of the NIE Plc (Transmission and Distribution) licence, which refers to pass through costs which must be reasonably incurred and determined by the Authority. Similarly, Condition 55, Annexes 2 and 3 of the NIE Energy Limited licence, refers to any "reasonable costs incurred" and defines the "dt" term as being "any reasonable cost incurred."

There also exist a number of generic obligations in several electricity licences to purchase economically; for example Condition 22 of the Supply Licences states that if the licensee purchases electricity to comply with a Last Resort Supply Direction, it must take all reasonable steps to do so as economically as possible. Condition 29 of the SONI TSO Licence allows the licensee to purchase system support services from the most economical sources available to it.

Further procurement conditions include, Condition 19 of the SONI Market Operator Licence, whereby the licensee should follow a procurement strategy in the acquisition of assets and services. Condition 23 of the Supply Licences outlines that the total amount of the Last Resort Supply Payment claimed by the licensee, should not exceed the total cost as is reasonably incurred.

We are happy to provide an additional annex to identify specific electricity licence conditions, if required.

In relation to gas licences, Condition 3.3.2 in the mutualisation conveyance licences of Belfast Gas Transmission Limited (BGTL) and Premier Transmission Limited (PTL) requires that network services are procured as appropriate and as befits a "reasonable and prudent operator." This allows for the procurement of specified areas such as maintenance, surveys and insurance. This condition was included to control the risk of operating expenditure being pass through and is designed to cover the principal cost areas that can be tendered.

Procurement is reviewed as part of the Gas Directorate's general shadow price control work on the mutualised companies.

Letter from the Accounting Officer to the Chairperson

Further evidence letter from the Accounting Officer to the Chairperson

Response to PAC information request - Annex A

Contents

Section Page

Executive Summary

Detailed Findings

Appendices

1 Suggested Action Plan

2 Recoveries Claim

Executive Summary

NIW Internal Audit – Contracting Out Appointment, Steria Exit 3

Background

A notice of termination on the Xansa contract was issued on the 16th December 2008.

This contract had been awarded to Xansa (the prime contractor) in January 2006. The purpose of the contract was to provide billing, contact handling and mobile work management services (MWM). Xansa was later acquired by Steria who then became the prime contractor. There was a sequence of unsuccessful remediation of poor service levels and refusal to negotiate a new base case charging model, as required under the contract following the deferral of domestic billing. As a result, NI Water took steps to terminate the contract. It was decided to keep in place, via contract novation. the main subcontractors Echo and AMT-Sybex to continue the delivery of customer billing, contact services and MWM.

NIW appointed Contracting Out LLP to:

• assist with the termination of the Xansa contract,
• identify where Xansa service costs could be reduced or recovered,
• novate the subcontracts,
• modify subcontracts to address NIW requirements and
• provide commercial assistance throughout the termination period.

Review Scope

• Appointment of Contracting Out to advise on Steria termination including approval of appointment;
• The reward structure approval process;
• Review and validation of time and other costs billed by the contractor; and
• Evidence to support the substance and value of the Steria claim.

Scope Exclusions

Anything not included above is excluded from scope and the following is specifically excluded:

• Legal and contractual validity of the cost recoveries claim proposed by Contracting Out.

Review Objectives

• To independently assess the process leading to the appointment of Contracting Out in relation to the Steria termination to confirm its compliance with corporate policy/delegated authority levels and Shareholder governance requirements; and
• To assess the robustness of the evidence retained and reviewed to support the Steria claim.

Review Conclusion and Findings

Our review has six main findings which are detailed in Section 2 and included in a suggested management action plan in Appendix 1.

This review does not provide an assurance opinion.

Detailed Findings

2.1 Appointment of Contracting Out to advise on Steria exit, including approval of appointment

Background

The lead Partner of Contracting Out LLP, Sue Holmes (SH), was previously engaged as interim Commercial Director of NIW by the Strategic Investment Board (SIB). This followed the decision taken by government to pursue a PPP route for major capital investment in new water and waste water treatment plants (namely, Alpha & Omega). Until 31 March 2007, all of SH's costs were paid by SIB and invoiced back to NIW.

Following vesting as a GoCo on 1 April 2007, and the end of SH's contract with SIB, NI Water's former Chief Executive (Katharine Bryan) implemented a Master Consultancy Services Agreement between Contracting Out LLP and NI Water which was signed by Katharine Bryan and Sue Holmes on 10 April 2007. This agreement established a basis for NI Water to engage consultancy services from Contracting Out 'as agreed from time to time in Schedules, within any timescale set out in such Schedules'.

Issue 2.1.1

There is no contract period or value limit to the Contracting Out Master Consultancy Services agreement and as such this potentially contravenes EU procurement legislation and the requirements of condition F1 of the Regulatory Licence to adhere with the Utilities Contracts Regulations 2006 which requires contracts estimated to exceed value of (Euro) 422k over contract life to be publicly tendered. This was also a Single Tender Action (STA) with a potential contract value over £250k (costs paid to date £620k with a further £75k due). It was not reported to the Shareholder as required under the financial delegations set out in the Governance letter between the Department for Regional Development and NIW dated 20 March 2007.

External approval for Contracting Out appointment to Steria exit

Nine separate schedules for services have been issued under the Master Consultancy Agreement (schedules 4 and 5 have not been used) and the agreement to engage support in the termination of the Xansa (Steria) contract was under Schedule 7. Schedule 7 was signed as agreed by David Gilmour and Sue Holmes on 6 February 2009. The fee agreed was a fixed price of £250k plus a bonus of 6% of any cost recoveries identified to off-set any termination claim made by Steria up to a max of £3million. The meaning of the actual bonus entitlement is unclear from the wording set out in Schedule 7 and discussion with the Commercial Director confirmed that the intention of the agreement is that the bonus would amount to 6% of any costs recovered from Steria in excess of a £3million threshold.

Issue 2.1.2

The award of Schedule 7 under a STA was not notified to the Shareholder for prior approval as required per the delegated authority limits within the governance letter with the shareholder dated 20 March 2007.

Internal approval for Contracting Out appointment to Steria exit

The Commercial Director represented that he had received verbal agreement from the Chairman and former Acting Chief Executive (Chris Mellor) to engage in Schedule 7. We were also informed that a business case was prepared and forwarded for approval by the Chairman, although no evidence of this could be found by audit. There was also no evidence of approval at Board level as required for an STA over £250k per NIW's current Financial Delegation policy. Evidence of an email from the Commercial Director to the Chairman on the 2 June 2009 clarifying the arrangements with Contracting Out set out that there was 'no issue with procurement regulations' and the Chairman responded on the 5 June 2009 stating that he was content with the process and happy to support the arrangements.

Issue 2.1.3

The award of Schedule 7 was not appropriately internally approved with lack of evidence that a business case was prepared and approved by the Board as required under NIW's financial delegations of authority for STA's exceeding £250k.

2.2 The reward structure approval

Reward structure and payments

The fee agreed was a fixed price of £250k plus a bonus of 6% of any cost recoveries identified to off-set any termination claim made by Steria up to a max of £3million. Fees to be payable as follows:

• 10% of fixed fee by 16 Feb 2009 (paid 2/4/09)
• 35% of fixed fee by 15 April 2009 (paid 7/5/09)
• 55% of fixed fee by 15 June 2009 (paid 18/6/09)
• 75% of fixed fee by 15 Aug 2009 (paid 3/9/09)
• 90% of fixed fee by 15 Oct 2009
• 100% of fixed fee by 16 Dec 2009

It was confirmed from review of the deliverables required under Schedule 7 that the milestone payments above are linked to defined deliverables. This review did not however test if those deliverables had in fact been met as it was outside of the agreed scope within the terms of reference.

Reward structure approval

The Northern Ireland Public Sector Procurement policy May 2009, relevant Dear Accounting Officer (DAO) letters issued by the Department of Finance and Personnel (DFP) and Managing Public Money Northern Ireland June 2008 were reviewed by audit to determine whether there were any restrictions on bonus/contingent payments to consultants. Whilst there do not appear to be any restrictions the financial delegations within the governance letter require NIW to notify any potential consultancy spend exceeding £750k and any STAs exceeding £250k to the Shareholder.

Issue 2.2.1

As outlined in Issue 2.1.2 above prior approval was not requested from the Shareholder for the award of Schedule 7 by STA as required by the delegated authority limits.

2.3 Review and validation of time and other costs billed by Contracting Out

Time incurred / expenses invoiced to NIW under Schedule 7 were not required to be submitted with supporting documentation, e.g. timesheets, as the fee agreement was on a fixed fee basis linked to deliverables as described above. All invoices paid to date under Schedule 7 were verified as having been signed off by the Commercial Director as approved prior to payment date.

We were informed that timesheets and back up for expenses are required under other schedules where the reward structure is based on an agreed daily rate (this was not verified as other schedules deemed outside scope of this review).

2.4 Evidence to support the substance and value of the Steria claim

On the basis that NIW does not currently hold any of the evidence to support the Steria claim for cost recoveries being proposed by Contracting Out of £23.2m, audit sat in on a legal meeting that was scheduled to review evidence gathered by SH with the legal advisors, Dundas & Wilson on the 25th September 2009. There was limited evidence provided by SH and it was evident that further work was required by SH to enable NIW to have confidence that there is robust evidence to support each element of the claim. Refer to Appendix 2 for detail of findings in relation to each element of the claim. Limited testing that was able to be carried out by audit found that £3.1m of the claim in relation to double payments was invalid.

Issue 2.4.1

There appears to be limited evidence to support elements of the Steria claim, particularly in relation to reporting performance credits and MWM overcharges. The Commercial Director represented that this was mainly due to lack of access granted by Steria during the forensic investigation. The limited testing able to be performed by audit found that £3.1m of the claim in relation to double payments was invalid as the amounts had actually only been paid once. Ownership of the evidence should also pass to NIW and management should then review the level of the claim in light of the evidence available and relevant legal advice.

Response to PAC information request - Annex B

Response to PAC information request - Annex C - Flag C1 to C8

Response to PAC information request - Annex D - Flag D1 to D6

Response to PAC information request - Annex G - Flag G1 to G2

Response to PAC information request - Annex H - Flag H1 to H9

Response to PAC information request - Annex I - Flag I1 to I4

Response to PAC information request - Annex K - Flag K1

Response to PAC information request - Annex K - Flag K2

Response to PAC information request - Annex K - Flag K3 to K8

Response to PAC information request - Annex M - Flag M1 to M6

The Content of this Annex is Available in the Assembly library

Response to PAC information request - Annex O

Chairperson's letter to Head of Civil Service 26 August

Confidential

Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX

Tel: (028) 9052 1208
Fax: (028) 9052 0366
E: pac.committee@niassembly.gov.uk
aoibhinn.treanor@niassembly.gov.uk

Mr Bruce Robinson
Head of the Civil Service
Room FD34
Stormont Castle
Belfast
BT4 3TT 26 August 2010

Dear Bruce,

PAC inquiry into Procurement Governance at NI Water

The Committee discussed the enclosed submission at its meeting on 24 August 2010 in closed session, and accepted it into evidence. The submission relates to the company, 'Contracting Out LLP', and its relationship to and dealings with NI Water and Mr Priestly, then acting in his capacity as Accounting Officer of the sponsor Department.

Members were concerned that the allegations contained in the submission were potentially of relevance to the investigation that you are undertaking in relation to the conduct of Mr Priestly and agreed that it would be remiss not to bring the material to your attention given your interest in the matter. The Committee asks you to note that a number of the companies mentioned in the submission have issued legal proceedings and to treat this material in confidence.

In considering a way forward for its inquiry into the wider issues raised in evidence on 1 July, the Committee also agreed to request the terms of reference you propose for the investigation you are taking forward; the timeframe you envisage for this investigation; and any other details which will help the Committee frame its deliberations.

I would be grateful to receive your reply by 31st August.

Yours sincerely,

Paul Maskey

Chairperson
Public Accounts Committee

No 1 Larne Rd
Carrickfergus
Co. Antrim

BT38 7EW

T. 02893365421
E. j.holmes@contractingout.biz

Mr Laurence MacKenzie
Chief Executive Officer
Northern Ireland Water Limited
Northland House
3 Frederick Street
Belfast
BT1 2NR 16 March 2010

Dear Sir

Re: The Master Agreement and Schedule 7 between Contracting Out LLP ("Contracting Out") and Northern Ireland Water Limited ("NIW") signed April 2007 (the Contract).

I think like the rest of NI we have taken time out this week to read the "Report Of The Independent Review Team To The Accounting Officers Of The Department For Regional Development And Northern Ireland Water" published recently.

Of particular interest to us was that NIW had told the investigating committee that our outstanding invoice for £888,347.83 incl. VAT (now £905,215.99 see invoice attached) was for 'savings identified' and is currently under consideration by NIW.

This statement is rather different in both instances from the position set out in the NIW letter to us of 5 February 2010 also attached.

We hope this difference presents a window of opportunity for the outstanding amount of our invoice (including accumulated interest) to now be promptly paid or alternatively a commercial settlement agreed that takes account of these and future claims. Settlement will of course stop interest continuing to accrue.

We noted also that no reference was made in NIW's submissions to the committee to the repeated offers of settlement or to the NIW condition which made the latest offer unthinkable – hopefully because it has been set aside.

Despite all that has transpired in this matter we believe that a settlement (rather than a legal action) to be in the best interests of all parties and of the Steria action which should be given the best opportunity of success given the potential it presents for NIW cost recoveries.

Our proposal for resolution is for NIW to:–

1. pay our outstanding invoice immediately; or

2. pay the amount of the invoice not in dispute £575,290.77 Excl. VAT (see calculation attached) and dispute the balance. This would represent the position taken in the NIW letter of 5 February 2010 – see also our response of 8 February 2010 attached; or

3. set up a meeting between ourselves before the Easter Break including respective lawyers to conclude a settlement – all decision makers to be present and enabled.

In any event and as our letter of 8 February 2010 remains unanswered we think it is only reasonable to expect a response in 14 days.

Yours sincerely

Sue Holmes

Partner: Contracting Out LLP
Cc Mr Paul Priestly, Permanent Secretary DRD.

No 1 Larne Rd
Carrickfergus
Co. Antrim

BT38 7EW

T. 02893365421
E. j.holmes@contractingout.biz

Company Secretary
Northern Ireland Water Limited
Northland House
3 Frederick Street
Belfast
BT1 2NR 4 December 2009

Dear Sir

Re: The Master Agreement and Schedule 7 between Contracting Out LLP ("Contracting Out") and Northern Ireland Water Limited ("NIW") signed April 2007 (the Contract).

In respect of recoveries achieved to date in accordance with clause 4.3 of Schedule 7 of the Master Agreement the following invoice is submitted for payment.

The amount of this invoice (see attached calculation and supporting documents) has been determined using the recoveries achieved for NIW through the negotiation of the Echo Direct Contract which replaced the Echo contract with Steria that was novated to NIW on 3 July 2009 by comparing the amounts now due to Echo under the novated contract with the reduced amounts now being paid in terms of the Echo direct contract which is valid until March 2013.

Other substantial savings have been identified in respect to this Contract and in this regard Contracting Out reserves its rights under this Contract to submit further invoices in accordance with paragraph 4.3 as soon as the amount of the recoveries made is determined.

As you will be aware, Contracting Out were requested to meet with NIW at which time NIW requested that Contracting Out consider the modification of paragraph 4.3 and/or accept a one-off payment as full and final settlement of this benefit. A sum was discussed and agreed however, the condition of acceptance was that the sum would be confirmed for payment by NIW within 14 days. No such confirmation was received nor was any further communication made with Contracting Out on the matter. We have thus invoiced NIW on the basis of the Contract. Nevertheless should such an arrangement still be of interest to NIW, Contracting Out would be pleased as before to come to such an arrangement provided a settlement can be reached before the due date for payment of the attached invoice. We wish to make it clear however that this offer of compromise is made without prejudice to Contracting Out's right to pursue full recovery should our offer of compromise not be acceptable.

Yours sincerely

Sue Holmes

Partner: Contracting Out LLP

A Limited Liability Partnership Incorporated in Northern Ireland. Partnership Number NILLP243 Partners: Ms. S Holmes. Mr J Holmes MBA CHFI

Jonathan Holmes

From: Ellesmere, Mark [Mark.Ellesmere@niwater.com]
Sent: 15 December 2009 14:54
To: Sue Holmes
Subject: RE: Contracting Out Settlement.
Importance: High

Without Prejudice

Sue, Apologies for the delay inreponding I was at Board meeting this morning. Thank-you for note and proposed settlement invoice. There are a number of issues from my perspective. I set these out below:-

1. The proposed agreement is to amend para 4.3 of Schedule 7 of the Master Consultancy Services Agreement (the "Agreement") and replace the potential bonus payment with a fixed fee in the sum of £200k. It should be noted that as at today's date there have been no actual cost recoveries to satisfy the condition outlined in para 4.3 and the invoice you issued recently in this regard is not accepted by NIW as being due and owing.

2. Notwithstanding the above as discussed I am keen that this matter is resolved and agree payment of the sum of £200k to Contracting Out for services provided up to and including the Mediation hearing on 30th October on the following conditions:-

a) Invoice to be resubmitted and relevant vouching information accepatable to NIW be provided (please consider this a request for such information under para 2.1.5 of Schedule 7 of the Agreement.) For the avoidance of doubt I do not expect any additional fees to be generated by this request.

b) Written confirmation from you that payment of the above amount is in full and final settlement of all claims / fees / costs etc due and owing by NIW to CO in relation to the Agreement. In any event the Agreement terminates on 31.12.09.

c) You return all NIW materials, all CO analysis of those materials and the results of any investigations / audits carried out by CO under Schedule 7 of the Agreement currently held by you whether in hard or soft copy and in a user friendly format (ie. not simpy pdfs that cannot be updated / amended).

In order to reflect the above I suggest the following amends to the settlement letter:–

• Paragraph 3 is not clear as to what it is trying to achieve and is unnecessary given the waiver of claims in paragraph 2; I therefore consider that it should simply be deleted.
• It is difficult to see how the indemnity proposed to be given by each party in terms of paragraph 4 can operate when both parties are waiving any and all claims that they may come to have. In any event the indemnity again seems unnecessary given the protection for both parties given by paragraph 2. To the extent that the indemnity proposed could operate then I think it might have unintended consequences - on the present wording for example it could be said that it is wide enough to require you to indemnify NIW against the Steria claims. I therefore consider that paragraph should be restricted to simply saying "We shall each bear our own costs, whether legal or otherwise in respect of this settlement."
• Paragraph 5 is also not clear its present form as to what it is saying. I would suggest simply having it say "Nothing in this letter shall be construed as an admission of liability, default or otherwise by either us in respect of the Contract or the Invoice."
• I do not agree to the terms of paragraph 10 as I cannot have a situation where payment of the agreed settlement sum is made and yet Contracting Out can pursue NIW for additional payment.

On that basis I will be in a position to have the payment made before Xmas break.

As discussed we may need some futher support from CO to assist with our expert's understanding of the case. If that is the case then this will be procured separately.

Mark.

Mark Ellesmere
General Counsel & Company Secretary
northern ireland water
Northland House
3 Frederick Street
Belfast, BT1 2NR

Tel: +44(0)28 9035 7471 Ext: 24347
Web: www.niwater.com

P Please consider the environment before printing this e-mail

- - - - Original Message - - - -

From: Sue Holmes [mailto:sue.holmes@contractingout.biz]
Sent: 15 December 2009 11:29
To: Ellesmere, Mark
Subject: FW: Contracting Out Settlement.
Importance: High

Mark

As you will appreciate I have taken advice on our settlement offer sent to you yesterday which I feel takes account of all the issues and I thus feel our position reflects where we are with the Contract. That said I am always open to discussing any comments you would like to make and will view them with, as always, an open mind particularly if any changes you may seek are minor. However in the meantime our position set out in our letter yesterday must remain in place and thus it would not be appropriate to make available to you a draft version of the letter — as this letter was not presented as a draft.

If there is a position you feel we have not considered in our settlement letter we would as indicated be pleased to receive such comments from you. I must suggest this is done with all haste to address the time frame outlined in our letter so that both parties can benefit from this compromise arrangement. Beyond this date such a compromise is not acceptable to

Contracting Out.

Sue

Sue Holmes
Partner: Contracting Out LLP
Tel: +44 (0)2893365421
Mobile: +44 (0)7920118731
Email: sue.holmes@contractingout.biz

- - - - Original Message - - - -

From: Ellesmere, Mark [mailto:Mark.Ellesmere@niwater.com]
Sent: 15 December 2009 10:41
To: Sue Holmes
Subject: RE: Contracting Out Settlement.
Importance: High

Sue can you send a word version of the proposed settlement terms - i have some comments on these.mark

- - - - Original Message - - - -

From: Sue Holmes <sue.holmes@contractingout.biz>
Sent: 14 December 2009 12:37
To: 'Ellesmere, Mark' <Mark.Ellesmere@niwater.com>
Subject: FW: Contracting Out Settlement.

Mark

Herewith as discussed Friday our letter of settlement together with the related settlement invoice. As indicated the attached invoice is a compromise settlement of the Invoice presented on 3 December in accordance with paragraph 4.3 of Schedule 7 of the Contract. It should be noted that the invoice presented on 3 December was supported with the necessary calculations of the sum due (i.e. vouched).

You have suggested in your email of 11 December 2009 that the settlement invoice should be vouched and indicated at the meeting that your expectations were to receive related time sheets. However the settlement invoice is a reflection of a commercial settlement which has no basis to the Contract and thus cannot be so vouched first as its basis is a sum that has been negotiated by the parties in respect of the terms of the settlement set out in the accompanying letter, and second even payments made in accordance with the Contract did not require timesheets but were based on progress payments. Only work carried out in terms of paragraph 2.1.5 of Schedule 7 required time sheets to be made available to support related invoices. The settlement invoice is not made in terms of paragraph 2.1.5.

I understand that in respect to your litigation with Steria you require the expenditure claimed by NIW in respect of Audit to be supported in the form of cost allocation to time invested. We have indicated previously that we would be willing in terms of a request in respect of paragraph 2.1.5 to put together such a support document but we have not yet received such a request.

Sue

Sue Holmes
Partner: Contracting Out LLP
Tel: +44 (0)2893365421
Mobile: +44 (0)7920118731
Email: sue.holmes@contractingout.biz

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This email and any files transmitted with it are private and intended solely for the use of the individual or the entity to which they are addressed. If you are not the intended recipient the email and any files have been transmitted to you in error, and any copying, distribution or other use of the information contained in them is strictly prohibited.

Nothing in this email amounts to a contractual or other legal commitment on behalf of Northern Ireland Water.

You are advised that both incoming and outgoing emails may be monitored and recorded. Whilst we have taken reasonable precautions to ensure that this email and any attachment has been checked for viruses, we cannot guarantee they are virus free and we cannot accept liability for any damage sustained as a result of software viruses. We would advise that you carry out your own virus checks, especially before opening an attachment.

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Jonathan Holmes

From: Ellesmere, Mark [Mark.Ellesmere@niwater.com]
Sent: 16 December 2009 18:03
To: sue.holmes@contractingout.biz
Cc: Mark Kirke
Subject: RE: Contracting Out LLP Response to Email of 15 December 2009
Importance: High
Sensitivity: Confidential

Sue, Thanks and noted. I believe we can work this through. As I indciated at our meeting I need some form of vouching in order to stand over the payment. I am in and out of office tomorrow bit I have authorised Mark Kirke to contact you directly in this regard and hopfully bring this to a satisfactory conclusion. Mark.

Mark Ellesmere

General Counsel & Company Secretary
northern ireland water
Northland House
3 Frederick Street
Belfast, BT1 2NR

Tel: +44(0)28 9035 7471 Ext: 24347
Web: www.niwater.com

Please consider the environment before printing this e-mail

From: Jonathan Holmes [mailto:j.holmes@contractingout.biz]
On Behalf Of sue.holmes@contractingout.biz
Sent: 16 December 2009 15:18
To: Ellesmere, Mark
Subject: Contracting Out LLP Response to Email of 15 December 2009
Importance: High

Hi Mark

Please see attached a PDF copy our response to your email of 15 December 2009. Original to be sent by post.

Regards

Sue

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This email and any files transmitted with it are private and intended solely for the use of the individual or the entity to which they are addressed. If you are not the intended recipient the email and any files have been transmitted to you in error, and any copying, distribution or other use of the information contained in them is strictly prohibited.

Nothing in this email amounts to a contractual or other legal commitment on behalf of Northern Ireland Water.

You are advised that both incoming and outgoing emails may be monitored and recorded. Whilst we have taken reasonable precautions to ensure that this email and any attachment has been checked for viruses, we cannot guarantee they are virus free and we cannot accept liability for any damage sustained as a result of software viruses. We would advise that you carry out your own virus checks, especially before opening an attachment.

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No 1 Larne Rd
Carrickfergus
Co. Antrim

BT38 7EW

T. 02893365421
E. j.holmes@contractingout.biz

Mr. Mark Ellesmere
Company Secretary
Northern Ireland Water Limited
Northland House
3 Frederick Street
Belfast
BT1 2NR 16 December 2009

Dear Sir

Re: The Master Agreement and Schedule 7 between Contracting Out LLP and Northern Ireland Water Limited ("NIW") dated April 2007 ("the Contract").

It appears from the first sentence of paragraph 1 of your email received 15 December 2009 that you seek to change the terms of the Contract. That is you wish to replace paragraph 4.3 with a fixed payment of £200k. You then go on in your paragraph 2a to require that amongst other things:–

• the invoice should be resubmitted with relevant vouching that is acceptable to NIW.
• the requirement should be considered a request under paragraph 2.1.5 but that this should give rise to no further cost.

If this reflects your conditions for settlement then I have a number of concerns:-

1. The Contract was terminated by NIW on the 2 November 2009 and this termination was accepted by Contracting Out LLP on the 3 November 2009 and all parties have subsequently acted in accordance with the processes of termination. I am concerned that the changes you are proposing would be effected to a Contract already terminated. At best this seems unusual perhaps even inappropriate and at worst could be seriously misconstrued – we would not wish to act in such a way.

2. It is unclear what would be acceptable vouching to NIW bearing in mind that fixed sums in terms of the Contract are deliverable-based not rates/time-based – even were this Contract current.

3. Given that the Contract has been terminated it is not possible to now be instructed under paragraph 2.1.5 and even if such an instruction were possible, the requirements for invoicing under paragraph 4.2 cannot be met retrospectively as such very detailed information is only recorded where required.

4. A request was made by NIW to Contracting Out (see attached email) to provide information to support the costs which NIW is seeking to recover from Steria. As indicated, we are willing to do this but it could not be to the level of detail required in paragraph 4.2 of the Contract. We can with minimal effort, for example, identify the number of people hours expended per month on the Contract and with some further effort link these monthly people hours to the deliverable on which such monthly hours were expended (through interrogation of working papers) but it should be appreciated this was not a requirement of the Contract even when current. It should also be noted that time expended in excess of the fixed fee for the Contract scope could only be recovered by the provisions of paragraph 4.3 for which time expended was not the condition of payment.

The offer made by NIW to Contracting Out LLP on 16 October 2009 did incorporate a proposal from NIW to change the terms of the Contract for an agreed payment within 14 days of £200k as well as an undertaking that work required to support any legal action would be instructed in terms of paragraph 2.1.5 up to 31 December 2009 (Expiry Date of the Contract) and thereafter through a separate procurement. As indicated this verbal agreement was not formalised by NIW within the agreed period and was anyway overtaken by the termination notice issued by NIW on 2 November 2009.

Your renewal of the settlement amount of £200k on 11 December 2009 was, we understood, made in respect of our invoice no COLLP337 and no mention was made of your requirement to change the Contract. This settlement offer was again agreed by Contracting Out LLP subject to the settlement conditions sent to you on Monday 14 December 2009. These settlement conditions have taken account of the commercial nature of the settlement given the termination notice of 2 November 2009 and thus have no bearing on the Contract.

We are still open to considering your proposed settlement but as explained above cannot see how all your conditions can be satisfied given that the Contract has been terminated.

As for the wording of the settlement letter we are happy to discuss this but I think this is likely to be easier to resolve once we can understand how your conditions for Contract change and vouching can be addressed given the Contract termination and the retrospective nature of your instructions.

In any event, we stand by the conditions of settlement to your offer, submitted by us to you on 14 December 2009.

Yours sincerely

Sue Holmes

Partner: Contracting Out LLP

Jonathan Holmes

From: Sue Holmes [sue.holmes@contractingout.biz]
Sent: 21 December 2009 13:15
To: 'Ellesmere, Mark'
Cc: 'Mark Kirke'
Subject: FW: Settlement Terms - Contracting Out LLP
Sensitivity: Confidential

Mark

On 3 December 2009 we submitted our invoice COLLP337 in terms of paragraph 4.3 of our Contract. You requested a meeting 11 Dec. 2009 at which you proposed a commercial settlement of £200k. On 14 Dec 2009 we submitted our terms on which we would accept such a settlement. Various correspondence took place with yourself and your lawyers. You requested that we change the Contract and provide time sheets to support the NIW commercial offer. We explained that changing the Contract was not possible and rather a questionable action since the contract had been terminated on 2 November 2009 by NIW. As for the timesheets you require we have already drawn your attention to the fact that the Contract does not require such time sheets as the payments were deliverable based (and in terms of the deliverables you have at no time disputed that the deliverables have been provided) and that anyway the commercial settlement was your proposal not ours. On Friday 18 Dec 2009 you told us that you were authorised to implement the commercial settlement provided we could furnish you with an estimate of the number of additional man-hours that amount represented. We agreed to provide this information but cautioned you that it would be based on the monthly estimates from the team – both you and Mark Kirke indicated this would be acceptable. It is clear that your negotiated position as of Friday has been changed.

We have explained in several emails and discussions that we cannot and will not be a party to some retro-fitting of the Contract. We have indicated that we are willing to agree a commercial settlement in respect to our claims in terms of paragraph 4.3 and we have set out the terms on which this can be agreed in our letter of today's date these terms have taken into account your time estimate requirements and the comments of your lawyers but are otherwise unchanged from our submission of 14 Dec. 2009.

We have attempted to understand your needs in respect to the vouching you claimed to need for internal justification of the settlement and we have attempted to assist. We have outlined the time allocation information we have kept for our own purposes and provided for you as agreed in our latest letter. We have also indicated what information could be generated if required but which would take substantial time and effort – such information was not a requirement of the Contract. We have also explained that neither of these would provide the level of detail you require in the time sheets you are demanding as a condition of the commercial settlement and thus such time sheets cannot be provided - yet this demand is again repeated in this morning's email. We consider this continued requirement inappropriate and unreasonable. The only way such timesheets could be provided to this level of detail is by invention and we will not be party to such actions.

As indicated by our letter we are willing to agree the amount of the commercial settlement proposed. The commercial settlement was in terms of paragraph 4.3 on which we have in good faith made very substantial concessions. However we are not prepared to accommodate further movements of the goal posts. Either we have a settlement as identified Friday and in our letter of 21 December or we do not. Our letter of today's date stands. If we have not received payment by the due date i.e. on or before 25th December 2009, we will as indicated revert to our rights under the Contract.

Sue

Sue Holmes
Partner: Contracting Out LLP
Tel: +44 (0)2893365421
Mobile: +44 (0)7920118731
Email: sue.holmes@contractingout.biz

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From: Ellesmere, Mark [mailto:Mark.Ellesmere@niwater.com]
Sent: 21 December 2009 10:53
To: sue.holmes@contractingout.biz
Cc: Mark Kirke
Subject: RE: Settlement Terms - Contracting Out LLP
Importance: High
Sensitivity: Confidential

Without Prejudice

Sue Thank-you for this. I have taken further instructions on this matter. I will only be able to agree payment upon receipt of daily timesheets to back up the 260 additional man days. Mark.

Mark Ellesmere

General Counsel & Company Secretary
northern ireland water
Northland House
3 Frederick Street
Belfast, BT1 2NR
Tel: +44(0)28 9035 7471 Ext: 24347
Web: www.niwater.com

Please consider the environment before printing this e-mail

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From: Jonathan Holmes [mailto:j.holmes@contractingout.biz]
On Behalf Of sue.holmes@contractingout.biz
Sent: 21 December 2009 00:02
To: Ellesmere, Mark
Cc: 'Mark Kirke'
Subject: Settlement Terms - Contracting Out LLP
Importance: High
Sensitivity: Confidential

Mark

Herewith as discussed Friday.

Regards

Sue

Sue Holmes
Partner: Contracting Out LLP
Tel: +44 (0)2893365421
Mobile: +44 (0)7920118731
Email: sue.holmes@contractingout.biz

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This email and any files transmitted with it are private and intended solely for the use of the individual or the entity to which they are addressed. If you are not the intended recipient the email and any files have been transmitted to you in error, and any copying, distribution or other use of the information contained in them is strictly prohibited.

Nothing in this email amounts to a contractual or other legal commitment on behalf of Northern Ireland Water.

You are advised that both incoming and outgoing emails may be monitored and recorded. Whilst we have taken reasonable precautions to ensure that this email and any attachment has been checked for viruses, we cannot guarantee they are virus free and we cannot accept liability for any damage sustained as a result of software viruses. We would advise that you carry out your own virus checks, especially before opening an attachment.

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No 1 Larne Rd
Carrickfergus
Co. Antrim

BT38 7EW

T. 02893365421
E. j.holmes@contractingout.biz

Mr. Chris Mellor
Chairman of the Board
Northern Ireland Water Limited
Northland House
3 Frederick Street
Belfast
BT1 2NR 5 February 2010

Dear Sir

Without Prejudice Save as to Costs

Dear Chris

Re: The Master Agreement and Schedule 7 between Contracting Out LLP and Northern Ireland Water Limited ("NIW") dated April 2007 ("the Contract").

My apologies for writing to you directly but unfortunately I have been left with little option.

You will no doubt recall that my company played a role in the Steria Contract termination last year helping to gather the information needed to bring the Steria Contract to a close and assisting with the transfer of the subcontracts to NIW.

Unfortunately despite our work being completed in late October 2009 payment of our Invoice COLLP337 for £755,290.77 presented in early December 2009 remains outstanding and is now attracting interest.

The Contract provided for the payment for services in part through a fixed fee and in part through a success fee. In this way NIW felt they had passed some of the cost risks to ourselves and this was accepted. It is our claim for the success fee that remains outstanding.

Soon after the Invoice was presented in December 2009 we were contacted by NIW and asked if we would agree a one-off settlement amount of £200k which would be paid directly to us if we waived all our rights in terms of the success fee. We were also told that NIW would like to use us further in this matter should the court case anticipated proceed.

While the offer was substantially less than our expectation from the terms of the Contract we agreed to accept the offer in order to maintain the good relations we have always enjoyed with NIW and also to avoid any conflict which may impinge on the success of the Steria action.

However shortly after agreeing to accept the NIW offer we were informed by NIW that we would only be paid the monies if and when we provided detailed daily time sheets to justify the amount of the offer.

We reminded NIW that the Contract did not require time sheets to be submitted as it was deliverable based (NIW had at the time the Contract was negotiated rejected a time and rates based approach to providing the services) and that therefore we never recorded such detailed daily information.

We pointed out that at best we could provide rough approximations of manpower allocations (which NIW were not prepared to accept) but that any attempt at daily time sheets would be nothing short of invention and that we could not be a party to such actions whatever the inducement.

We were disturbed that despite understanding that such information did not exist, NIW insisted again in a communication in late December that no payment in respect of the offer would be made unless the required daily time sheets were provided to the satisfaction of NIW.

Put in such an untenable position we brought the discussions in respect to the NIW offer to a close and we awaited payment of the invoice that had given rise to the offer.

We were again contacted informally by NIW's lawyers on 19 January 2010 and asked whether we were still prepared to settle. We made it clear that we were provided the requirement for daily time sheets was dropped. No further communication has been received.

We are a small company, should this invoice remain unpaid or a settlement not be reached we will be placed in a very difficult financial situation and will have to take steps we would normally wish to avoid.

We are therefore hopeful you will use your substantial influence to assist the parties to effect a settlement that will be proper, immediate and such that we will again be able to co-operate in the best interests of the Steria action being pursued by NIW.

In the interest of a speedy conclusion to this matter we hold ourselves available to meet with you during the next 14 days failing which, we shall assume a settlement cannot be found.

Yours sincerely

Sue Holmes

Partner: Contracting Out LLP

No 1 Larne Rd
Carrickfergus
Co. Antrim

BT38 7EW

T. 02893365421
E. j.holmes@contractingout.biz

To be Opened by Addressee Only
Strictly Private and Confidential

Mr. Paul Priestly
Permanent Secretary DRD
Department for Regional Development
Clarence Court
10-18 Adelaide Street
Belfast
BT2 8GB 5 February 2010

Also by E-mail to: paul.priestly@drdni.gov.uk

Dear Sir

Re: The Dispute and pending court action between Steria Ltd ("Steria") and Northern Ireland Water ("NIW").

The purpose of this letter is to draw to your attention to events you may wish to be aware of and which materially impact the above referenced action the success or failure of which will I believe have far reaching implications for the DRD and the public sector in general.

As you will be aware, not least from the injunctive action secured by NIW against Steria in June last year, the NIW claims against Steria are numerous, not without complexity and very substantial in terms of potential public purse recoveries. When this action comes to court it will no doubt be given a high public profile.

This action therefore needs more than most to be given the best opportunity to succeed on its merits all of which have been shown to be commercially and legally sound and persuasive. However, it seems that success is not being seriously pursued perhaps because failure is being seen as less reputationally damaging than the transparency necessary for the attainment of success.

It has taken substantial determination and dedication on the part of those who were charged with the Commercial and Technical Review of the Contract last year to overcome the many obstructions, inconsistencies and outright refusals to co-operate, put in the way of the investigation, not just by Steria, and complete the necessary work of the Reviews.

It is evident that the Reviews would not have been possible at all without the:-

• creation of the Commercial Directorate whose externally sourced Director had no historic investment in the status quo of this Contract but was instead motivated by delivering on procurement obligations and efficiency targets, and
• replacement of the existing Customer Services Director who was also the Contract SRO with the previous Business Services Director.

Even with the advantage of the new Commercial Director in the lead and the technical support of the new CS Director the internal resistance to the investigation was obvious and profound. There can be little doubt that the subsequent and ongoing refusal by Steria to co-operate in any way with both the Technical and Commercial investigations was partly the result of this internal resistance to the Commercial Review.

As a result of this combined resistance the Reviews required very substantial additional effort to complete. This additional effort was paid for directly on a rates basis to the Technical Review team who had been provided by one of the big four consulting companies. The Commercial team however were required by NIW to recover the additional fees due for extending their level of effort (from 18 May as contracted to 15 December as required by NIW) from the success fee provisions of their contract.

Despite these many impediments the findings of the second Commercial Review report (Initial Review report was issued in late April) were found to be as robust as they were astounding and both supported and enhanced the initial findings.

Attempts were made by NIW to find a settlement with the Contractor but the meetings held excluded, at Steria's request, those parties most closely associated with the reviews.

In June 2009 despite the findings of the Commercial and Technical Reviews the Director who had previously been in charge of the Contract and its SRO since inception requested and was granted immediate early retirement on full benefits.

Steria abandoned the Contract in early July 2009 and to ensure continuity of service it was necessary for NIW to take injunctive action against Steria based on the Initial Review findings. The action was successful however it is of interest to note that Steria did not attempt to refute the substance of the Affidavit submitted in support of the injunction application – which is now public record.

Given the fortunate treatment of the SRO it is bizarre that the two Directors who had championed the Commercial and Technical Reviews, achieved substantial savings and lead the successful transfer of the services to the subcontractors were made redundant; the Commercial Director with such speed as to risk incurring the perception of wrong doing. The Commercial Directorate as an entity ceased to exist.

What message can you take from such events other than it pays to be an insider whatever your performance?

As for myself and my team who amongst other tasks delivered the Commercial Review and worked in tandem with NIW's legal advisors the following instructions were given by NIW:-

• In June 2009 we were requested to agree to an expansion of the contract scope of work to include providing commercial support to the legal team for the injunction action and the subsequent full action where settlement was not achieved – both were agreed. This would have involved the extension of the contract term past December 2009.
• In July 2009 we were informed our contract would not be extended.
• In late August 2009 we were asked to again extend the scope of work to include the preparation of the commercial documents for and to include, the attendance at the Mediation hearings in Oct. 2009 - this was agreed and delivered.
• In October following the legal team's request for our help in the preparation of the Statement of Case for the follow on action to the injunction we were requested to agree an amount proposed by NIW (£200k) on which the success fee could be fully settled and to agree a new arrangement by which our commercial inputs could be secured for any future court action. Both were agreed by the parties subject to payment within 14 days of the settlement fee.
• In early November 2009 we were told to stop all work – at the time all work had been completed and we had not received any further instructions – and consider the contract terminated. We agreed but pointed out that as a result of the termination all outstanding amounts due must be paid directly in accordance with the contract.
• In early December 2009 following the submission of a success fee invoice (£750k) we were requested to attend a meeting with the Company Secretary (also General Counsel) at which time we were told that our contract had been ended in November 2009 due to internal complications which were not of our making but that our further inputs were required to support the ongoing action.
• We were asked again to agree to the settlement agreed in October 2009 with the Commercial Director (i.e. the amount agreed as full and final settlement of the success fee at £200k and a separate arrangement to support the legal team). Again we agreed and submitted our final invoice for the £200k amount agreed which was considerably less than the amounts due to us under the contract.
• We were advised by NIW the following week that the invoice for the settlement amount needed to be supported by daily time sheets which must be detailed to the satisfaction of NIW. It was well known to NIW that the contract was deliverable based not rates based (at NIW's request) and thus detailed time sheets had neither been required nor kept. We offered to furnish the number of people days and days of effort which were kept for own purposes but this was summarily rejected by NIW.
• In January 2010 the offer was again renewed by NIW's lawyers however it was again confirmed that we would not be paid the settlement amount unless these detailed time sheets satisfying NIW were provided.

As evidenced by our letter to the NIW Chairman (see attached - for which we have had no reply to date) the settlement offered by NIW requires us to essentially invent detailed information to support the offer of settlement payment from NIW! Given we are a company whose function is to help our clients detect just such inappropriate behaviour it must have been evident what our position was always going to be, despite the inducements.

Why would a major public sector body set conditions that were so obviously improper and hence impossible for us to fulfil lawfully? Was this to ensure that we would be sufficiently alienated to ensure that we like all the others who were directly involved in the reviews, would be detached from providing the support needed by the legal team?

The settlement agreed to by both parties on more than one occasion is easily justified by the terms of the contract and the very substantial savings it achieves, let alone the additional effort NIW has benefited from. Our reports continue to form the basis of the ongoing action which as a result of the non-payment by NIW they do not have the licence to use in this way.

Left with no alternative we pursued our rights under the contract and demanded payment of the success fee invoice presented in December 2009. To our disbelief NIW now claim no such monies were due. Given the offer of a settlement (£200k) made by NIW on more than one occasion to settle our success fee claims, and which we are told still remains open, this recent statement is absurd and vexatious. It is even more unacceptable when it is appreciated that:-

• the NIW claim which forms part of the Steria action includes for the reclaim of the monies supposedly paid to us which, we are then told by NIW, is not due to us!
• this amount is also fully funded from the extensive savings achieved by the renegotiation of the major subcontracts which was the intent of the success fee term of the Contract.

It is important to stress however that the purpose of this letter is not per-se the resolution of our dispute with NIW in respect of non payment as helpful as that would be to us and the success of the Steria action, but it is rather to bring to your attention a sequence of events that must be concerning if success in the Steria action is in fact the goal.

I am also not campaigning to be further involved in providing commercial support to the legal team though we are not entirely adverse to providing assistance once settlement has been achieved. We are nevertheless very aware of the necessity in these times of severe budget cuts for the public sector to seek to recover public funds via all proper means, even the courts, where an equitable settlement is not forthcoming.

Actions like these can be won but they need to be seriously championed and well supported both commercially and technically by specialists who have the necessary in-depth knowledge of the particulars but whose remuneration is not at risk merely because they are a David to NIW's Goliath.

Unfortunately unless this matter can be settled immediately NIW have left us with little alternative but to pursue payment through the channels available to us as a small company so as to resolve the non payment of our invoices and the clear issue of licence in respect of the use of the deliverables. If we are forced into taking this avenue we will sadly have to ignore the impact that our actions may have on the forthcoming Steria action in order that our company remains liquid.

I am grateful you have taken the time to review this submission and I hold myself available to meet, at which time we would be pleased to further evidence our concerns.

Yours sincerely

Sue Holmes

Partner: Contracting Out LLP

Letter to PAC

No 1 Larne Rd
Carrickfergus
Co. Antrim

BT38 7EW

T. 02893365421
E. j.holmes@contractingout.biz

Mr Paul Priestly
Permanent Secretary
Department for Regional Development
Room 701
Clarence Court
10-18 Adelaide Street
Belfast
BT2 8GB 22 March 2010

Also by E-mail to: paul.priestly@drdni.gov.uk

Dear Mr Priestly

Re: Your letter reference PSDRD 96/10 of 19 March 2010 in response to our letter of 28 February 2010.

Let me first thank you for replying to our letter. It has been unfortunately necessary to involve you in this matter as we have not been able to elicit similar prompt responses from NIW.

As I have indicated above your assistance in this matter is greatly appreciated. However, you have been incorrectly informed in regard to the £200k offer and its current status.

1. First the offer of settlement in respect of Clause 4.3 of our contract for the amount of £200k was made by NIW (11th December 2009) not by Contracting Out following the submission our first invoice in terms of Clause 4.3 on 3 December 2009.

2. While Contracting Out accepted the offer made on 11th December 2009 (see letters of 14 Dec., 21 Dec. 2009 attached) our acceptance was subject to time and payment conditions being fulfilled by NIW. No such payment was made by NIW and thus the acceptance offer expired.

3. NIW's rejection of our offer of acceptance and imposing new conditions that time sheets were provided was sent to us 24 Dec. 2009.

4. For the avoidance of doubt see our letter on 4 Jan. 2010 attached. NIW was certainly well aware that our offer of acceptance had expired, been rejected and had been withdrawn.

The Contracting Out claim is for £868k as per our invoice of the 3 Dec. 2009 in respect of clause 4.3 i.e. for savings identified now increased by interest due to £905k. This position is exactly as stated by NIW in its submission to the Independent Review Committee, NIW have quoted this amount increased by the interest due as of end Feb. 2010 ~ £888k.

Contracting Out's entitlement under Clause 4.3 is not the issue as evidenced by the offers from NIW of settlement and the NIW submission to the Review Committee. What seems to be the issue with NIW is the amount due under this entitlement.

There is also no doubt that substantial savings have been identified in terms of the Steria and Echo contracts and in the case of the Echo contract, on which the 3rd December invoice is based, already secured.

Contracting Out set out the basis of the amount of the claim in our invoice of 3 December 2009. The only letter we have received from NIW requires us to take account of the £3m termination claim. While we don't agree with NIW's position we have nevertheless pointed out that even if we take account of their position then an amount of £575k (Excl. VAT and interest) is due to us immediately and the balance can be disputed by NIW. No reply to this letter dated 5 February 2010 has yet been received.

Any settlement of our invoice is a settlement in terms of Clause 4.3 hence the only information required by NIW to 'consider' this invoice is the evidence of the savings and the percentage due to Contracting Out which forms part of the contract – all of which was made available with the invoice 4 months ago. In our recent letter of 16 March 2010 we have thus suggested this matter can be resolved by paying our invoice plus interest accrued, or by paying the portion not in dispute (including interest) in accordance with our letter of 5 Feb. 2010 or to agree a settlement figure before the end of the financial year 2010. NIW have not even acknowledged receipt of this letter.

However, in recognition of your most helpful intervention, and in a genuine desire to avoid impacting NIW's legal action with Steria we make the reasonable settlement offer set out below in respect of the provisions of Clause 4.3. This settlement can be more than justified by NIW as a result of the savings made, not just in respect of this invoice, but also in respect of the monies due to us as a result of the savings in respect to the Steria contract and is anyway more than funded by the savings on the Echo contract alone.

The offer, which is made without prejudice save as to costs, is: On deposit of £345k (Excl. Vat) in Contracting Out's Account as part payment of Invoice COLLP337 before 31 March 2010 Contracting Out agree it has no further claims in respect to Clause 4.3 or any other Clause under the contract and will (1) issue a credit note for the balance of the invoice COLLP337 i.e. (£905,215.99 - £345,000.00 = £560,215.99) and (2) issue a credit note for invoice COLLP341 (see copy attached) and will affect the transfer of the licence to use the deliverables.

In the event payment of this settlement amount is not made by NIW before 31 March 2010 we have attached our further invoice COLLP341 for savings identified in respect of the Steria contract to assist NIW to make the proper provision for this and invoice COLLP337 in their end of year accounts.

Yours sincerely

Sue Holmes

Partner: Contracting Out LLP

No 1 Larne Rd
Carrickfergus
Co. Antrim

BT38 7EW

T. 02893365421
E. j.holmes@contractingout.biz

Mr. Mark Ellesmere
Company Secretary
Northern Ireland Water Limited
Northland House
3 Frederick Street
Belfast
BT1 2NR 14 December 2009

Dear Sir

Re: The Master Agreement and Schedule 7 between Contracting Out LLP and Northern Ireland Water Limited ("NIW") dated April 2007 ("the Contract").

Invoice No COLLP337 dated 3 December 2009 in the sum of £868,584.39 (inclusive of VAT) ("the Invoice").

We refer to our claim for payment under the Contract set out in the Invoice (duly vouched) and our meeting on the 11 December 2009 to discuss settlement of the claim for payment under the Invoice.

We confirm that at our meeting on the 11 December 2009 we agreed to settle our claim for payment of the Invoice on a full and final basis and the purpose of this letter is to set out the terms of that settlement. The terms of settlement are as follows:

1. NIW shall pay Contracting Out LLP within 7 calendar days of the date of this letter the sum of £200,000.00 (two hundred thousand pounds) plus VAT in full and final settlement of the claim for payment pursuant to the Invoice and all claims for payment pursuant to the Contract subject to the terms of this letter. Payment shall be made by bank transfer to:–

Account: Contracting Out LLP
Bank: Co-operative Bank
Sort Code: 089299
Acc. No.: 69329489

We enclose our invoice ref. COLLP338 for the settlement sum.

2. This letter and the payment of the settlement sum is in full and final settlement of, and each of us to the fullest extent permitted by law releases and forever discharges the other, from all or any actions, claims, rights, demands or set offs, whether in this jurisdiction or any other, whether or not presently known to either of us, and whether at law, in equity or pursuant to statute and whether the claim is by either of us, our respective parent companies, principals, partners, directors, servants, agents or officers, and whether the claim is in respect of but not limited to negligence or breach of duty in respect of the Contract, the services provided pursuant to the Contract or the Invoice.

3. Each of us agrees on its own behalf and on behalf of its respective servants, directors, principals, parents, officers, agents or partners not to sue or commence proceedings, prosecute or cause to be commenced or prosecuted against any of the persons or entities aforesaid and action, claim, demand, suit of proceeding.

4. We shall each bear our own costs, whether legal or otherwise in respect of this settlement and we each agree to indemnify and keep indemnified the other against all claims, demands, costs, proceedings, charges and expenses which may be brought in respect of the Contract, the Invoice or the services provided pursuant to the Contract.

5. The purpose of this letter is to compromise our claim for payment pursuant to the Invoice and is not and shall not be construed by either of us as an admission of liability, default or otherwise.

6. This letter comprises the entire agreement and understanding between us in respect of this settlement and each of us represents that we have not entered into this compromise in reliance upon any representation or warranty made by or on behalf of the other (whether oral or in writing).

7. Each of us agrees to keep strictly confidential the terms of this letter and the negotiations leading up to it and not to disclose them to any third party other than as required by law or the order of a competent government authority or tribunal or of a court of law.

8. This letter shall be governed and construed in accordance with the laws of Northern Ireland and any dispute or difference in respect of, under or arising out of it shall be referred to the exclusive jurisdiction of the courts of Northern Ireland and we each submit to that jurisdiction.

9. We each agree that the terms of this settlement and this letter are not enforceable by any third party whether under the Contracts (Rights of Third Parties) Act 1999 or otherwise.

10. In the event the terms of this settlement letter are not complied with i.e. the time period specified in paragraph 1 above, then we reserve the right to pursue payment of the Invoice and interest thereon without further notice.

11. Acceptance of the terms of this letter by both parties will be deemed to have occurred on transfer of funds by Northern Ireland Water Limited to Contracting Out LLP within the time period specified in paragraph 1 above.

Yours sincerely

Sue Holmes

Partner: Contracting Out LLP
Encl. Invoice COLLP338

A Limited Liability Partnership Incorporated in Northern Ireland. Partnership Number NILLP243 Partners: Ms. S Holmes. Mr J Holmes MBA CHFI

No 1 Larne Rd
Carrickfergus
Co. Antrim

BT38 7EW

T. 02893365421
E. j.holmes@contractingout.biz

Mr. Mark Ellesmere
Company Secretary
Northern Ireland Water Limited
Northland House
3 Frederick Street
Belfast
BT1 2NR 21 December 2009

Dear Sir

Re: The Master Agreement and Schedule 7 between Contracting Out LLP and Northern Ireland Water Limited ("NIW") dated April 2007 ("the Contract").

Invoice No COLLP337 dated 3 December 2009 in the sum of £868,584.39 (inclusive of VAT) ("the Invoice").

We refer to our claim for payment under the Contract set out in the Invoice (duly vouched) and our meeting on the 11 December 2009 and subsequent conference calls to discuss settlement of the claim for payment under the Invoice.

We confirm that at our meeting on the 11 December 2009 we agreed to settle our claim for payment of the Invoice on a full and final basis and the purpose of this letter is to set out the terms of that settlement. The terms of settlement are as follows:

1. NIW shall pay Contracting Out LLP within 5 (five) calendar days of the date of this letter the sum of £200,000.00 (two hundred thousand pounds) plus VAT.

Note: this amount being the fees for additional man-days ( ~260) provided by Contracting Out over a six month period (May to October 2009) at the contractual daily rate of £775.00 per day (Excl. Vat) as required by NIW to source and research the necessary information once it became apparent that (1) NIW's contractor could not or would not provide the reports, records and documents essential to the commercial review and (2) NIW's contractor intended to terminate its provision of Services in early July 2009 (See paragraph 2.2).

2. This amount of £200k plus VAT shall be in full and final settlement of the claim for payment pursuant to the Invoice and all claims for payment pursuant to the Contract subject to the terms of this letter. Payment shall be made by bank transfer to:–

Account: Contracting Out LLP
Bank: Co-operative Bank
Sort Code: 089299
Acc. No.: 69329489

We enclose our invoice ref. COLLP339 for the settlement sum.

3. This letter and the payment of the settlement sum is in full and final settlement of, and each of us to the fullest extent permitted by law releases and forever discharges the other, from all or any actions, claims, rights, demands or set offs, whether in this jurisdiction or any other, whether or not presently known to either of us, and whether at law, in equity or pursuant to statute and whether the claim is by either of us, our respective parent companies, principals, partners, directors, servants, agents or officers, and whether the claim is in respect of but not limited to negligence or breach of duty in respect of the Contract, the services provided pursuant to the Contract or the Invoice.

4. We shall each bear our own costs, whether legal or otherwise in respect of this settlement.

5. The purpose of this letter is to compromise our claim for payment pursuant to the Invoice and is not and shall not be construed by either of us as an admission of liability, default or otherwise.

6. This letter comprises the entire agreement and understanding between us in respect of this settlement and each of us represents that we have not entered into this compromise in reliance upon any representation or warranty made by or on behalf of the other (whether oral or in writing).

7. Each of us agrees to keep strictly confidential the terms of this letter and the negotiations leading up to it and not to disclose them to any third party other than as required by law or the order of a competent government authority or tribunal or of a court of law.

8. This letter shall be governed and construed in accordance with the laws of Northern Ireland and any dispute or difference in respect of, under or arising out of it shall be referred to the exclusive jurisdiction of the courts of Northern Ireland and we each submit to that jurisdiction.

9. We each agree that the terms of this settlement and this letter are not enforceable by any third party whether under the Contracts (Rights of Third Parties) Act 1999 or otherwise.

10. In the event the terms of this settlement letter are not complied with i.e. the time period specified in paragraph 1 above, then we reserve the right to pursue payment of the Invoice or other claims and interest thereon without further notice.

11. Acceptance of the terms of this letter by both parties will be deemed to have occurred on transfer of funds by Northern Ireland Water Limited to Contracting Out LLP within the time period specified in paragraph 1 above.

Yours sincerely

Sue Holmes

Partner: Contracting Out LLP
Encl. Invoice COLLP339

A Limited Liability Partnership Incorporated in Northern Ireland. Partnership Number NILLP243 Partners: Ms. S Holmes. Mr J Holmes MBA CHFI

No 1 Larne Rd
Carrickfergus
Co. Antrim

BT38 7EW

T. 02893365421
E. j.holmes@contractingout.biz

Mr. Mark Ellesmere
Company Secretary
Northern Ireland Water Limited
Northland House
3 Frederick Street
Belfast
BT1 2NR 4 January 2010

Dear Sir

Re: The Master Agreement and Schedule 7 between Contracting Out LLP and Northern Ireland Water Limited ("NIW") dated April 2007 ("the Contract").

Invoice No COLLP337 dated 3 December 2009 in the sum of £868,584.39 (inclusive of VAT) ("the Invoice").

We refer to our e-mail and proposed settlement terms dated the 21st December 2009 in respect of the above Invoice.

We note that no payment in respect of the proposed settlement had been made by Northern Ireland Water in accordance with the terms of our letter of the 21 December 2009.

Accordingly we write to formally confirm the withdrawal of our offer of settlement of the above Invoice.

The full sum claimed in the Invoice remains due and owing and we shall take such steps as are open to us to recover that sum together with interest thereon and costs of recovery without further notice to you.

Yours sincerely

Sue Holmes

Partner: Contracting Out LLP

No 1 Larne Rd
Carrickfergus
Co. Antrim

BT38 7EW

T. 02893365421
E. j.holmes@contractingout.biz

Mr. Mark Ellesmere
Company Secretary and General Counsel
Northern Ireland Water Limited
Northland House
3 Frederick Street
Belfast
BT1 2NR 8 February 2010

Dear Mark

Re: The Master Agreement and Schedule 7 between Contracting Out LLP ("COLLP") and Northern Ireland Water Limited ("NIW") dated April 2007 ("the Contract").

Thank you for your letter of the 5 February 2010.

Whilst I am pleased for your acknowledgement of COLLP's entitlement I cannot accept your position in respect of payment or the sums claimed being due for the following reasons:

(i) Paragraph 4.3 of schedule 7 only requires that the Consultancy "identifies" cost reductions and/or cost recoveries. Recovery is a matter for NIW and payment is not in any way dependent on such recovery. By way of example if NIW's position were correct then COLLP could identify cost reductions/savings, etc. and if NIW elected either not to pursue them or to compromise any claim then COLLP could not recover. This is commercial nonsense.

(ii) Paragraph 4.3 of Schedule 7 requires that the Consultancy negate and/or off-set the £3.0 million termination claim; both of these have in fact been achieved and the supporting work for both those conditions formed the basis of the NIW action with Steria that culminated in the injunction of June 2009 and also formed the basis of the mediation of October 2009.

In any event regardless of (i) or (ii) above and accepting the NIW interpretation of paragraph 4.3 as set out in your letter, which we do not, COLLP have both identified and secured cost savings / reductions well in excess of £3 million in respect to the Echo Subcontract (contrary to your assertion that cost recoveries have not been made) and when deducting that figure from the sum identified in our invoice COLLP337, COLLP are still entitled to a sum of £575,290.77 (Excl. VAT). Given NIW's position as stated in your letter of 5 February 2010 then this undisputed amount should have already been paid to COLLP and the balance of the invoice disputed before payment became due.

Consequently the sums we have claimed are due and continue to attract interest. If this matter is not settled then we will continue to advise you periodically of the accrual of these charges.

Whilst I note that you say that NIW continue to be willing to "discuss matters" I find this hard to accept given that NIW continue to link this to the provision of information which it knows does not exist and which COLLP have already said it is unwilling to create. Such continued linkage can only serve to thwart any suggested settlement. Whilst COLLP remains willing to enter into discussions I must question just how serious NIW's intentions are in this respect.

To date acceptance of the offer of settlement presented to COLLP by NIW would have been either improper or impossible. Unless an offer can be made by NIW in the next week (5 working days commencing 8 February 2010), that withdraws the requirement for COLLP to create information, we will consider settlement unachievable. In the event such settlement is not achieved in this additional time period then the amount of £575,290.77 excl. VAT shall become immediately due and payable as part-payment of the invoice COLLP337 in accordance with NIW's claimed position in respect of paragraph 4.3 as set out in your letter of 5 February 2010.

Finally, regarding the provision of documents: As you are aware any NIW information that still remains in our possession are simply copies of existing NIW information which you already have and thus is readily available to you for whatever purpose (you will recall that COLLP were not permitted access by NIW to original or primary documents). Our contractual obligations are to confidentiality only. In addition we are currently in dispute with NIW in respect to payment of our fees and such information will be needed to support our claims.

As to information produced by COLLP you will be aware of the provisions of clause 3.1 of the Master Agreement under which all COLLP rights are reserved until payment of all fees due. The provision and use of this information therefore can only be after such payment is made. In any event you have all the Deliverables already however their use remains restricted under clause 3.1 as set out above.

You also refer to provision of "other forms of information". This is far too vague and you will have to more specific as to what you are seeking.

Hopefully this matter can now be properly resolved.

Yours sincerely

Sue Holmes

Partner: Contracting Out LLP

No 1 Larne Rd
Carrickfergus
Co. Antrim

BT38 7EW

T. 02893365421
E. j.holmes@contractingout.biz

Mr Laurence MacKenzie
Chief Executive Officer
Northern Ireland Water Limited
Northland House
3 Frederick Street
Belfast
BT1 2NR 22 March 2010

Dear Sir

Re: The Master Agreement and Schedule 7 between Contracting Out LLP ("Contracting Out") and Northern Ireland Water Limited ("NIW") signed April 2007 (the Contract).

Attached please find invoice COLLP341 for the savings identified in respect of the Steria contract.

We bring this to your attention to assist you make the proper provision in NIW's accounts for this invoice and invoice COLLP337 in the event that our offer sent under separate cover cannot be finalised.

Yours sincerely

Sue Holmes

Partner: Contracting Out LLP

Cc Mr Paul Priestly, Permanent Secretary DRD.

A Limited Liability Partnership Incorporated in Northern Ireland. Partnership Number NILLP243 Partners: Ms. S Holmes. Mr J Holmes MBA CHFI

From: Sue Holmes
To: "Jonathan Holmes"
Subject: FW: Belfast telegraph queries
Date: 07 July 2010 09:29:00

Sue Holmes

Partner: Contracting Out LLP
Tel: +44 (0)2893365421
Mobile: +44 (0)7920118731
Email: sue.holmes@contractingout.biz

From: DGordon@belfasttelegraph.co.uk [mailto:DGordon@belfasttelegraph.co.uk]
Sent: 28 June 2010 14:24
To: sue.holmes@contractingout.biz
Subject: Belfast telegraph queries

Ms Holmes:

Apologies for the delay in getting this to you - I got hit with an unexpected bit of work this morning.

Some of this is on the technical side, and includes effectively checking information about Contracting Out's work for NI Water against what others - including NIW itself - have said.

The context is that the Assembly's Public Accounts Committee is holding a hearing this Thursday on NI Water governance. I expect Contracting Out's payments to be raised in the course of this.

If you wish to respond, please do so if possible by 2.30 pm tomorrow (Tuesday June 29)

Thanks

David Gordon
Political Editor
Belfast Telegraph
Tel

1) Can you confirm your own previous involvement in Water Service and NI Water?

I am told that you were Director PPP up to April 2007, working on secondment from Strategic Investment Board. After this date, I am informed you were then interim Head of Contracts Unit for a period, working on a consultancy/freelance basis.

2) Have you any comment to make on NI Water hiring Contracting Out through a single tender action to advise on termination of Steria contract? This appointment was the subject of an internal audit review - leading to a wider independent procurement review that ended up costing the NI Water chairman and three other directors their board posts.

3) Can you confirm the payments received by Contracting Out from NI Water for advice on the Steria contract? NI Water has stated that it paid £526,982 in total for work between February 2009 and November 2009.

4) Were your payments/bills supposed to be tied to savings secured from the Steria termination process? If so, how could these be calculated given that the Steria termination has still to be concluded?

5) Does Contracting Out wish to comment on the extracts below from the independent review of NIW procurement (A) and an internal audit document (B)?

Both these documents are published online by the Department of Regional Development. Together they clearly identify Contracting Out as Contractor A

Extract (A) - independent review: "The investigation into Contractor A, a consultancy specialising in procurement, had concluded that that organisation had been engaged through a STA with a spend to date of £660,000, a further £50,000 in the pipeline and a settlement on the six per cent incentive bonus relating to 'identified savings' yet to be reached (detailed in Schedule 7 to the contract master agreement and relating to the termination of the Customer Billing/Contact contract). We understand that in December 2009 NIW received a further invoice for £888,000 based on Contractor A's calculation of the savings and interest to date on the claims identified, which remain outstanding. We were told by NIW that the position is under consideration."

Extract (B) internal NI Water audit: "A recent independent review was commissioned by the Chief Executive into the appointment of Contracting Out LLP to assist with the Steria contract termination. That review highlighted that the appropriate internal and external Shareholder approvals, as required by the delegated authorities set out in the financial delegations policy, had not been obtained. This applied to both the award of the framework contract to Contracting Out LLP under a single tender action 'STA' and the framework schedule for subsequent work in relation to the Steria exit.

The Chief Executive notified the Shareholder of the issues found and gave an undertaking that internal actions would be pursued to ensure that such procurement authority breaches do not recur in the future. In support of this a second independent review was commissioned by the Chief Executive to assess whether any other existing contracts had not been approved properly in line with the delegated policy and if so, to identify any process improvements needed to prevent unauthorised contracts being placed going forward."

The online publication of documents can be found here:
http://www.drdni.gov.uk/index/publications/publications-details.htm?docid=5978

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Head of Civil Service's letter to the Chairperson 31 August

Bruce Robinson
Head of the Northern Ireland Civil Service
Head of the Office of the First Minister & Deputy First Minister
Stormont Castle
Stormont
Belfast

BT4 3TT

Tel: 028 90378133 Fax 028 90378205
E-mail: hocs@ofmdfmni.gov.uk
HCS-620-10

Mr Paul Maskey
Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX 31 August 2010

Dear Paul

Thank you for your letter of 26 August and the enclosed papers.

To enable the Committee to consider the wider issues raised in evidence on 1 July you asked for the terms of reference for the investigation following Paul Priestly's suspension from his position of Permanent Secretary of the Department for Regional Development and I enclose a copy. As you may be aware I took the decision to suspend Mr Priestly in light of information which emerged on 17 August concerning events which followed the Public Accounts Committee hearing on Northern Ireland Water on 1 July 2010.

The decision to suspend Mr Priestly was taken in line with the employment policies of the Northern Ireland Civil Service (NICS) which are set out in the NICS Human Resource Handbook. In accordance with the provisions of the Handbook, the suspension is not a disciplinary penalty but is designed to facilitate an investigation into the circumstances relating to this matter.

The investigation will be undertaken by Sir Jon Shortridge KCB, former Permanent Secretary of the Welsh Assembly Government. He plans to commence his investigation at the start of October and I would hope that it will be completed by the end of that month.

On completion of the investigation Sir John Shortridge will submit his report to me and I will decide at that stage what further steps should be taken in accordance with the employment policies of the NICS. Until then I will not be providing any further information about the conduct or progress of the investigation. In accordance with the obligations placed on employers by data protection legislation, the contents of the investigation report once completed will not be made public. I am sure that you, like I, will be conscious of the duty of care which must be exercised to any individuals who find themselves the subject of an investigation of this nature and that great care should be taken in any public comment about this issue.

I have considered the papers enclosed with your letter and which relate to a dispute between Northern Ireland Water and the company Contracting Out LLP and it is my view that the complaints concerning Mr Priestly do not fall to be investigated under paragraph 4.1 of Section 6.03 of the NICS HR Handbook.

I have also written today to the Chair of the Regional Development Committee and the C&AG to notify them of the Terms of Reference for the investigation and the identity of the person carrying out the investigation. I intend making the information about this investigation public shortly.

Yours sincerely

Bruce Robinson

Head of the NI Civil Service

Terms of Reference for Investigation - Paul Priestly

HCS-606-10

Terms of Reference

1. Following allegations of irregularities around the awarding of procurement contracts in Northern Ireland Water (a government owned company), the Department for Regional Development (DRD) commissioned an Independent Review Team to carry out a review of the circumstances surrounding these alleged irregularities. The role of the Independent Review Team was discussed, inter alia, at the Northern Ireland Public Accounts Committee hearing on the Governance of NI Water held on 1 July 2010 attended by DRD officials including Paul Priestly, DRD Permanent Secretary and Accounting Officer.

2. Subsequently, a member of the Independent Review Team wrote to the Public Accounts Committee criticising how the hearing was conducted. As a result of his role in this correspondence Mr Priestly was suspended from duty on 17 August 2010 under paragraph 7.1 of section 6.03 of the NICS HR Handbook to allow an investigation to be carried out in line with paragraph 4.1 of section 6.03 of the NICS HR Handbook.

3. As Head of the Northern Ireland Civil Service I have asked you to undertake this investigation. It should be carried out expeditiously bearing in mind the need for a full and proper investigation and consideration of all the facts of the case. The output of this investigation will be a report to be submitted to me which will establish the facts regarding the conduct of Mr Priestly and any other civil servant in relation to the letter of 5 July 2010.

4. The report will include your comment on whether you believe there may have been any misconduct, including breaches of relevant standards of conduct, terms and conditions of appointment, and in Mr Priestly's case, his personal responsibilities as Accounting Officer and Head of Department.

Bruce Robinson

Head of Northern Ireland Civil Service

Date: 27 August 2010

Statement by Declan Gormley and Chris Mellor 1 September

Tab 1

Tab 3

Letter from DRD to the Chairperson 2 September

Letter from DRD to the Chairperson 7 September

Appendix 4 - 01.04.10 Annex B

Appendix 10

Correspondence
September 2010 –
3 February 2011

Chairperson's letter to C&AG 3 September

Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX

Tel: (028) 9052 1208
Fax: (028) 9052 0366
E: pac.committee@niassembly.gov.uk
aoibhinn.treanor@niassembly.gov.uk

3 September 2010

Mr Kieran Donnelly
Comptroller and Auditor General
Northern Ireland Audit Office
106 University Street
Belfast
BT7 1EU

Dear Kieran,

Thank you for your participation in the Committee's meeting yesterday.

The Committee agreed that in order to ensure the accuracy of its final report that you undertake an exercise to:

1) validate and seek to give an assurance/opinion on the 74 contractors and Contractor A identified at is evidence session on 1 July

2) validate the accuracy of the deep dive audit undertaken and to determine whether any other procurement issues exist prior to the establishment of NI Water as a Government Owned Company (GoCo).

I would be grateful if you could indicate a timeframe for the above information in order to enable the Committee to consider it in its report.

Yours sincerely,

Paul Maskey

Chairperson
Public Accounts Committee

Chairperson's letter to HOCS 6 September

Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX

Tel: (028) 9052 1208
Fax: (028) 9052 0366
E: pac.committee@niassembly.gov.uk
aoibhinn.treanor@niassembly.gov.uk

Mr Bruce Robinson
Head of the Civil Service
Room FD34
Stormont Castle
Belfast
BT4 3TT 6 September 2010

Dear Bruce,

PAC inquiry into Procurement Governance at NI Water

Thank you for your letter dated 31 August 2010. The Committee considered this at its meeting of 2 September, and the information has been useful in helping the Committee decide its next steps.

For completeness, Members agreed to ask you by what alternative process you will address the allegations made by 'Contracting Out LLP', given that you do not deem it appropriate that they be dealt with in the current investigation by Sir John Shortridge. I would be grateful for your reply by 14 September 2010.

The Committee would also be grateful for an update from you at the conclusion of the current investigation, in confidence if necessary, in relation to any outcome and/or action which may have a bearing on its governance inquiry.

Yours sincerely,

Paul Maskey

Chairperson
Public Accounts Committee

Chairperson's letter to Dr McKibbin 7 September

Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX

Tel: (028) 9052 1208
Fax: (028) 9052 0366
E: pac.committee@niassembly.gov.uk
aoibhinn.treanor@niassembly.gov.uk

7 September 2010

Dr Malcolm McKibbin
Accounting Officer
Department for Regional Development

Cc Lian Patterson
Finance Director

Dear Malcolm,

Public Accounts Committee Evidence Session on Governance of NI Water

Thank you for the Department's letters of 2 and 7 September 2010 providing an update to the Committee on the progress of the mapping exercise and the disciplinary process that is being conducted.

The Committee has noted Mr McKenzie's offer to provide a confidential oral briefing on the disciplinary measures and agreed that it may follow this up with him at a later date.

The Committee has also asked the Comptroller and Auditor General to go in to NI Water to examine the procurement concerns raised in recent internal audit reports, and he has agreed to do so.

Further to the information you provided regarding staff substitutions, the Committee has asked for additional detail. Please provide a breakdown of human resource moves by discipline at transformation, to demonstrate the cost impact of replacing specialist and generic capacity in the organisation; and a breakdown of the cost of replacing civil servants who did not move from Water Service to NI Water.

The Committee may have further questions when it has fully considered today's letter from Ms Patterson. I appreciate your ongoing assistance with these queries.

I would be grateful to receive your reply by 17 September 2010.

Yours sincerely,

Paul Maskey

Chairperson
Public Accounts Committee

HOCS letter to Chairperson 14 September

Bruce Robinson
Head of the Northern Ireland Civil Service
Head of the Office of the First Minister & Deputy First Minister
Stormont Castle
Stormont
Belfast

BT4 3TT

Tel: 028 90378133 Fax 028 90378205
E-mail: hocs@ofmdfmni.gov.uk
Our Ref: COR/128/10
HCS-620-10

Paul Maskey MLA
Chairperson
Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX 14 September 2010

Dear Paul

PAC Inquiry into Procurement Governance at NI Water

Thank you for your letter of 6 September. You had asked me for completeness to outline by what alternative process I will address the allegations made by Contracting Out LLP.

As this relates to a contractual/commercial agreement between NI Water and Contracting Out LLP, it would be inappropriate at this time for either the Department for Regional Development or my office to initiate a review into how this has been handled. However, the PAC may wish to raise this matter with the NIAO so that consideration can be given as to whether it is appropriate to address the allegations as part of the current NIAO investigation into procurement contract issues in NI Water.

Yours sincerely

Bruce Robinson

Head of the NI Civil Service

Dr McKibbin's letter to Chairperson 17 September

Annex A

Breakdown of human resource moves by discipline at transformation, to demonstrate the cost impact of replacing specialist and generic capacity in the organisation; and a breakdown of the cost of replacing civil servants who did not move from Water Service to NI Water.

Background

It was originally planned that the GoCo would be established on 1 April 2006. As a result Staff in Water Service started to transfer to the rest of NICS from 2005. However, the GoCo was not established until 1 April 2007 by which time a significant amount of staff had transferred from Water Service to the rest of the NICS.

Transfers out of Water Service

Employee records during the two year period April 2005 to March 2007 were maintained in the Human Resource Management System (HRMS). The information shown in Table 1 below has been obtained from the HRMS and shows staff movements from Water Service to the rest of the NICS over the two year period:

Table 1

Comparison of staffing levels within Water Service and NI Water

Average staff numbers during the period of transformation are shown in Table 2 below:

Table 2

Source: Water Service/NI Water Annual Reports

Note the figures shown in Table 2 do not include staff substitutes/contracted staff.

NIW Vacancy Management

The following should be noted in respect to filling posts left vacant by those transferring out and the engagement of staff substitutes:

• Not all transferee's were replaced on a "like for like" basis;
• Not all staff substitutes were used to cover vacant posts left by staff transferring out. Some staff substitutes were used (pending recruitment of permanent staff) to fill new roles which had not existed in Water Service others were required to cover a peak in work-load required at the establishment of NIW;
• Some vacant posts were quickly filled by recruiting new permanent staff whilst others were covered by using staff substitutes;
• In some cases efficiencies were made and the post was not filled due to the introduction of new processes; and
• Water Service / NIW underwent a substantial restructuring during this period and in some cases permanent and temporary employees were utilised in different roles.

There is therefore not a one to one mapping between staff transferring out and staff substitutes engaged in the business during the time of transformation. For the above reasons NIW is not in a position to match staff substitutions against the names / positions of those who transferred out and to provide accurate associated additional costs.

Chairperson's letter to HOCS 22 September

Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX

Tel: (028) 9052 1208
Fax: (028) 9052 0366
E: pac.committee@niassembly.gov.uk
aoibhinn.treanor@niassembly.gov.uk

Mr Bruce Robinson
Head of the Civil Service
Room FD34
Stormont Castle
Belfast
BT4 3TT 22 September 2010

Dear Bruce,

PAC inquiry into Procurement Governance at NI Water

Thank you for your letter dated 14 September 2010. The Committee considered this at its meeting of 21 September.

The Committee acknowledges that one allegation made by Contracting Out LLP relates to procurement, namely the practice of NIW in requiring timesheets to support a contractual payment. The Committee has already referred this allegation to the NIAO.

Nonetheless, the Committee maintains that the second allegation, which related to Mr Priestly's treatment of a whistleblower request, falls squarely in your remit to investigate.

The Committee would be grateful if, by return, you should describe your next steps in taking this forward.

I would be grateful to receive your reply by 29 September 2010.

Yours sincerely,

Paul Maskey

Chairperson
Public Accounts Committee

HOCS letter to Chairperson 27 September

Bruce Robinson
Head of the Northern Ireland Civil Service
Head of the Office of the First Minister & Deputy First Minister
Stormont Castle
Stormont
Belfast

BT4 3TT

Tel: 028 90378133 Fax 028 90378205
E-mail: hocs@ofmdfmni.gov.uk
Our Ref: COR/128/10
HCS-620-10

Paul Maskey MLA
Chairperson
Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX 27 September 2010

Dear Mr Maskey

PAC Inquiry into Procurement Governance at NI Water

I am writing to acknowledge receipt of your letter to Bruce Robinson, Head of the NI Civil Service dated 22 September 2010 received in our office by e-mail today 27 September in relation to the above.

Your letter is receiving attention.

Yours sincerely

Pauline Boyle

HOCS letter to Chairperson 1 October

Bruce Robinson
Head of the Northern Ireland Civil Service
Head of the Office of the First Minister & Deputy First Minister
Stormont Castle
Stormont
Belfast

BT4 3TT

Tel: 028 90378133 Fax 028 90378205
E-mail: hocs@ofmdfmni.gov.uk
Our Ref: Our Ref: COR/128/10
HCS-732-10

Paul Maskey MLA
Chairperson
Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX 1 October 2010

Dear Paul

PAC Inquiry into Procurement Governnance at NI Water

Thank you for your further letter of 22 September. I believe you are referring to paragraph 9 of Sue Holmes letter. However it is difficult to see how the letter received from her by Mr Priestly on 28 February 2010 can be characterised as whistleblowing. It concerns a claim by Ms Holmes' company for amounts she feels are due under a contract with NI Water. I note on 19 March Mr Priestly informed Ms Holmes that he had discussed the matter with Mr Mackenzie and in her response of 22 March Ms Holmes characterised his letter as "helpful".

In these circumstances I do not intend to ask Sir Jon Shortridge to investigate this matter.

Yours sincerely

Bruce Robinson

Head of the NI Civil Service

Chairperson's letter to Regulator 10 October

Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX

Tel: (028) 9052 1208
Fax: (028) 9052 0366
E: pac.committee@niassembly.gov.uk
aoibhinn.treanor@niassembly.gov.uk

10 October 2010

Mr Iain Osbourne
Utility Regulator
Queen's House
14 Queen Street
Belfast BT1 6ED

Dear Iain,

PAC inquiry into Procurement Governance at NI Water

The Committee has considered the evidence it has received to date in this inquiry.

You will appreciate that this evidence includes oral evidence, correspondence with witnesses and FOI responses which have been brought to the Committee's attention.

You wrote to me on 5 August regarding procurement in utilities locally, and provided some additional material to the Committee about your response to issues of non-competitive tendering that had arisen in Northern Ireland Electricity (NIE) in procurement of legal and consultancy services.

The Committee has agreed to request the following further information from you.

1. The number of procurement breaches identified in NIE and, for each breach, the name of the company, the nature and value of the breach and the period to which it relates;

2. The name of the Chief Executive in post at the time of the breaches;

3. A copy of your letter of March 2009 to NIE in which you identified an earlier procurement breach together with the response from NIE;

4. Your letter of 17 June 2010 to NIE which highlighted your concerns following the procurement audit;

5. Copies of all documentation provided to any member of the Committee under FoI — without redaction.

The Committee has considered NIW's procurement plans and procurement activity reports and the reporters' findings (the Halcrow reports) which were submitted to you. While requiring quantitative measures of improvement relating to procurement activities, the reporter's reviews did not identify the procurement failings later discovered by NIW Internal Audit. In view of this, do you consider that the current approach to the reporters' reviews remains adequate in terms of NIAUR oversight? Do you consider that reviews of procurement activity should not only assess whether appropriate procurement policies and procedures are in place, but test compliance with such policies and procedures?

I would be grateful to receive your reply by 21 October 2010.

Yours sincerely,

Paul Maskey

Chairperson
Public Accounts Committee

Letter to Dr McKibbin 11 October 2010

Public Accounts Committee
Room 371
Parliament Buildings
BELFAST BT4 3XX

Tel: (028) 9052 1208
Fax: (028) 9052 0366
E: pac.committee@niassembly.gov.uk
aoibhinn.treanor@niassembly.gov.uk

11 October 2010

Dr Malcolm McKibbin
DRD Accounting Officer
Room 702, Clarence Court
10-18 Adelaide Street
Belfast BT2 8GB

Dear Malcolm,

PAC inquiry into Procurement Governance at NI Water

The Committee has considered the evidence it has received to date in this inquiry and agreed to request the following further information from you.

You will appreciate that this evidence includes oral evidence, correspondence with witnesses and FOI responses which have been brought to the Committee's attention.

1. For completeness, the Committee wishes that you provide to it transcripts or notes of all of the interviews carried out by and all statements submitted to the review team (IRT); and all correspondence between the team and those interviewed. I would be grateful to receive this by 15 October.

2. On 18 January 2010 a number of DRD staff were engaged in researching grounds for the dismissal of NIW Board members. Why were staff undertaking this task, and on whose instructions?

3. On 19 January 2010 Paul Priestly set out in email to Lian Patterson a proposal to commission a "quick review" on action to be taken to address governance failures, asking "might this be enough to persuade LMcK?" Ms Patterson responded "Think you have a very good plan… I can put to Laurence today." Please explain what Mr Priestly was attempting to persuade the CEO to do and why this was linked to the review.

4. The Committee noted that the contracts approval internal audit report makes no reference to governance failings. In light of this, how do you explain the presumption in the terms of reference of the review that there had been governance failures? Who drafted the review team's terms of reference, and how were its members selected?

5. In regard to the establishment of the review team, the Committee wishes to clarify the commissioning arrangements. The review team report states that it was jointly commissioned by the Accounting Officers of DRD and NIW. However, at the evidence session on 1 July, Mr Priestly referred to this issue as his decision. In light of this inconsistency, please clarify who commissioned the team.

6. On 20 January 2010 Paul Priestly wrote to the NIW Chairman informing him that, on the advice of the review team, the CEO should "exclude himself from all Board discussions on the review and the matters which have led to it". What was the basis of this advice? When was this matter discussed by the review team and who was present when it was discussed? Please provide a copy of the minutes of any meeting where this advice was given.

7. The Chairman informed NIW Board members on 21 January 2010 that Laurence MacKenzie had withdrawn his resignation as he had "received legal advice that I should withdraw my resignation on the basis that I am not personally culpable in respect of any of the contract regularities, and that's the view of the Review Team as well".

a. If the legal advice received by Mr MacKenzie was paid from public funds, please provide a copy of this advice and details of the cost, who paid for it and who authorised payment.

b. How did the review team determine that Mr MacKenzie was not culpable?

c. When did the team make this decision, and who was present when it was made? If there is a minute of this meeting, please provide a copy.

d. Why was this view not referred to in the review team's report?

8. The Committee also wishes to receive the following documentation:

a. The responses from the NIW Chairman, NIW Board and CEO to drafts of the review team report and any correspondence between the review team and the Chairman, Board members or CEO relating to these responses.

b. The response from DRD to the second draft of the review team report.

c. Responses from Bruce Robinson to Paul Priestly's emails to him on 19 January discussing the establishment of the review team, and all correspondence between DRD and Bruce Robinson re establishment of the review team.

d. In full, Lian Patterson's recommendation on 2 March 2010 of ministerial dismissal of Board members.

e. All documentation within DRD and between DRD and Don Price regarding his retention; and the rationale for retaining Mr Price and giving him alone the opportunity to stay and give undertakings of good faith.

f. Copies of requests for conflicts of interest by DRD to, and the conflicts registered by, the members of the review team.

I will also be writing on the Committee's behalf directly to Laurence McKenzie to ascertain specific details from his perspective.

You will appreciate that the Committee's inquiry has developed in an unprecedented manner, and it is of the utmost importance that it has all material information before it to exercise its objective functions of scrutiny and reporting.

I would be grateful for your reply by 21 October 2010, except for the information requested at paragraph 1, which is required by 15 October.

Yours sincerely,

Paul Maskey

Chairperson
Public Accounts Committee

Chairperson's letter to Mr MacKenzie 12 October

Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX

Tel: (028) 9052 1208
Fax: (028) 9052 0366
E: pac.committee@niassembly.gov.uk
aoibhinn.treanor@niassembly.gov.uk

Mr Laurence MacKenzie 12 October 2010

Dear Laurence,

PAC inquiry into Procurement Governance at NI Water

The Committee has considered the evidence it has received to date in this inquiry.

You will appreciate that this evidence includes oral evidence, correspondence with witnesses and FOI responses which have been brought to the Committee's attention.

The Committee has agreed to request the following further information from you:

1. On 18 January you provided Board members with a summary of the contracts approval internal audit findings and informed the DRD Accounting Officer of those findings. The Board members did not receive a full copy of the Report until 21 January. It has been argued that your responsibilities to the Board required you to release the report to the Board in the first instance and give it the opportunity to consider the matter before reporting to the departmental accounting officer. Why did you decide not to do so?

2. The Committee asks that you outline the relationship between yourself, Peter Dixon and Paul Priestly. As part of your response the Committee invites you to explain the purpose of your meeting with Mr Dixon on 15 January and the meaning of the "done deal" reference in your email of 19 January to Mr Dixon.

3. The Committee asks that you outline the circumstances leading to the restructuring within NI Water that led to the Director of Procurement being appointed Commercial Director in August 2009. Also, please outline the chronology of events which led to the Commercial Director leaving NI Water including the terms of his redundancy and whether a confidentiality agreement was signed in this case.

4. The Committee understands that Contracting Out's contract in dealing with the Steria exit was terminated in October 2009. The Committee wants to know whether another firm was appointed to replace Contracting Out in this work. If so, what was the name of the firm, what rates of payment were agreed, and what was the total amount paid? Was the appointment of any replacement firm made following a competitive tendering exercise?

5. Please provide details of all NI Water senior appointments since you became Chief Executive. This should include the names of the appointee, his or her position, salary, reason for appointment, and the name of his or her former employer.

I would be grateful to receive your reply by 21 October.

Yours sincerely,

Paul Maskey

Chairperson
Public Accounts Committee

Mr MacKenzie's letter to Chairperson 21 October

Dr McKibbin's letter to Chairperson 22 October

Annex 1

Annex 2

Annex 3

Annex 5

Annex 6

Mr P McGlone asked the Minister for Regional Development to outline if a declaration for potential conflict of interest was (i) sought by his Department; and (ii) provided by members of the Independent Review Team into NI Water as part of their appointment.

(AQW 255/11)

Minister for Regional Development (Mr C Murphy): (i) No declaration for potential conflict of interest was sought by the Department. (ii) Deloitte, as part of the normal engagement process, completed a full conflict check on engagements with DRD and NI Water in the context of Jackie Henry, as an individual, joining the review team. The outcome of this was advised to and discussed with DRD and as a result the Department did not consider that there were any conflicts of interest.

Dr McKibbin's letter to Chairperson 1 October

Letter to Mr Iain Osbourne 10 October 2010

Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX

Tel: (028) 9052 1208
Fax: (028) 9052 0366
E: pac.committee@niassembly.gov.uk
aoibhinn.treanor@niassembly.gov.uk

Mr Iain Osbourne
Utility Regulator
Queen's House
14 Queen Street
Belfast BT1 6ED 10 October 2010

Dear Iain,

PAC inquiry into Procurement Governance at NI Water

The Committee has considered the evidence it has received to date in this inquiry.

You will appreciate that this evidence includes oral evidence, correspondence with witnesses and FOI responses which have been brought to the Committee's attention.

You wrote to me on 5 August regarding procurement in utilities locally, and provided some additional material to the Committee about your response to issues of non-competitive tendering that had arisen in Northern Ireland Electricity (NIE) in procurement of legal and consultancy services.

The Committee has agreed to request the following further information from you.

1. The number of procurement breaches identified in NIE and, for each breach, the name of the company, the nature and value of the breach and the period to which it relates;

2. The name of the Chief Executive in post at the time of the breaches;

3. A copy of your letter of March 2009 to NIE in which you identified an earlier procurement breach together with the response from NIE;

4. Your letter of 17 June 2010 to NIE which highlighted your concerns following the procurement audit;

5. Copies of all documentation provided to any member of the Committee under FoI — without redaction.

The Committee has considered NIW's procurement plans and procurement activity reports and the reporters' findings (the Halcrow reports) which were submitted to you. While requiring quantitative measures of improvement relating to procurement activities, the reporter's reviews did not identify the procurement failings later discovered by NIW Internal Audit. In view of this, do you consider that the current approach to the reporters' reviews remains adequate in terms of NIAUR oversight? Do you consider that reviews of procurement activity should not only assess whether appropriate procurement policies and procedures are in place, but test compliance with such policies and procedures?

I would be grateful to receive your reply by 21 October 2010.

Yours sincerely,

Paul Maskey

Chairperson
Public Accounts Committee

Regulator's letter to the Chairperson 25 October

Annex 1

Annex 2

Annex 3

Northern Ireland Authority
for Utility Regulation
Queens House,
14 Queen Street,

BELFAST, BT1 6ED

T: +44 (0) 28 9031 1575
F: +44 (0) 28 9031 1740
W: www.uregni.gov.uk

Laurence MacKenzie
Network Strategy Manager
Northern Ireland Electricity
Fortwilliam House
Edgewater Office Park
Edgewater Road
Belfast
BT3 9JQ 3 March 2009

Ref SONI Divestment

Dear Laurence,

Further to your letter to me dated 28 August 2008 regarding the costs NIE has incurred in the divestment process of SONI from the Viridian Group I can confirm the following.

NIAUR is content to approve NIE's proposals on the estimated levels of charges for services as per your table defining Advisory fees (lBl), Legal Fees (Cameron McKenna), Pensions (Lane, Clark and Peacock) and Stamp Duty — CHCC.

In addition to this NIAUR is in agreement in principle to NIE recovering its costs associated with the divestment of SONI through the D of its price control, for the year in which they are incurred.

Furthermore NIAUR notes that with regard to the Advisory Fees this appointment was made following a competitive tender process. No such evidence has been presented, however, for the process involved in the appointment of those companies dealing with Legal Fees and Pensions. Therefore NIAUR requests that in the first instance evidence is provided of the actual costs incurred by NIE for all parties employed. Secondly NIAUR requests that NIE follows a similar due process to that of IBI when obtaining legal services etc in future projects. Again NIAUR will expect to see evidence of this process from NIE when requested.

I trust this is satisfactory for your requirements. Should you require any further information or clarification please do not hesitate to contact me.

Yours sincerely

Dermot MacCann

T: +44 (0) 28 9031 6626
F: +44(0)28 9031 1740

Northern Ireland Electricity plc
P O Box 2
120 Malone Road

Belfast BT9 5HT

Tel 028 90 661100
Fax 028 90 663579
Website: www.nie.co.uk

Our Ref: WAB/jes.

Dr Juliet Corbett
NIAUR
Queens House
14 Queen Street
BELFAST
BT1 6ER. 8 June 2009.

Dear Juliet

SONI Divestment – Advisers' Fees

Dermot's letter to Laurence dated 3 March 2009 confirms NIAUR's agreement in principle to the recovery of the advisers' fees which NIE incurred in divesting SONI, subject to NIE providing evidence of the costs actually incurred.

Final invoices have now been received and the total cost amounts to £1,158,530.

Outturn costs comprise the following:

* VAT associated with company disposals that is irrecoverable.

The services provided by IBI, CMS Cameron McKenna and Lane, Clarke and Peacock (LCP) were explained in our 28 August 2008 letter. Additional services were required as follows:

Hewitt Associates are the actuary for the Viridian Group Pension Scheme (VGPS) and their role included the preparation of the actuary's letter, commenting on the pensions schedule and liaison with LCP on section 75 debt legislation issues and calculation of the initial section 75 debt estimates.

Linklaters are familiar with the group's pensions issues and were engaged to provide specialist legal advice in respect of pensions. Their role included drafting the pensions schedule, commenting on the actuary's letter, advising on EirGrid's temporary period of participation in the VGPS and responding to questions from bidders and advisors in relation to pensions issues.

Carson McDowell provided legal services principally in respect of property work. This entailed preparation of a certificate of title for CHCC required as part of the sale process. Some cost was also incurred for corporate work where documentation was required to be reviewed by a NI firm of solicitors.

Ernst & Young provided professional services in connection with the review by bidders' advisors of the audit workpapers of SONI.

The enclosed file contains the invoices by way of evidence as requested. Please let me know if you have any queries.

Whilst the approval of 3 March 2009 includes the stamp duty in respect of Castlereagh House Control Centre, this has yet to be paid and we will write to you again when the payment has been made.

Dermot's letter also commented on the procurement of legal and other services for future projects and we will respond separately on that point.

In my email to you dated 27 February 2009 I asked whether NIAUR would agree that, since the divestment of SONI facilitates the wider objectives of the SEM, recovery of these outturn costs via PSO charges (rather than T&D charges) would be appropriate. We would be grateful for your confirmation that the amount of £1,158,530 can be recovered through PSO charges.

Yours sincerely

Ashley Boggs

Head of Regulatory Affairs.
L 090608 SONI Divestment Advisers Fees
Northern Ireland Electricity plc, Registered Office, 120 Malone Road, Belfast BT9 5HT.

Registered in N Ireland NI 26041. A member of the Viridian Group.

Northern Ireland Electricity plc
P O Box 2
120 Malone Road

Belfast BT9 5HT

Tel 028 90 661100
Fax 028 90 663579
Website: www.nie.co.uk

Our Ref: WAB/jes.

Mr Dermot MacCann
NIAUR
Queens House
10 -14 Queen Street
BELFAST
BT1 6ER. 30 June 2009.

Dear Dermot

Legal services

I refer to your letter of 3 March 2009 to Laurence in which you approved in principle the recovery of the advisers' fees which NIE incurred in divesting SONI, subject to NIE providing evidence of the costs actually incurred. A file containing invoices and a covering letter dated 8 June 2009 have been given to Juliet for approval.

Your letter requests that NIE should follow a competitive tender process when obtaining legal and other services in future projects. I would like to respond on that point by assuring you that NIE is very aware of the need to obtain value for money in all aspects of its business, including where there is a requirement to engage advisers. As regards the divestment of SONI, whilst the services provided by IBI were procured following a competitive tender process, we saw merit in appointing CMS Cameron McKenna (CMS) directly, subject to the agreement of a satisfactory fee arrangement.

As you know, CMS has been providing legal and regulatory advice and guidance to NIE since before 1992 and to SONI since its separation from NIE in 2000. CMS was therefore considered to be best placed to act in relation to the divestment given its particular knowledge of SONI and its contractual agreements and regulatory obligations. CMS also had the cost advantage of having no learning curve to climb in circumstances where the historical and current regulatory and legal framework within which SONI operates (and with which CMS were intimately acquainted) would be significant in the sale process. Notwithstanding this, the instruction was only confirmed after CMS agreed to a significant discount on their normal hourly rates.

CMS is not the sole provider of legal services to NIE and we will use a competitive tendering process for other stand alone projects where CMS does not have any particular advantage over another firm (for example in relation to procurement advice). A recent example is the Enduring Solution Project where DLA Piper has been instructed.

NIE will continue to need access to specific legal advice on electricity matters on a draw down basis without having to engage in an open procurement each time – e.g where response timescales are tight, as was the case in the Quinn Group determination and also in responding to NIAUR's request for a submission on IME 3. It is our intention to retain CMS as lead firm for regulatory and commercial issues affecting NIE provided that we can continue to benefit from preferential fee scales which we are satisfied are market competitive. However we would submit that the hourly rate charged by lawyers should not be the sole determining factor in engaging legal services, particularly when those services are in respect of strategic legal issues affecting the electricity industry in Northern Ireland. We value our long standing relationship with CMS, and the broad experience of their lawyers in electricity matters in the United Kingdom and wider afield. We see merit in maintaining this relationship provided that the CMS fee scales remain comparable to other top tier London law firms having the same calibre of personnel and experience as CMS. As Viridian Group retain other London law firms to provide corporate legal advice (for example in relation to pensions or competition law) we are able to monitor fee scales across a number of firms.

We have written to NIAUR recently (3 June 2009) seeking the Authority's approval to recover legal fees incurred on the work on the Distribution Code and we will also be writing on other areas of work where, it has been necessary to retain CMS. These areas of work include: IME 3 and the Quinn Group determination. We recently renegotiated fee rates with CMS to take effect from January 2009 which represent a 30% discount against the firm's standard rates. Indeed prior to 1 April 2008 CMS had held its fee rates for NIE firm for three years notwithstanding that its standard fee rates had increased over that period. We therefore regard the services provided by CMS as representing good value for money when the discounted fee rates are considered.

As indicated above, following a competitive process, in which CMS was also involved, DLA Piper (DLAP) was appointed to provide legal services to support stage 2 of the Enduring Solution project. While DLAP are primarily a regional law firm with lower hourly rates there were only marginal differences in estimated cost, when compared with CMS, in relation to those work items that could be undertaken by less experienced personnel (associates or trainees). This confirmed our belief that engaging a London firm with expertise in a specialist niche area of the law will not necessarily be any more expensive than engaging a generalist regional firm because of the cost savings achieved through less time being required to be expended by the specialist firm due to their experience.

Yours sincerely

Ashley Boggs

Head of Regulatory Affairs.
L 090630 Procuring advisers
Northern Ireland Electricity plc, Registered Office, 120 Malone Road, Belfast BT9 5HT.

Registered in N Ireland NI 26041. A member of the Viridian Group.

Annex 3 - UR to NIE T&D - Procurement Procedures

Northern Ireland Authority
for Utility Regulation
Queens House,
14 Queen Street,

BELFAST, BT1 6ED

T: +44 (0) 28 9031 1575
F: +44 (0) 28 9031 1740
W: www.niaur.gov.uk

Harry McCracken
Managing Director,
NIE Transmission and Distribution
120 Malone Road
Belfast
BT9 5HT 17 June 2010

Dear Harry,

Procurement Procedures in Relations to Legal and Technical Consultancy Services.

I refer to the recent audit report prepared by PKF.

PKF were instructed by the Utility Regulator to carry out this audit of certain additional cost claims incurred by the NIE Transmission and Distribution (T+D) business during the price control period commencing April 2007. The total claim audited was around £4.lm across 12 projects.

The scope of the audit was:

• To verify that the costs being claimed represented genuine additional costs to NIE T+D; and
• To review and comment upon the cost controls and procurement practices in respect of these proj ects, to ensure that value for money was received by NIE T+D on behalf of electricity consumers.

In its report PKF sets out its conclusions and recommendations in respect of the costs claimed and the approval process between THE Utility Regulator and NIE T+D. I understand that your team is presently considering this report and we look forward to discussing these aspects with you in due course.

The purpose of this letter however is to immediately flag to you my concerns in regard to certain procurement practices identified by the audit and to suggest that you take appropriate corrective action as quickly as possible. Most of the costs associated with these projects relate to the procurement of legal and technical consultancy services. PKF have noted that the NIE T+D formal procurement process requires that all contracts above £5,000, for materials or services, must be subject to competitive tender. However, they then go on to say that: "In respect of professional fees and some consultancy services (and particularly in relation to legal services) competitive tendering is the exception rather than the norm".

On the 3rd March 2009, the Utility Regulator actually wrote to Mr. Laurence MacKenzie, the then Managing Director of NIE T+D, in regard to advisory costs incurred on the SONI divestment project of around £1m (letter attached). This letter noted that no evidence had been presented to demonstrate that a competitive tendering process had been followed for the appointment of legal and pension advisors for this project and requested that such a process is adopted for procuring legal services, etc. in future projects. However PKF state that, based on its audit review, NIE T+D has not subsequently applied the requested process.

This audit identifies shortfalls in procurement practices for legal and technical consultancy services over 12 projects during the price control period beginning in April 2007. In my view, it is also likely that a tendering process has not been the norm for these types of services, particularly legal services, even before this current price control period. This is of immediate concern to the Utility Regulator because, beyond the £4. im of costs already incurred, I understand that there are other operating costs of some £7m in the pipeline.

It is unlikely that the Utility Regulator will be able to approve any further costs of this nature unless NIE T+D can demonstrate that a competitive tendering process has been undertaken. I am therefore advising that NIE T+D take immediate corrective action in regard to its procurement practices for legal and technical consultancy services. PKF have recommended that a competitive tendering process is applied, as per NIE's standard procurement processes, for these services.

Please do not hesitiate to contact me if you wish to discuss further.

Yours sincerely

Shane Lynch

Director of Electricity

Chairperson's letter to HOCS 29 October

Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX

Tel: (028) 9052 1208
Fax: (028) 9052 0366
E: pac.committee@niassembly.gov.uk
aoibhinn.treanor@niassembly.gov.uk

Mr Bruce Robinson
Head of the Civil Service
Room FD34
Stormont Castle
Belfast
BT4 3TT 29 October 2010

Dear Bruce,

PAC inquiry into Procurement Governance at NI Water

Thank you for your letter dated 1 October 2010.

The Committee recognises your intention not to refer this matter to Sir Jon Shortridge, as you made clear in your letter of 1October.

In its letters of 6 and 22 September 2010 the Committee did not repeat the request that the whistleblowing allegations made by Contracting Out LLP should be referred to that investigation.

What the Committee wants you to identify is what action you, in your capacity as the Head of the Northern Ireland Civil Service and of the team of Permanent Secretaries, will be taking to address the way in which the allegations were handled.

The Committee is also concerned that in passing the whistleblower correspondence on to Mr MacKenzie, whose actions were central to the complaint by 'Contracting Out LLP', Mr Priestly effectively denied the whistleblower's concerns the confidential treatment she requested.

Confidentiality is protected on request as a matter of course in the early stages of NICS whistleblowing inquiries. The Committee is concerned that a lesser standard was used in this case and agreed to forward to you some additional information submitted to it to support your consideration of the confidential treatment of the whistleblowing allegation.

I would be grateful to receive your reply by 12 November 2010.

Yours sincerely,

Paul Maskey

Chairperson
Public Accounts Committee

Enc 1

No 1 Larne Rd
Carrickfergus
Co. Antrim

BT38 7EW

T. 02893365421
E. j.holmes@contractingout.biz

TO BE OPENED BY ADDRESSEE ONLY
STRICTLY PRIVATE AND CONFIDENTIAL

Mr. Paul Priestly
Permanent Secretary DRD
Department for Regional Development
Clarence Court
10-18 Adelaide Street
Belfast
BT2 8GB

Also by E-mail to: paul.priestly@drdni.gov.uk

Dear Sir

Re: The Dispute and pending court action between Steria Ltd ("Steria") and Northern Ireland Water ("NIW").

The purpose of this letter is to draw to your attention to events you may wish to be aware of and which materially impact the above referenced action the success or failure of which will I believe have far reaching implications for the DRD and the public sector in general.

As you will be aware, not least from the injunctive action secured by NIW against Steria in June last year, the NIW claims against Steria are numerous, not without complexity and very substantial in terms of potential public purse recoveries. When this action comes to court it will no doubt be given a high public profile.

This action therefore needs more than most to be given the best opportunity to succeed on its merits all of which have been shown to be commercially and legally sound and persuasive. However, it seems that success is not being seriously pursued perhaps because failure is being seen as less reputationally damaging than the transparency necessary for the attainment of success.

It has taken substantial determination and dedication on the part of those who were charged with the Commercial and Technical Review of the Contract last year to overcome the many obstructions, inconsistencies and outright refusals to co-operate, put in the way of the investigation, not just by Steria, and complete the necessary work of the Reviews.

It is evident that the Reviews would not have been possible at all without the:-

• creation of the Commercial Directorate whose externally sourced Director had no historic investment in the status quo of this Contract but was instead motivated by delivering on procurement obligations and efficiency targets, and
• replacement of the existing Customer Services Director who was also the Contract SRO with the previous Business Services Director.

Even with the advantage of the new Commercial Director in the lead and the technical support of the new CS Director the internal resistance to the investigation was obvious and profound. There can be little doubt that the subsequent and ongoing refusal by Steria to co-operate in any way with both the Technical and Commercial investigations was partly the result of this internal resistance to the Commercial Review.

As a result of this combined resistance the Reviews required very substantial additional effort to complete. This additional effort was paid for directly on a rates basis to the Technical Review team who had been provided by one of the big four consulting companies. The Commercial team however were required by NIW to recover the additional fees due for extending their level of effort (from 18 May as contracted to 15 December as required by NIW) from the success fee provisions of their contract.

Despite these many impediments the findings of the second Commercial Review report (Initial Review report was issued in late April) were found to be as robust as they were astounding and both supported and enhanced the initial findings.

Attempts were made by NIW to find a settlement with the Contractor but the meetings held excluded, at Steria's request, those parties most closely associated with the reviews.

In June 2009 despite the findings of the Commercial and Technical Reviews the Director who had previously been in charge of the Contract and its SRO since inception requested and was granted immediate early retirement on full benefits.

Steria abandoned the Contract in early July 2009 and to ensure continuity of service it was necessary for NIW to take injunctive action against Steria based on the Initial Review findings. The action was successful however it is of interest to note that Steria did not attempt to refute the substance of the Affidavit submitted in support of the injunction application – which is now public record.

Given the fortunate treatment of the SRO it is bizarre that the two Directors who had championed the Commercial and Technical Reviews, achieved substantial savings and lead the successful transfer of the services to the subcontractors were made redundant; the Commercial Director with such speed as to risk incurring the perception of wrong doing. The Commercial Directorate as an entity ceased to exist.

What message can you take from such events other than it pays to be an insider whatever your performance?

As for myself and my team who amongst other tasks delivered the Commercial Review and worked in tandem with NIW's legal advisors the following instructions were given by NIW:-

• In June 2009 we were requested to agree to an expansion of the contract scope of work to include providing commercial support to the legal team for the injunction action and the subsequent full action where settlement was not achieved – both were agreed. This would have involved the extension of the contract term past December 2009.
• In July 2009 we were informed our contract would not be extended.
• In late August 2009 we were asked to again extend the scope of work to include the preparation of the commercial documents for and to include, the attendance at the Mediation hearings in Oct. 2009 - this was agreed and delivered.
• In October following the legal team's request for our help in the preparation of the Statement of Case for the follow on action to the injunction we were requested to agree an amount proposed by NIW (£200k) on which the success fee could be fully settled and to agree a new arrangement by which our commercial inputs could be secured for any future court action. Both were agreed by the parties subject to payment within 14 days of the settlement fee.
• In early November 2009 we were told to stop all work – at the time all work had been completed and we had not received any further instructions – and consider the contract terminated. We agreed but pointed out that as a result of the termination all outstanding amounts due must be paid directly in accordance with the contract.
• In early December 2009 following the submission of a success fee invoice (£750k) we were requested to attend a meeting with the Company Secretary (also General Counsel) at which time we were told that our contract had been ended in November 2009 due to internal complications which were not of our making but that our further inputs were required to support the ongoing action.
• We were asked again to agree to the settlement agreed in October 2009 with the Commercial Director (i.e. the amount agreed as full and final settlement of the success fee at £200k and a separate arrangement to support the legal team). Again we agreed and submitted our final invoice for the £200k amount agreed which was considerably less than the amounts due to us under the contract.
• We were advised by NIW the following week that the invoice for the settlement amount needed to be supported by daily time sheets which must be detailed to the satisfaction of NIW. It was well known to NIW that the contract was deliverable based not rates based (at NIW's request) and thus detailed time sheets had neither been required nor kept. We offered to furnish the number of people days and days of effort which were kept for own purposes but this was summarily rejected by NIW.
• In January 2010 the offer was again renewed by NIW's lawyers however it was again confirmed that we would not be paid the settlement amount unless these detailed time sheets satisfying NIW were provided.

As evidenced by our letter to the NIW Chairman (see attached - for which we have had no reply to date) the settlement offered by NIW requires us to essentially invent detailed information to support the offer of settlement payment from NIW! Given we are a company whose function is to help our clients detect just such inappropriate behaviour it must have been evident what our position was always going to be, despite the inducements.

Why would a major public sector body set conditions that were so obviously improper and hence impossible for us to fulfil lawfully? Was this to ensure that we would be sufficiently alienated to ensure that we like all the others who were directly involved in the reviews, would be detached from providing the support needed by the legal team?

The settlement agreed to by both parties on more than one occasion is easily justified by the terms of the contract and the very substantial savings it achieves, let alone the additional effort NIW has benefited from. Our reports continue to form the basis of the ongoing action which as a result of the non-payment by NIW they do not have the licence to use in this way.

Left with no alternative we pursued our rights under the contract and demanded payment of the success fee invoice presented in December 2009. To our disbelief NIW now claim no such monies were due. Given the offer of a settlement (£200k) made by NIW on more than one occasion to settle our success fee claims, and which we are told still remains open, this recent statement is absurd and vexatious. It is even more unacceptable when it is appreciated that:-

• the NIW claim which forms part of the Steria action includes for the reclaim of the monies supposedly paid to us which, we are then told by NIW, is not due to us!
• this amount is also fully funded from the extensive savings achieved by the renegotiation of the major subcontracts which was the intent of the success fee term of the Contract.

It is important to stress however that the purpose of this letter is not per-se the resolution of our dispute with NIW in respect of non payment as helpful as that would be to us and the success of the Steria action, but it is rather to bring to your attention a sequence of events that must be concerning if success in the Steria action is in fact the goal.

I am also not campaigning to be further involved in providing commercial support to the legal team though we are not entirely adverse to providing assistance once settlement has been achieved. We are nevertheless very aware of the necessity in these times of severe budget cuts for the public sector to seek to recover public funds via all proper means, even the courts, where an equitable settlement is not forthcoming.

Actions like these can be won but they need to be seriously championed and well supported both commercially and technically by specialists who have the necessary in-depth knowledge of the particulars but whose remuneration is not at risk merely because they are a David to NIW's Goliath.

Unfortunately unless this matter can be settled immediately NIW have left us with little alternative but to pursue payment through the channels available to us as a small company so as to resolve the non payment of our invoices and the clear issue of licence in respect of the use of the deliverables. If we are forced into taking this avenue we will sadly have to ignore the impact that our actions may have on the forthcoming Steria action in order that our company remains liquid.

I am grateful you have taken the time to review this submission and I hold myself available to meet, at which time we would be pleased to further evidence our concerns.

Yours sincerely

Sue Holmes

Partner: Contracting Out LLP

Enc 2

HOCS letter to Chairperson 2 November

Bruce Robinson
Head of the Northern Ireland Civil Service
Head of the Office of the First Minister & Deputy First Minister
Stormont Castle
Stormont

Belfast BT4 3TT

Tel: 028 90378133 Fax 028 90378205
E-mail: hocs@ofmdfmni.gov.uk
Our Ref: COR/128/10
HCS-793-10

Paul Maskey MLA
Chairperson
Public Accounts Committee
Room 371
Parliament Buildings
BELFAST BT4 3XX 2 November 2010

Dear Paul

PAC Inquiry into Procurement Governance at NI Water

Thank you for your letter of 29 October.

I understand that the protections for "whistleblowing" originate in the Public Interest Disclosure Act 1998 and are applied in Northern Ireland by the Public Interest Disclosure (NI) Order 1998. Introducing the Bill in Parliament Lord Borrie said –

This Bill is meant to encourage any worker in any workplace who discovers a malpractice of some kind … to disclose those matters in the public interest. It is not concerned with a worker who wishes to disclose some malpractice for his own ends, possibly to try to gain a private advantage. As the title of the Bill clearly indicates, it is concerned with the public interest.

The correspondence you have sent me indicates that the predominant interest Ms Holmes had in mind was the payment she considered was due to her company. She clearly would gain a private advantage from such a payment and it is difficult to see how this amounted to a public interest disclosure or "whistleblowing".

The other issue in relation to the Public Interest Disclosure (NI) Order 1998 is that Ms Holmes was not an employee of NI Water but a contractor and would not appear to fall within the protected category of worker.

In these circumstances it is my view that Ms Holmes' correspondence with Mr Priestly were not "whistleblowing" allegations and accordingly it would be my view that no action is required on this account.

Yours sincerely

Bruce Robinson

Head of the NI Civil Service

Letter from Chairperson to Mr Stephen Peover 29 October

Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX

Tel: (028) 9052 1208
Fax: (028) 9052 0366
E: pac.committee@niassembly.gov.uk
aoibhinn.treanor@niassembly.gov.uk

Mr Stephen Peover
Accounting Officer,
Department of Finance and Personnel
Rathgael House
Balloo Road
Bangor
BT19 7NA 29 October 2010

Cc Malcolm McKibbin

Dear Stephen,

PAC Inquiry into Northern Ireland Water

The Committee has considered the evidence it has received to date in this inquiry.

You will appreciate that this evidence includes oral evidence, correspondence with witnesses and FOI responses which have been brought to the Committee's attention. Among these are responses to FOI requests regarding the awarding of Centre of Procurement Expertise (CoPE) status.

The Committee has agreed to ask for copies of the NI Water CoPE Reviews 2005 and 2009.

The Committee is aware that at the time that PWC was awarded the 2009 CoPE Assessment contract, it was engaged in a number of contracts with NIW, some of which breached financial delegations/ EU Regulations. In light of this, the Committee wishes to know how DFP addressed the conflict of interest in the award of this contract.

I am copying this letter to Dr McKibbin. Please contact the Committee Clerk if you have any queries about the Committee's request. I would be grateful for your reply by 12 November.

Yours sincerely,

Paul Maskey

Chairperson
Public Accounts Committee

Letter from Mr Stephen Peover to Chairperson 12 November

From the Permanent Secretary
Stephen Peover
Rathgael House
Balloo Road

BANGOR, BT19 7NA

Tel No: 028 91277601
Fax No: 028 9185 8184
E-mail: stephen.peover@dfpni.gov.uk

Mr Paul Maskey
Chairman
Public Accounts Committee
Room 371, Parliament Buildings
BELFAST 12 November 2010

Dear Mr Maskey

PAC Inquiry into Northern Ireland Water

Thank you for your letter of 29 October 2010 in which you requested copies of the NI Water CoPE Reviews 2005 and 2009. Separate reports were not produced in respect of each CoPE and issues were subsumed within one composite report supplemented by CoPE Action Plans. A copy of the 2005 Review Report is attached together with the NI Water Action Plans for 2005 and 2009. The 2009 Review Report was forwarded to the Committee on 2 December 2009.

You have also asked how DFP addressed conflict of interest in the award of the PWC CoPE assessment contract.

Tender documentation issued by the Central Procurement Directorate to all interested suppliers in relation to this competition required bidders to complete a conflict of interest statement. PWC confirmed there would be no conflict or perceived conflict of interest in relation to the personnel or type of work involved in the contract.

Finally I should like to update you on progress since Norman Irwin's letter dated 21 September 2010 which indicated that the Procurement Board had commissioned a review of the Action Plan put in place by NI Water to address areas of weakness. The review followed the Gateway Review process and was conducted by a team external to NI Water led by the OCG Director of Major Projects. The Review Team's report was discussed yesterday at a meeting of the Procurement Board and it was agreed that the report should be shared with the Committee.

Accordingly a copy of the report is also enclosed. Following consideration the Procurement Board has decided that NI Water should continue as a CoPE.

I trust that this will be helpful to the Committee.

Yours sincerely

Stephen Peover

Enc

Appendix 5 - Pages from CoPE Report 2009 - appendix pages 21-23.pdf

Appendix 5 - Pages from COPE Final report Appendix B - pages B21-B24.pdf

Appendix 5 - Peer Review Final.pdf

This report is an evidence-based snapshot of progress at the time of the review. It reflects the views of the independent peer review team, based on information evaluated over a five day period, and delivered to the commissioners of the review at its conclusion.

1 Purpose of review

This Peer Review has been commissioned on behalf the Procurement Board for the Northern Ireland Central Government bodies. The primary focus is the implementation of Northern Ireland Water's (NIW) Action Plan on their procurement processes, which was drawn up in response to the Report of the Independent Review Team (IRT)[1]. This report is intended to assist the Procurement Board in their assessment of whether the decision to award Centre of Procurement Excellence (CoPE) status to Northern Ireland Water (NIW) remains valid[2]. The full terms of reference for the review are at Annex A. The findings and recommendations are evidence-based and forward-looking, and on the basis of information provided and discussions with interviewees listed at Annex B.

Summary of findings and recommendations

From the evidence presented to the Peer Review Team (PRT), we assess Delivery Confidence in respect of the Action Plan implementing the IRT report to be Amber-Green. The PRT has not seen any evidence to justify removal of the current CoPE status. We make a number of other observations and recommendations in the body of the report.

2 Governance and control framework

Following the IRT report on NIW's procurement governance, NIW drew up an action plan to implement the report's recommendations. The Peer Review Team (PRT) finds that all the detailed recommendations to establish an appropriate governance and control framework for NIW procurement have been addressed, and most of the specific deliverables have been completed. Specifically:

• A transparent "end to end" governance system in relation to procurement processes has been established. A purchase-to-pay (P2P) system has now been rolled out. This ensures that it is not possible to spend without the approval of the budget-holder or beyond the approved and lawful contract expiry date. Invoices are returned to suppliers if they cannot be linked to a purchase order.
• Financial delegations have been revised to require Board approval of all significant new contracts or Single Tender Actions.
• There is a comprehensive database of contracts with key information such as the contract owner, and the value and length of the contract, with links to supporting approval documents. The database provides, among other functions, early warning on impending contract expiry.
• Internal Audit "deep dive" reviews of operational and capital expenditure and of "invoice slicing" have been completed and the reports presented to the Board.
• Comprehensive procurement manuals for each of goods and services and capital goods have been prepared ("Capital Programme Monitoring and Reporting", dated September 2010; and "Procurement of Goods and Services – Procedures", dated 23 August 2010).
• A mapping of executive responsibilities for failures noted in the Contracts Approval Internal Audit report has been carried out and disciplinary proceedings instigated where appropriate. (We understand these will all be completed by the end of the year.)
• A dedicated procurement compliance officer has been appointed, who reports directly to the Chief Executive.
• The Finance Director is responsible for both procurement (goods and services) and finance: there is a dedicated head of procurement (goods and services) and a finance controller who reports to the Finance Director. Responsibility for procurement of capital projects rests with the Director of Engineering and Procurement who reports to the Chief Executive.
• Reports on procurement are presented to the Board every month. Procurement is a standing item on the Board agenda and we understand active discussion takes place.
• A training programme for all senior staff and budget-holders for major contracts on procurement processes and financial control has taken place. We understand this is to be further rolled out to cover a wider range of contracts and framework arrangements (eg call-off contracts).
• There is now centralised management control and monitoring of the three strategic PPP/PFI contracts within NIW.
• An operational contract management centre has been established and links are strengthening between the business and this centre.
• Reporting lines have been changed so that the Internal Audit unit is accountable to the Chief Executive and to the Chair of the Audit Committee. A benchmarking exercise of the effectiveness of the Internal Audit function has been carried out.
• Non-executive membership of the Board has been refreshed on an interim basis. The CEO and members of the executive have revised personal performance targets.
• The responsible department, the Department for Regional Development, has strengthened its involvement with NIW:
• meetings at senior management level take place every 3 weeks, which focus in particular on any issues arising on Single Tender Action and contract extensions, and these are minuted;
• there are monthly meetings on capital works (DRD requires sight of all business cases over £10m, and DRD passes these to DFP to provide ultimate financial approval);
• a DRD Director attends the NIW Audit Committee; and there are regular meetings at top management level with the Chairman of the Audit Committee;
• In addition, we understand that DRD is reviewing the existing DRD/NIW governance letter and is considering whether a formal Management Statement and Financial Memorandum (MSFM) would be appropriate in the future.

The PRT finds that the actions taken to date are a comprehensive response to the recommendations in the IRT report and these now need time to take full effect. We observe that core documentation, such as the procurement manuals, are well-structured and of a high standard.

Some deliverables remain to be completed: a main outstanding issue is the Internal Audit review of the end-to-end governance processes which has just started and we understand will completed by the end of November.

The PRT observes that there are generally firm controls in place with further consideration underway to handle occasional out-of-hours service delivery issues. Looking ahead, the proportionality and effectiveness of the controls will need to be kept under regular review.

3 Organisational behaviours and commitment

The PRT has found that a positive step change has taken place in both organisational behaviours and commitment throughout the organisation since the IRT report and the production of the action plan relating to the report.

The PRT notes that the new Board has strengthened its oversight and control of procurement in a number of areas including significantly reducing the thresholds associated with the authority to approve expenditure. [We were advised that, at its first meeting in September 2010 the new Board implemented new reduced approval levels as follows:

• From £5m for Goods and Services to a reduced level of £1m
• From £10m for Capital to a reduced level of £2m

The Board also required that any proposal for a Single Tender Action over £30K be subject for Board approval (reduced from a previous level of £250K.)

The Board further requested that all proposals requiring DRD, DFP, NIEA or NIAUR approval be first submitted to it for NIW Board approval before submission.

The PRT found clear evidence of the Board reviewing and challenging individual procurement cases and where necessary returning the proposals to the management line to substantiate and address concerns.

The PRT have noted that the Board has established (29 September) a sub-committee on procurement [to increase focus which will:

• examine all proposed new contracts before award above delegated limits [£1m (goods and services) and £2m (capital works)];
• review and approve the composition of evaluation teams; and
• agree the evaluation criteria, scoring and weighting.

The terms of Reference for this new Procurement sub-committee are currently being drawn up and we understand these will be submitted to the October Board meeting for approval.

The PRT observes that the obligations on NIW to operate as both a Government-owned Company (GoCo) and a NDPB requires careful consideration and places a large reliance of effective personal relationships.

4 Compliance and best practice

The PRT were advised that Service Levels Agreements (SLAs) now exist between individual Directorates within NIW and the Procurement Unit. This will help to ensure clarity on the roles and responsibilities, and ensure clearer and more timely rules of engagement in the future.

A sample of standard quotation documentation was provided. This includes a mini-set of the buyer's (NIW's) terms and conditions, ensuring compliance with the Expenditure Control Limits set by the Procurement Board that all procurement between £1,500 & £30,000 should be undertaken via competition.

The PRT was provided with evidence of the training on new processes and systems, which will help embed compliance. We understand that this has been rolled out to all senior staff. Consideration could be given to skilling-up local Super-Users who can deal with any day to day operational issues.

The PRT found a consistent message that the recently introduced Procurement to Pay process (P2P) had significantly decreased the potential for purchases off-contract with a clear policy of, "no purchase order no payment".

The PRT also considered the requirements of the Office of the Utility Regulator on NIW to agree procurement plans in advance (every 18 months) and to review NIW's annual procurement activity reports along with agreed outcomes.

The PRT noted that, in accordance with a recommendation in the Action Plan, that a Procurement Compliance Officer has been recently appointed. The PRT reviewed the Job Specification but due to the postholder's vacation commitments, did not have the opportunity of interviewing the individual concerned. Given the weight of the post, the PRT observes that further strengthening of resource may be needed in the light of experience.

5 Delivery confidence re. Action Plan; recommendation on CoPE status

Based on the evidence made available, the PRT assesses Delivery Confidence[3] in respect of the Action Plan to implement the IRT report findings as AMBER-GREEN ie "Successful delivery appears probable however constant attention will be needed to ensure risks do not materialise into major issues threatening delivery."

The PRT has not seen any evidence to justify removal of the current CoPE status.

6 CoPE methodology

CoPEs (Centres of Procurement Expertise) were set up in Northern Ireland following a review of Public Procurement in 2001 and the recommendations of the review (containing some 80 recommendations) were largely implemented by 2005.

PwC developed a process for reviewing and accrediting CoPEs and carried out assessments in 2005 and again in 2009. The 2005 review identified a number of improvement areas which had been largely implemented by the time of the 2009 review.

The PRT has reviewed the current methodology for CoPE review and accreditation. Although being generally suitable at the time of implementation we do not consider that the current process is sufficiently robust to be used in the future. We understand that the Procurement Board is considering options for the development of a new accreditation model. We offer the following recommendations for consideration:

• ensure that accreditation includes an appropriate assessment of the compliance with all relevant public procurement policy and legal requirements and financial delegation limits;
• the accreditation should cover all procurement types and activities carried out by the CoPE recognising that the skills and expertise required are very different in respect of goods and services and capital works. We would recommend that different criteria for approval are developed for each of these areas within an overall accreditation process.
• It may be appropriate to consider a process of regular self-assessment, perhaps annually, validated by independent review at least once in a three years period, as being the way forward. The PRT would note that a self-assessment approach has recently been adopted through procurement capability reviews of central UK government departments.

7 Further actions to improve outcomes

The PRT offers the following suggestions for consideration:

• At present, the reporting lines for procurement within NIW are fragmented. We would suggest, in line with current best practice, that consideration be given to appointing a Head of all Procurement as part of the Senior Management team.
• Consider appointing Super-Users within each business area to help improve the knowledge and operation of the new P2P system, in particular, goods receipting (to facilitate the achievement of prompt payment targets; and the provision of increasingly accurate and timely management information);
• Following the establishment of SLAs between each business directorate and procurement, that consideration be given to flagging any non-compliance with these in the monthly procurement report to the Board.
• Increased use of category management to all procurement activities of NIW (goods, services and capital works) could drive increased value for money.

8 Further reviews

The PRT suggests:

• A further external review within the next 12 months to assess the implementation on the ground of the various reforms which have been put in place.

Annex A

Terms of Reference for a Peer Review, on Behalf of the Procurement Board, of the Northern Ireland Water Action Plan drawn up following the Independent Review Team report dated 25 February 2010.

Background

Public procurement policy in Northern Ireland (NI) requires Departments, their agencies, NDPBs and public corporations to carry out their procurement activities by means of a documented service level agreement with CPD or a relevant Centre of Procurement Expertise (CoPE). Responsibility for the development, dissemination and co-ordination of public procurement policy lies with the Procurement Board which is required to review the competency of CoPEs on a periodic basis.

In order to undertake these competency reviews the Procurement Board has adopted an accreditation model which is used to assess the extent to which procurement organisations meet a number of specific criteria. Each organisation is then awarded a score based on this evaluation. At the latest competency review, undertaken in September 2009 by PriceWaterhouseCoopers, NI Water achieved a score of 814 out of a possible 1,000 which is just above the threshold for 'exemplar' standard.

In February 2010 the Department for Regional Development (DRD) and NI Water jointly published the Report of the Independent Review Team (IRT). This confirmed that breakdowns in the governance and control framework of NI Water, identified in an earlier Contracts Approval Internal Audit report, were serious in nature and required urgent remedial action. These findings have called into question the exemplar status accorded to NI Water as a result of the CoPE accreditation review.

NI Water has indicated that an Action Plan approved by the NI Water Board, the most recent version of which is dated 13/09/10, has been put in place by its Chief Executive and DRD to address the root causes of the issues identified from the IRT and Internal Audit reviews. It is understood that execution of the Action Plan is well underway and is regularly reviewed by NI Water's Executive Committee and Board of Directors.

The Procurement Board has agreed that a Peer Review of the NI Water Action Plan is required so that it can assess if the decision to award CoPE status to NI Water remains valid. The Peer Review will be led by an Office of Government Commerce (OGC) Director who is an accredited High Risk Gateway Review Team Leader.

Purpose of the Peer Review

The purpose of the Peer Review is:-

• to assess the robustness of the Action Plan in addressing the identified breakdowns in NI Water's governance and control framework;
• to assess the progress which has been made to date in implementing the Action Plan;
• to comment on the extent to which NI Water's organisational behaviours support the objectives of the changes in the Action Plan;
• to assess the level of senior management focus and commitment in addressing the issues raised;
• to determine the degree to which the implementation of the action plan provides assurance in relation to legislative and policy compliance, best practice, QA systems, and contract management;
• to evaluate the overall degree of assurance provided by the action plan - according to the OGC Delivery Confidence scale – and to make a recommendation on whether CoPE status continues to be appropriate for NI Water;
• to consider the methodology for CoPE accreditation and make recommendations for improvements where appropriate.
• to make any recommendations on further actions to improve outcomes; and
• to recommend further reviews considered necessary and the timescale.

Personnel

The Review Team shall consist of -

(i) a Director from OGC's Major Projects Directorate to head up the team;

(ii) an OGC accredited High Risk Gateway Review Team Member with relevant procurement experience; and (iii) the Head of one of the CPD CoPEs.

It is envisaged that the review will take no more than 5 days and that it will be conducted Clare House, Belfast. It will include a Planning Meeting scheduled for 1/10/10 to confirm the individuals and documentary evidence that the team will wish to see in the course of its work. The Review Team will base its findings on scrutiny of relevant documentation and interviews with NI Water, DRD and DFP staff.

Approach to the Review

At the end of each day the Review Team will brief [a Director of NIW] on emerging findings and check for factual accuracy. In accordance with Gateway practice the Team will provide [the Director] with a draft copy of the Review Report on the last day of the Review for a final accuracy check before the formal presentation of findings.

Access to Personnel and Papers

• The team would have full access to all papers it considers necessary in order to carry out the terms of the Review.
• The team would have full access to all personnel in DRD and NIW, including Board Members of NIW, which it considers necessary in order to carry out the terms of the Review.

Timescales and Reporting

The Review will take place during w/c 18th October. The Team will brief the DFP Permanent Secretary, DRD Permanent Secretary, the Chief Executive of NI Water and Director of CPD on its main findings on the last day of the Review and provide the final draft of the Review Report.

DFP, NIW and DRD will be invited to respond with any comments on the Report's factual accuracy to the Review Team Leader but will not be able to challenge the Team's analysis, conclusions or recommendations. It will be the aim to have all comments and queries resolved by 29/10/10 to allow for consideration of the Report at the November meeting of the Procurement Board.

Annex B

List of interviewees

Efficiency and Reform Group (ERG), Cabinet Office

1 Horse Guards Road, London SW1A 2HQ

Service Desk

Customers can contact the Service Desk about all aspects of our business.

The Service Desk will also channel queries to the appropriate second-line support. We look forward to hearing from you.

You can contact the Service Desk 8am – 5pm Monday to Friday:
T: 0845 000 4999 E: ogcservicedesk@cabinet-office.gsi.gov.uk

Press enquiries

T: 020 7271 1318 F: 020 7271 1345
© Crown copyright 2010

[1] Report of the Independent Review Team to the Accounting Officers of the Department for Regional Development and Northern Ireland Water on Northern Ireland Water Procurement Governance Issues published March 2010.

[2] NIW was accredited as a CoPE in 2005 and this accreditation was confirmed in 2009 following a review by Pricewaterhousecoopers (pwc) of the procedures and practices of NIW's procurement teams.

[3] Delivery Confidence is part of OGC's Gateway Review process for projects and programmes which assesses the likelihood of successful delivery against a 5-tier scale (Green; Amber-Green; Amber; Amber-Red; Red).

Letter to Dr McKibbin 14 January

Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX

Tel: (028) 9052 1208
Fax: (028) 9052 0366
E: pac.committee@niassembly.gov.uk
aoibhinn.treanor@niassembly.gov.uk

Dr Malcolm McKibbin
Accounting Officer
Department for Regional Development
702 Clarence Court
10-18 Adelaide Street
Belfast BT2 8GB 14 January 2011

Dear Malcolm,

PAC Inquiry into Procurement Governance at NI Water

At its meeting yesterday the Committee agreed to ask you, as lead Accounting Officer for NI Water, for an update on the mapping of responsibilities among Executive Directors in the company.

The Committee last received a report on this process on 7 September 2010.

I would be grateful to receive your response by 24 January 2011.

Yours sincerely,

Paul Maskey

Chairperson
Public Accounts Committee

Letter to HOCS 14 January 2011

Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX

Tel: (028) 9052 1208
Fax: (028) 9052 0366
E: pac.committee@niassembly.gov.uk
aoibhinn.treanor@niassembly.gov.uk

14 January 2011

Sir Bruce Robinson KCB
Head of the Northern Ireland Civil Service
Room FD34
Stormont Castle
Ballymiscaw
Belfast
BT4 3TT

Dear Bruce,

PAC inquiry into NI Water

The Public Accounts Committee is drawing together its inquiry report on this issue and agreed at its meeting yesterday to ask you for an update on the process being taken forward with regard to the suspended Permanent Secretary, Mr Priestly.

On 31 August 2010 you wrote to the Committee that

"On completion of the investigation Sir John Shortridge will submit his report to me and I will decide at that stage what further steps should be taken in accordance with the employment policies of the NICS. Until then I will not be providing any further information about the conduct or progress of the investigation".

I believe that Sir John has now reported and would be grateful if you could inform the Committee what format and timeframe apply to the "further steps" or process which is currently under way. I would appreciate your response by 24 January 2011.

Yours sincerely,

Paul Maskey

Chairperson
Public Accounts Committee

Letter to Dr McKibbin 14 January

Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX

Tel: (028) 9052 1208
Fax: (028) 9052 0366
E: pac.committee@niassembly.gov.uk
aoibhinn.treanor@niassembly.gov.uk

Dr Malcolm McKibbin
Accounting Officer
Department for Regional Development
702 Clarence Court
10-18 Adelaide Street
Belfast BT2 8GB 21 January 2011

Dear Malcolm,

PAC Inquiry into Procurement Governance at NI Water

The Committee considered confidentiality agreements in NI Water at its meeting yesterday and agreed to ask you whether departmental approval extended to such agreements.

In particular, the Committee noted the compensation for loss of office settlement in the Company's accounts for a previous CEO leaving NI Water. Did the Department approve this payment? Did the Department approve the confidentiality clause which attaches? Does the Department preclude the use of employment contracts which employ confidentiality clauses?

I would be grateful to receive your reply by 25 January 2011.

Yours sincerely,

Paul Maskey

Chairperson
Public Accounts Committee

Letter from Dr McKibbin 24 January

Letter from Dr McKibbin 25 January

Letter from HOCS 26 January 2011

Sir Bruce Robinson KCB
Head of the Northern Ireland Civil Service
Head of the Office of the First Minister & Deputy First Minister
Stormont Castle
Stormont
Belfast

BT4 3TT

Tel: 028 90378133 Fax 028 90378205
E-mail: hocs@ofmdfmni.gov.uk
Our Ref: COR/128/10
HCS-47-11

Mr Paul Maskey
Chairperson
Public Accounts Committee
Northern Ireland Assembly
Room 371
Parliament Buildings
Ballymiscaw
BELFAST
BT4 3XX 26 January 2011

Dear Paul

PAC Inquiry into NI Water

Thank you for your letter of 14 January in which you asked for an update on the process being taken forward with regard to Mr Paul Priestly.

The matter is being taken forward as an internal management process conducted in accordance with Northern Ireland Civil Service (NICS) disciplinary policy as set out in the NICS Human Resources Handbook. In order to preserve the confidentiality and integrity of that process I will not be making any further comment on its progress or its timescale until it has been completed.

I note your deep concern about the leaking to the media of the draft PAC report on NI Water. I share your concern on this most unfortunate development, in addition to the impact of the reporting of this on the work of the Committee it may also impact adversely on the process noted above.

Yours sincerely

Bruce Robinson

Letter to HOCS 31 January 2011

Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX

Tel: (028) 9052 1208
Fax: (028) 9052 0366
E: pac.committee@niassembly.gov.uk
aoibhinn.treanor@niassembly.gov.uk

Sir Bruce Robinson KCB
Head of the Northern Ireland Civil Service
Room FD34
Stormont Castle
Ballymiscaw
Belfast
BT4 3TT 31 January 2011

Dear Bruce,

PAC inquiry into NI Water

Thank you for your letter of 26 January, which the Committee considered at its meeting the next day.

The Committee appreciates that an inquiry is still ongoing. However, it is only reasonable that an update on the process be provided to reassure PAC that progress is being made.

The Committee agreed to ask you, therefore, to confirm whether you have received a report by Sir Jon Shortridge into the role of Mr Priestly and others in the letter of 5 July 2010 sent by a member of the independent review team (IRT) to me, and whether matters are now proceeding on the basis of that report.

I would appreciate your reply by 2 February 2011.

Yours sincerely,

Paul Maskey

Chairperson
Public Accounts Committee

Letter to Mr Padraic White, Interim Chairperson NI Water 30 January 2011

Public Accounts Committee
Room 371
Parliament Buildings
BELFAST
BT4 3XX

Tel: (028) 9052 1208
Fax: (028) 9052 0366
E: pac.committee@niassembly.gov.uk
aoibhinn.treanor@niassembly.gov.uk

Mr Padraic White
Interim Chairman of the Board
NI Water Ltd
Northland House
3 Frederick Street
Belfast
BT1 2NR 31 January 2011

Cc Malcolm McKibbin, Trevor Haslett, Dear Padraic,

PAC inquiry into Procurement and Governance in NI Water

The Committee is finalising its report on this inquiry and expects to send it to print imminently. The Committee understands that the disciplinary matters arising from the Executive mapping of responsibilities in the Company as a consequence of the IRT report have yet to be brought to conclusion.

The Committee understands from the Principal Accounting Officer, Dr McKibbin, that since the resignation of the former CEO, you are the appropriate person to provide the Committee with the answers it requires.

The Committee recognises that disciplinary matters are properly for NI Water. However, it is only reasonable that an update on the process be provided to reassure PAC that the matter has been properly addressed. The Committee requests in particular that where the process has completed, you advise in general terms, what penalty or sanction has been applied.

The Committee understands that you may wish to provide the information in an anonymised form or a form which protects the identity of the individual or individuals concerned.

The Committee is concerned that one disciplinary process is not yet complete and would like to be reassured that there is good reason for this delay and to learn the date that has been set for completion.

The Committee understands that disciplinary inquiries have been undertaken in respect of five members of NI Water staff and requests that you specify how many of them are board members.

I should appreciate your reply by 2 February 2011.

Yours sincerely,

Paul Maskey

Chairperson
Public Accounts Committee

Letter from HOCS 2 February

Sir Bruce Robinson KCB
Head of the Northern Ireland Civil Service
Head of the Office of the First Minister & Deputy First Minister
Stormont Castle
Stormont
Belfast

BT4 3TT

Tel: 028 90378133 Fax 028 90378205
E-mail: hocs@ofmdfmni.gov.uk
Our Ref: COR/128/10
HCS-58-11

Mr Paul Maskey
Chairperson
Public Accounts Committee
Northern Ireland Assembly
Room 371
Parliament Buildings
Ballymiscaw
BELFAST
BT4 3XX 2 February 2011

Dear Paul

PAC Inquiry Into NI Water

In my letter to you of 26 January I referred to our shared concerns about the leaked draft of the PAC Report into NI Water.

My concerns have been reinforced by information that the BBC intend to broadcast a programme drawing on the contents of the leaked report. The Departmental Solicitor has written to the BBC urging it not to broadcast such a programme as it may have an adverse impact on the process I referred to in my earlier letter to you. I will not be assisting in that programme. I am also conscious that to comment on a leaked draft report may constitute a contempt of the Assembly as may the dissemination of such a report. However that is clearly a matter for the Committee and the Assembly so I have not raised it with the BBC.

I enclose a copy of the Departmental Solicitor's letter to the Controller of BBC Northern Ireland.

In relation to your letter of 31 January, I can give you my personal assurance that progress is being made in relation to this matter.

Yours sincerely

Bruce Robinson

Letter from Padraic White 2 February

Appendix 11

NIAO Examination of Procurement Breaches in Northern Ireland Water

Examination of Procurement Breaches in Northern Ireland Water

Part 1: Background

Introduction

1.1 In April 2007 responsibility for the delivery of water and sewerage services in Northern Ireland transferred from Water Service to Northern Ireland Water (NIW). NIW is a limited company owned solely by government, with the Department for Regional Development (DRD) representing the government's shareholder interests through its Shareholder Unit.

Internal Audit reviews of procurement in NIW

1.2 In September 2009 the new Chief Executive Officer[1] (CEO) of NIW commissioned an Internal Audit review of the procurement of Contracting Out LLP (Contracting Out). Contracting Out had been appointed by NIW to assist with the termination of the Steria[2] Contract. The review concluded that:

• appropriate DRD Shareholder Unit approvals had not been obtained; and
• there was a potential breach of EU procurement requirements and of the Regulatory Licence.

1.3 As a result of the Contracting Out review, the CEO commissioned a second 'Contracts Approval' review which was carried out by NIW's Internal Audit. The Contracts Approval review examined all contracts recorded on NIW's Contracts Database and all suppliers where expenditure exceeded £100,000 in the preceding 12 months (1 December 2008 to 8 December 2009)[3]. The review identified significant instances of non compliance with the company's financial delegation policy, the Shareholder Governance Letter of March 2007 and potential breaches of the Regulatory Licence.

1.4 The CEO relayed the findings and implications of the Contracts Approval review to DRD, the NIW Board, and the Northern Ireland Authority for Utility Regulation (NIAUR). The CEO and DRD Permanent Secretary then jointly requested a wider 'Deep Dive' review[4]. This third review was carried out by a joint DRD and NIW Internal Audit team, headed by NIW Internal Audit.

1.5 On the basis of the findings of the Contracts Approval report, DRD and NIW Accounting Officers jointly commissioned an Independent Review Team (IRT) to report with recommendations on actions to be taken by NIW and DRD to address the governance issues surrounding procurement.

Internal Audit reported significant procurement breaches in NIW

1.6 In total, the 2 reviews (Contracts Approval and 'Deep Dive') identified 44 Single Tender Actions (STAs) not approved by the NIW Chief Executive, 13 irregular contract extensions that were potential breaches of EU procurement legislation, 3 business cases that did not have internal approval, 13 cases where business users continued to use suppliers repeatedly by raising quotations, and 1 case which had expenditure outside the approved business case. The STA cases also contained the following breaches:

• 10 cases did not have the required Board and Shareholder Unit approval; and
• 4 cases were potential breaches of EU procurement legislation and the Regulatory Licence.

NIAO's terms of reference and the scope of its examination

1.7 The Public Accounts Committee (PAC) requested, and the C&AG accepted, that NIAO should conduct an examination of the procurement breaches raised by NIW's Internal Auditors.

1.8 NIAO's examination has addressed the findings of the following three internal audit reports:

(i) Report 1 - The Contracts Approval Report of 27 January 2010;

(ii) Report 2 - The Control Environment - Phase I – Operating Expenditure report of 23 April 2010 and (in relation to one contract) the Control Environment – Phase II – Capital Expenditure, the 'Deep Dive' Report; and

(iii) Report 3 - The Contracting Out Appointment Report dated November 2009.

1.9 The procurement breaches identified by Internal Audit in Report 1 and Report 2 involved 74 cases which have been valued at £28.4 million. NIAO's examination covered all 74 cases detailed in the 'Irregular External and Internal Expenditure Listing', drawn up by NIW Internal Audit. Our review is at Part 2 of this report.

1.10 In our review of the 74 cases identified by Internal Audit we determined (subject to the availability of supporting documentation):

(i) whether the value and nature of the procurement breaches reported by Internal Audit are correct and are supported by sufficient, relevant and reliable evidence; and

(ii) the extent of the breaches of financial delegations, procurement regulations and/or procurement procedures reported post-date the inception of NIW in April 2007 or the extent to which the breaches are legacy issues in respect of Water Service.

1.11 NIAO's examination included Report 3 – the Contracting Out (or 'Contractor A') appointment. NIAO also considered the findings of Report 3 in light of the additional evidence provided to PAC by the contractor, Contracting Out. Where these documents differ as to the nature and terms of the contract, we have, as far as is possible, come to a view as to the facts of the case. Our review is at Part 3 of this report.

1.12 In December 2008, NIW served notice of termination of the contract on Steria. Steria exited the business in July 2009. NIW was involved in a process to arrive at a financial settlement with that company which was agreed on 10 September 2010. Details of the settlement had not been made public because NIW had entered into a confidentiality agreement with Steria. At the request of PAC, NIAO obtained and reviewed relevant documentation surrounding the Steria settlement including details of the final settlement. Our review is at Part 4 below.

1.13 In Part 5 of the report we have detailed our findings in relation to the financial control environment in NIW. Internal Audit found evidence of 'invoice slicing[5]' in respect of Company E. NIW launched a suspected fraud investigation led by the Head of Internal Audit We carried out a review of the adequacy of this investigation, see paragraph 5.19 to 5.22 below.

Methodology

1.14 NIAO re-examined each case of procurement breach identified within NIW's Internal Audit reports – Report 1 and Report 2. Our examination included:

• review of internal audit files;
• review of current and old archived contract databases maintained by the Operational Procurement Unit;
• meetings with staff;
• review of a sample of invoices relating to the procurement breaches;
• review of financial delegations and policies;
• review of Board and DRD meeting minutes ('stocktake meetings'/Quarterly Shareholder meetings); and
• review of Independent Review Team (IRT) notes.

1.15 In order to identify whether procurement breaches identified by Internal Audit occurred prior to formation of NIW on 1 April 2007, NIAO extended its review of these cases to 1 December 2005. We selected this cut-off date because financial data before that time is archived in the Oracle Financial System and is not readily accessible. However, we consider that sufficient information is available from December 2005 for us to form a view on the extent of procurement breaches before April 2007. NIAO has also updated the value of procurement breach expenditure to include any expenditure up to 31 August 2010.

1.16 The Department commented that during the period before the establishment of NIW on 1 April 2007 the Agency Chief Executive was the Accounting Officer. The Agency was subject to GANI and relevant financial delegations and procurement rules. The NIAO was responsible for Water Service audits. The Certificate and Report of the Comptroller and Auditor General to the House of Commons and the Northern Ireland Assembly for 2005-06 and to the Northern Ireland Assembly for 2006-07 are available.[6]

Part 2: Examination of Report 1 (Contract Approval) and Report 2 ('Deep Dive' Report)

2.1 NIAO has examined each of the 74 cases identified by Internal Audit and has determined for each (subject to the availability of supporting documentation) whether:

• the value and nature of the procurement breaches reported by Internal Audit are correct and supported by sufficient, relevant and reliable evidence; and
• the extent to which the breaches are legacy issues in respect of Water Service.

Procurement breaches identified by Internal Audit were accurate

On the number of Procurement Breaches

2.2 Internal Audit identified 74 cases in which there were procurement breaches. NIAO has confirmed that these were correctly identified; our detailed analysis is at Appendix 1. NIAO found one additional procurement breach as a result of our validation work. In this case the information related to two separate contracts, the first of which had been included in Internal Audit's findings; the second, valued at £0.5 million, had been omitted. The breach related to a tender evaluation that was not approved by the Procurement Unit. NIW advise that the additional procurement breach identified by the NIAO was not treated as an exception by NIW's Internal Audit (see Case Study 1).

On the Value of Procurement Breaches

2.3 Internal Audit reported that the value of the procurement breaches identified totalled £28.4 million. Internal Audit's review covered the period from 1 April 2007 to December 2009 for Report 1, and 1 April 2007 to February 2010 for Report 2, though the specific dates varied with each case. NIAO concluded that the value of procurement breaches was £30.8 million for the same period examined by Internal Audit. This includes £0.5 million in respect of an additional breach we identified, and £1.9 million relating to a number of adjustments (such as invoice timing issues) where NIAO identified additional information (see Figure 1).

Figure 1: Amendments to Value of Procurement Breach Expenditure

2.4 NIAO updated the values which had been collated by Internal Audit from the formation of NIW on 1 April 2007 to 31 August 2010 and as a result identified a further £3.8 million of procurement breaches (see Figure 2). NIW point out that this expenditure 'off contract' continued due to the backlog of contracts that required regularisation via proper tendering exercises following the Internal Audit reviews. Internal Audit included only the expenditure up to the date on which NIW advertised the new contract. We determined that all amounts paid on unapproved contracts up to the date they were regularised should be considered as procurement breaches. NIAO therefore considers that the total value of contracts and contract extensions that had procurement breaches in the period covered by Internal Audit's review and in the extended period examined by NIAO is £34.6 million (see Figure 2).

NIAO found that a significant number of procurement breaches originated in Water Service

2.5 NIAO found 41 of the 74 procurement breaches originated within Water Service prior to the formation of NIW. From 1 December 2005[7] to 31 March 2007 expenditure against these breaches totalled £11.3 million (see Figure 2). NIAO therefore calculates the total expenditure since December 2005, on the 74 procurement breaches in both Water Service and NIW was £45.9 million. Of this £34.6 million was incurred by NIW and £11.3 million by Water Service. NIW informed NIAO that it considers that the figure of £11.3 million is overstated by £185,000.

Figure 2: Procurement Breach Expenditure from 1 December 2005 to 31 August 2010

2.6 In addition, NIAO analysed the value of the procurement breaches which were first entered into by Water Service and which continued under NIW. In relation to these cases procurement expenditure of £14.8 million in total was incurred by Water Service (£11.3 million) and NIW (£3.5 million) as a result of the original breach.

2.7 The case study below illustrates a procurement breach which originated with Water Service and continued at NIW.

Case Study 1: Human Resource consultancy services

Water Service Human Resource (HR) planned to appoint consultancy for the development of an organisational HR strategy, with an estimated contract value of £650,000. On 30 August 2006 Water Service HR informed the Supplies and Services Procurement Unit (SSPU) that they were awaiting DFP approval for the consultancy work; and intended to appoint a named supplier through a single tender action.

SSPU's response, on 1 September 2006, noted the procurement options available and stated:

• under no circumstances should a direct approach be made to one supplier only;
• specification should be developed internally;
• tender should not be shaped to provide an advantage to one supplier - otherwise there may have been an issue of conflict of interest;
• the procurement exercise was to be managed by SSPU;
• evaluation of submitted proposals should be objective, open, fair and transparent; and
• the evaluation panel should comprise at least one independent member.

On 1 September 2006 the Director of Finance stated "it was paramount......that we should not make a direct or single tender approach to this supplier –certainly not without going through approval with the executive team".

During September 2006, SSPU ran the tender using a Department of Finance and Personnel Central Procurement Division (CPD) Framework. Only two valid bids were received from 56 suppliers. The tender closed on 6 October 2006 and all tender documents were transferred from SSPU to HR.

HR then informed SSPU that the original supplier, whom they had intended to appoint through a STA, was the preferred bidder. NIAO found that, although a formal contract was not in place, the preferred bidder had commenced work by December 2006. However, by January 2007, the SSPU had not received evaluation papers or approval to award the contract. At this stage it noted concerns that the consultancy may already be underway without a formal contract being in place, breaching procurement practice and leaving NIW open to legal challenge. SSPU were subsequently advised that the tender documents had been lost in the internal mail en route from HR.

On 19 June 2007, the SSPU informed HR of the need for an approved Business Case so that the contract could be awarded. On 11 July 2007, SSPU stated to HR that it would not be defending HR actions on the tender process. We saw no evidence that SSPU formally drew these issues to the attention of either Internal Audit or the NIW Board.

NIAO's review found no evidence of : an approved Business Case; DFP approval; or SSPU documentation, including tender documents, evaluation assessment and report, approvals or contract award letter for this consultancy work. It is also a concern that tender documents were lost; and that work began on this contract by the preferred bidder, without any formal contract award and without a rejection letter being issued to other bidders by SSPU.

We found that tender documents were lost and this work was instead carried out under an existing contract with the consultant originally proposed. Procurement Unit were not involved or informed of this decision. NIW told us that this pre-existing contract (Business Transformation Partner) had a business case that was approved by the Minister and DFP.

NIW advise that the additional procurement breach identified by the NIAO was not treated as an exception by NIW's Internal Audit as it went through a competitive tendering exercise and furthermore PwC indicate that no services were procured under this contract. NIW told NIAO that all of the £0.5m expenditure quoted was in relation to project delivered under the Business Transformation Partnership Contract for Pay and Grading, HR IT, Performance Management, Competency Framework, Staff Reductions etc. These were all appropriately procured and approval was secured from DFP for the Business Transformation package. On this basis the £0.5m should not be treated as additional irregular expenditure.

2.8 In 33 of the 74 procurement breaches identified by Internal Audit, NIAO found additional breaches as a result of our wider scope. These breaches included work commencing before a contract was in place, and further examples of STAs. The additional procurement breaches included 8 potential breaches of EU Utilities Regulations, in addition to the 17 identified by Internal Audit; 6 of the additional breaches were as a result of extending the period of our review.

2.9 Internal Audit had identified an additional 54 contracts valued at £8.7 million, which were extended outside the permitted contract terms. NIW advise that the reason they were not included within the irregular expenditure figure is that the audit approach it took was only to include those which had expenditure in excess of the OJEU threshold as there previously was no internal financial delegation approval requirement for contract extensions. This was addressed in the updated Financial Delegation policy issued by the organisation following the internal audits in June 2010, however this was outside of the period examined by IA. NIAO has not validated these figures and has not therefore included them in our revised total. However, these additional cases suggest that the value of procurement breaches is likely to be substantially higher than currently reported.

Summary

2.10 NIAO can confirm that all 74 of the cases reported by Internal Audit were procurement breaches. Internal Audit concluded there had been 17 potential breaches of EU Utilities Regulations. NIAO has since established that, on the basis of additional work we have completed, that the number of such breaches is 25.

2.11 Internal Audit's assessment of the cost of the procurement breaches in NIW was £28.4 million to February 2010. NIAO has identified that the total value of contracts and contract extensions that had procurement breaches, to 31 August 2010, is £34.6 million. NIAO also found that 41 of the 74 procurement breaches related to cases originating in Water Service. Procurement expenditure of £14.8 million was incurred by Water Service (£11.3 million) and NIW (£3.5 million) in relation to these 41 cases.

Part 3: Examination of Report 3 – the 'Contracting Out' review conducted by

NIW Internal Audit

3.1 As part of our examination, we reviewed the findings of Report 3 dated November 2009 and considered whether Internal Audit findings were supported by the evidence (see paragraphs 3.6 to 3.10 below). We also considered the additional evidence provided to PAC by 'Contracting Out LLP' in July 2010. Where this additional material differs from the evidence provided to PAC in its Evidence Session of 1 July 2010 we have come to a view on the facts of the case (at paragraphs 3.14 to 3.24 below).

The Contracting Out appointment

3.2 The lead partner of Contracting Out[8], Sue Holmes had, until April 2007 been engaged as Water Service's Public Private Partnership (PPP) Director and as interim Commercial Director. Sue Holmes was a member of the Water Service Executive Team employed through an agreement with the Strategic Investment Board (SIB). She was not a Water Service employee.

3.3 On 10 April 2007, the then Chief Executive of NIW signed a 'Master Consultancy Services Agreement' (the Master Agreement) with Contracting Out for the supply of consultancy services relating to major contracts. The Master Agreement set out the terms under which consultancy would be provided for defined periods under a series of related schedules[9] (see Figure 3). The Master Agreement was not itself a contract rather a framework to award contracts under. Up to March 2010, NIW paid Contracting Out £999,308. Schedule 7 accounts for £526,982 of this total.

Figure 3: Payments to Contracting Out[10]

Source: NIW

The purpose of the Internal Audit review

3.4 The Chief Executive of NIW instigated an Internal Audit review in September 2009 having been made aware, by the then Commercial Director of NIW, become aware of the unusual terms and conditions of the contract with Contracting Out. The Internal Audit review focused on the engagement of Contracting Out to provide support and advice in the termination of the Steria contract (Schedule 7). NIAO's consideration of the Steria contract is at Part 4 below. The scope of Internal Audit's review was to include the appointment, rewards structure and the approval process. Internal Audit was also to validate time and other costs billed by the contractor and consider the evidence to support the substance and value of the Steria claim. The former Commercial Director told us that he had advised the Head of Internal Audit not to review Steria evidence until work was complete. The Department told us that the Head of Internal Audit has no recollection of this and it would not have had an impact on work carried out.

3.5 Schedule 7 was signed by the then Commercial Director of NIW on 6 February 2009. The fee agreed was a fixed price of £250,000, plus an uncapped success bonus of 6 percent (the basis on which the bonus was to be calculated is considered at paragraphs 3.15 to 3.17 below).

Internal Audit Findings substantiated by NIAO

3.6 Based on the information available we were able to substantiate Internal Audit's key findings, these are set out in paragraphs 3.7 to 3.10 below.

Internal Audit Finding 1

3.7 Internal Audit examined the extent to which the Master Agreement complied with procurement regulations and found that:

• the Master Agreement was not time bound and a value cap was not set;
• the award process for the Master Agreement potentially contravened EU procurement legislation and the requirements of condition F1 of the Regulatory Licence to adhere with the Utilities Contracts Regulations 2006, which required contracts estimated to exceed the EU threshold over contract life to be publicly tendered; and
• the Master Agreement was a Single Tender Action with a potential value over £250,000 and the approval of DRD Shareholder Unit was not sought as required, under NIW's financial delegations.

NIAO agrees that the Master Agreement constitutes a potential breach of EU procurement rules. We consider that it operated as an irregular framework agreement. OGC guidance[11] states that "the procurement to establish a framework agreement is subject to the EU procurement rules".

Internal Audit Findings 2 and 4

3.8 Internal Audit examined whether Schedule 7 complied with the external approvals required for Single Tender Actions and with reward structure approvals. Internal Audit found that Schedule 7 had not been notified to the DRD Shareholder Unit for these prior approvals, as required by the NIW delegated authority limits. NIAO has confirmed Internal Audit's findings.

Internal Audit Finding 3

3.9 Internal Audit examined whether the award of Schedule 7 complied with internal approvals required for Single Tender Actions. While the decision to appoint Contracting Out to the Steria Termination Project was brought to the Board in December 2008, the Schedule was not approved as required by the Chief Executive. Internal Audit also reported a lack of evidence that a business case was prepared and approved by the Board, as required under NIW's financial delegations of authority. NIAO has confirmed Internal Audit's findings.

Internal Audit Finding 5

3.10 Internal Audit found that there was limited evidence to support elements of the £23.2 million in cost recoveries against Steria proposed by Contracting Out. NIAO agrees, that given the limited scope[12] of the Internal Audit review, the lack of relevant documentation, much of which was held by Steria, and the specialist skills required, Internal Audit could not validate the claim. Our comments on the derivation of the £23.2 million claimed are at paragraphs 3.18 and 3.19 below.

Additional Issues identified by NIAO

3.11 There were two aspects of the contractual arrangements with Contracting Out which we consider to be novel and contentious. Under its Governance Letter of March 2007 NIW was not required to adhere to GANI[13] (and subsequently MPMNI). Had compliance with GANI been required DRD Shareholder and DFP approval of these arrangements would have been mandatory:

• the Master Agreement, which was analogous to a framework agreement, was unconventional in that the arrangement was not advertised and was with one supplier only; and
• the payment of a success bonus, as set out in Schedule 7 (see paragraph 3.15), is also unconventional in the public sector.

3.12 Contracting Out was appointed on 10 April 2007 by the former CEO of NIW. We found no evidence of a business case to support this decision; there was therefore no consideration of alternative options for securing these consultancy services. The former CEO told NIAO that she appointed Contracting Out and there was proper consideration of the options, some consultation with appropriate colleagues and a file note to justify the decision. NIW holds limited documentation recording how the service specification, Master Agreement and Schedules had been drawn-up and by whom. The former CEO told NIAO that there was relevant documentation at the time.

3.13 The business case for Schedule 8 recommended proceeding with Contracting Out. The business case was provided by Contracting Out to NIW in an email of 3 February 2009. Contracting Out has advised us that a 'format outline' for this business case, without figures, was provided by them under instruction from NIW. NIW has been unable to provide us with a version which predates this draft.

NIAO Review of Additional Material provide to PAC by Contracting Out

3.14 Following the PAC's Evidence Session on NIW on 1 July 2010, Contracting Out wrote to the Committee on 21 July 2010. It raised concerns that evidence provided by the DRD Accounting Officer and NIW CEO on its contractual relationship with NIW contained material errors. We reviewed Contracting Out's concerns against the relevant documentation provided by NIW and our analysis of the key points of difference is recorded below. The Department pointed out that NIW has not had sight of Contracting Out concerns or been given right of response.

Was the 6 percent success bonus to be calculated on the basis of savings recovered or identified?

3.15 The Schedule 7 success bonus clause states, 'in the event that the Consultancy identifies sufficient cost reductions and/or cost recoverable to off-set any Termination Claim made by Steria up to a max of £3m, and/or it finds grounds to negate the right to make such a claim then the Consultancy will be entitled to a bonus payment based on a percentage of any cost recoveries made once this condition has been satisfied. The Bonus Payment will be determined as 6% of any such amounts identified by the Consultancy'.

3.16 In evidence to PAC, the NIW CEO emphasised, that, in his view, payment of the success bonus could have been claimed on the basis of savings identified rather than recovered. Contracting Out pointed out that this contradicted correspondence of 5 February 2010 between NIW's General Counsel and Contracting Out, in which NIW had been clear that the success bonus was not payable until cost recoveries had been realised.

3.17 Contracting Out is correct to identify that, at PAC, the CEO used an interpretation of how the bonus was to be calculated which differed from that previously given by NIW's General Counsel. We consider that the relevant clause was ambiguous (see paragraph 3.15) and lacked definitions of the key terms used. For example, the terms "cost reductions and/or cost recoverables" and "such amounts" are not defined within the contract.

What was the source of the £23.2 million identified as savings due on the Steria contract?

3.18 The substance of one of Contracting Out's concerns is that the NIW CEO was in error when he told PAC that "at that point in time, the individual told us [NIW] that they had identified savings of £23 million". The literal interpretation of the NIW CEO statement is that in September 2009, Sue Holmes had told NIW that £23 million in savings had been identified.

3.19 Our review of the available documentation shows that the £23 million figure first appeared in a NIW Board position paper of 22 September 2009, prepared by its legal advisors based on information provided by Contracting Out. The total of £23.2 million has two main components: £8.9 million in respect of Performance Credits and Reporting Credits and £14.3 million in respect of all other potential savings. The figure of £14.3 million first appears in a draft letter to Steria dated 18 June 2009, on NIW headed paper, attached to an email from Jonathan Holmes of Contracting Out to the then Commercial Director of NIW. The draft letter indicates that an unspecified amount in respect of Performance Credits and Reporting Credits would also be due. The origin of the £8.9 million figure cannot be ascertained from the documentation available to us, although this amount was known within NIW as early as June 2009. NIW told us, and Contracting Out has since confirmed, that Contracting Out provided all of the figures.

Did NIW ask Contracting Out to fabricate timesheets to support the settlement?

3.20 NIW's Chief Executive told PAC of his unease that the potential success bonus payable to Contracting Out was 6 percent of £23 million. NIW was concerned that it was open to the "potentially serious embarrassment of a seven figure sum being paid out to a consultant[14]". As an alternative to the bonus, a £200,000 settlement was negotiated with Contracting Out and subsequently approved by the CEO of NIW and, subject to certain conditions, by the Permanent Secretary of DRD in October 2009. These conditions included the need for a thorough investigation of the procurement of these services and that any further payments to Contracting Out would require DRD approval.

3.21 Contracting Out's submission to PAC explained that, after the £200,000 settlement in respect of the bonus had been agreed, NIW refused to pay the sum due until timesheets had been submitted by Contracting Out. Contracting Out considered that NIW wished it to "fabricate" timesheets which exactly matched the offer agreed and on this basis the negotiations stalled for a time. NIW refutes Contracting Out's view that it was asked to 'fabricate' timesheets.

3.22 NIAO found that NIW's 22 October 2009 request for approval from DRD referred to the £200,000 settlement being "based on an estimate of time expended". This was the first reference we saw, in the papers made available to us, of the settlement being linked to time spent. NIW did request, on a number of occasions[15], "some form of vouching" to support the payment. Contracting Out made clear that it did not hold timesheets, as the contract did not require this. It did however submit an invoice on 21 December 2009 which linked the settlement to fees for an additional 260 man-days between May and October 2010. Payment of £243,550 was made to Contracting Out on 30 March 2010, comprising a final settlement of £200,000, interest of £13,550 (at 8 per cent) and £30,000 VAT. The settlement was subject to a confidentiality agreement. Timesheets were not provided by Contracting Out to support the final settlement.

3.23 The documentation examined does not explain why NIW initially insisted on linking the £200,000 settlement to time spent; this was however the basis on which NIW had sought DRD approval. However, DRD had not made its approval conditional upon receipt of timesheets or any other validation of time spent. DRD's Accounting Officer did write to Contracting Out on 19 March 2010 stating "that it would be helpful if you could provide NIW with some further detail in relation to the work generated, dates involved etc.". NIAO found no evidence of a request from NIW to fabricate documentation.

Did the Contracting Out contract offer value for money?

3.24 Contracting Out submission to PAC noted the NIW CEO's comments that the rates proposed by the firm under the extension to Schedule 8 did not appear to offer good value for money and questioned the basis for this judgement. NIAO considers that it was difficult for NIW, in the absence of competition, to make any meaningful judgement about value for money

Summary

3.25 Our review found that the key internal audit findings were substantiated. We found that the Master Agreement was an irregular framework agreement which potentially contravened EU Utilities Regulations and the conditions of the regulatory licence. No commitment to purchase was entered into and we found no evidence that alternative options were ever considered as each Schedule or contract was taken up. Furthermore the Master Agreement was neither time bound nor value bound and had only one sole supplier. NIAO considers that this represented a novel and contentious arrangement which, had NIW been required to comply with GANI at the time, should have been drawn to the attention of the Shareholder and DFP.

3.26 In addition, the Schedule 7 STA (termination of the Steria contract) had also not received the required internal or external approvals. We consider that Internal Audit lacked the evidence and specialist skills required to come to a meaningful conclusion on whether savings of £23.2 million claimed could be supported.

3.27 Contracting Out was correct to identify that NIW has offered differing interpretations of the basis on which the success bonus was to be calculated. We consider that the relevant clause in Schedule 7 was ambiguous and note the absence of any definitions of the key terms used. 3.28 At September 2009 Contracting Out estimated savings of some £23 million.

3.29 NIW asked Contracting Out to submit timesheets to support the settlement payment. Despite Contracting Out informing NIW that it did not have timesheets, NIW initially insisted on receiving these before the final payment could be made. There is no evidence that this was a request from NIW to fabricate the documentation. In March 2010 a settlement was reached without timesheets being provided.

Part 4: Steria

4.1 NIAO reviewed the relevant documentation concerning the Steria settlement and obtained details of the final settlement.

Findings

4.2 On 18 January 2006 Water Service awarded a contract to Xansa (Xansa was later acquired by Steria) to provide customer billing, contract handling and mobile work management services[16]. After the deferral of domestic water charges from 1 April 2007, there were a number of disputes, and NIW subsequently decided to terminate the contract and keep in place, via contract novation, the main subcontractors. On 16 December 2008, NIW provided Steria with 12 months notification of this termination. On 6 February 2009, NIW signed a contract with Contracting Out for advice on the termination of the Steria contract, to identify where costs could be reduced or recovered, novate and modify the subcontracts, and provide commercial assistance. NIW began to withhold payment of invoices to Steria on the basis of anticipated recoveries for claimed overcharging by Steria. This led to a series of claims and counterclaims which resulted in Steria notifying NIW that it would terminate the contract on 3 July 2009.

4.3 A report prepared for the NIW Board in September 2009 by NIW legal advisors set out that NIW's claim was £23.2 million plus costs of £1.5 million. NIW and Contracting Out told us that Contracting Out prepared the £23.2 million figure. Steria issued a statement of claim on 20 October 2009, claiming £13.6 million plus interest for invoices due, termination costs of £3.3 million, consequential losses of £0.6 million and all other associated costs. Mediation failed to find a solution. A trial date was set for 21 September 2010.

4.4 In early October 2009, NIW asked its legal advisers to consider the contract position with Contracting Out in light of its dispute with Steria. The advice was:

"NI Water needs to consider its requirements from Contracting Out beyond 31 December 2009 ... NI Water should therefore consider only extending the Schedule 7 Engagement beyond 31 December 2009 for a minimum period necessary to ensure the continued services of Contracting Out in relation to the Steria dispute ... Ideally, the extension should also include post-termination provisions to ensure continued co-operation with NI Water in relation to any ongoing legal proceedings".

Following mediation between Steria and NIW the CEO instructed the then Commercial Director to terminate the contract with Contracting Out on 2 November 2009. This was in response to the conditions under which the Department approved the settlement figure (see paragraph 3.20).

4.5 NIW's legal advisors also recommended that it should engage expert witnesses and forensic accountants to carry out an independent assessment of Steria's claim. Deloitte was appointed, after a tender process, on 11 January 2010 at a cost of some £389,000. NIW advised us that Contracting Out was never engaged nor could they have acted as expert witnesses and forensic accountants in any court proceedings due to their lack of independence given the existence of the success fee arrangement. Deloitte's report, dated 3 March 2010, assessed the relative strength of each element of the claims of NIW and Steria Various outcomes were considered, one of which was that if the strongest element of each side's case was successful, NIW would owe Steria £5.3 million. The report highlighted that Deloitte needed further disclosure in relation to the dispute in order to come to a definitive view. NIW told us that further work by Deloitte did lead to a weakening of the initial assessment of the view within the March report.

4.6 On 10 September 2010, a settlement was agreed in which £9 million was to be paid to Steria (£10.6 million inclusive of VAT). The settlement broadly represented £8 million for invoices that were due and £1 million in interest. NIW also paid £2.1 million to a subcontractor, in respect of amounts Steria owed to that company, and which otherwise would have formed part of the settlement. In addition, NIW agreed to pay Steria's reasonable legal costs, to be assessed by the High Court if not agreed. Reasonable legal costs have not yet been agreed. The settlement was on the basis of legal advice and approved by the Board. The settlement was subject to a confidentiality agreement.

4.7 In recommending the settlement NIW's legal advisors stated that "[there] were also issues for NIW in evidencing all its heads of claim as some of the key witnesses were not NIW employees and were unwilling to assist NIW by giving evidence. These witnesses would have had to be compelled to attend trial against their will, calling into question whether they would have assisted NIW as fully as might otherwise be the case". Contracting Out told NIAO that they had made it clear to the CEO, NIW General Counsel and DRD Permanent Secretary that they were willing to assist but were never asked to testify. This was confirmed by the former Commercial Director. NIW advised that one of the key witnesses for it was a consultant who had put on record that he was not willing to give evidence.

4.8 NIW told NIAO that it would be misleading to conclude that difficulties with witnesses was the main driver for settling this matter. In NIW's view the main driver was the forensic analysis and expert witness opinion that Deloitte produced.

Summary

4.9 The settlement agreed with Steria was for £9 million plus VAT of £1.6 million, £10.6 million in total representing amounts previously withheld from Steria plus interest. As part of the settlement NIW also paid £2.1 million to a subcontractor, in respect of amounts Steria owed to that company. In addition, NIW agreed to pay Steria's reasonable legal costs.

4.10 NIW's legal advisors pointed out that NIW would have difficulty in evidencing its claim as some of the key witnesses were not employees and were unwilling to give evidence which may have had a negative impact upon their case. NIW told us that the main driver for settling was as noted above, the forensic analysis and expert witness opinion. NIAO saw no evidence that, in view of the potentially detrimental impact of the decision to terminate its contract with Contracting Out, it had been subject to a comprehensive risk analysis.

Part 5: The Financial Control Environment at NIW

5.1 During NIAO's examination of the procurement breaches as identified by Internal Audit (see paragraph 1.8) we found a number of serious underlying control weaknesses. Significant omissions in internal financial delegations in NIW

5.2 NIAO found that significant internal financial delegations had not been in place since April 2007. External[17] financial delegations had not been incorporated into NIW's guidance at 1 April 2007 and were only incorporated on 1 April 2008. DRD told us that in the first quarter of NIW's existence the Shareholder Unit saw evidence of NIW's compliance with the new governance arrangements/financial delegations, and Assurance Statements were provided to it by NIW for 2007-08 and 2008-09. DRD said these demonstrate the assurances provided in relation to amongst other things financial delegations to the Department.

5.3 NIAO identified fundamental deficiencies in internal Financial Delegations and these are illustrated at Figure 4 below.

Figure 4: Omissions from Financial Delegations

Source: NIAO from NIW Financial Delegations
? = financial delegations in place
x = no financial delegations

5.4 Our review found that NIW did not introduce internal financial delegations until 1 April 2008[18]. NIW told us that they carried over the old Water Service procedural manual and these, including internal financial delegations, were available to all staff through the NIW intranet. NIW told us that on 1 April 2007 the policies which had been applied within Water Service were to a large extent carried forward to the new company. The intranet remained the recognised repository of main policies of NI Water as it had been in Water Service. The intranet was also the main means of communication of policies to staff. There was no need to send a separate communication in relation to the Financial Delegations at 1 April 2007.

5.5 NIAO found that the financial delegations, introduced in 1 April 2008, were not complete. NIW did not have, in our view, sufficient financial delegations setting out authority levels for approving new contracts until 1 November 2009[19] and authority levels for planned options to extend contracts were not in place until 8 June 2010[20]. It is evident from our validation of the 74 procurement breaches and from discussion with business unit staff that financial delegations were not effectively communicated, followed and enforced.

5.6 NIW strongly disagree with paragraphs 5.2 to 5.5 above on the basis that financial delegations were in place from April 2007. NIW state that it has provided evidence to NIAO to demonstrate this. NIW also state that it has provided evidence that approval levels for new contracts and approving contract extensions were incorporated in the Tendering and Quotes Procedure that was in place within Water Service and NIW until the new Procurement Manual was issued in 2010 to all staff. NIAO has carefully considered all the evidence provided and remains of the view that there were significant omissions in the financial delegations.

5.7 There is a requirement under EU Utilities Regulations to aggregate spend on goods and services which have similar characteristics and are for the same type of goods and services. NIAO found evidence that staff across business units had not considered aggregation. We were informed by business unit staff that where spend was not aggregated, and contracts were not put in place, this did not mean that there was a total absence of tendering. Business Units told us that they were obtaining a number of quotations (three or four depending on the expenditure on the individual case) for supplies and services. When we sought evidence of the relevant number of quotations, as required by the financial delegations, it was not always available.

5.8 It became clear to us, through meetings with the business unit staff, that they considered they were applying the correct level of purchase control procedures at the time. Staff believed that the requirement, from 1 April 2008, to consider whether there was an aggregate spend of over £30,000, only applied to specific goods or services and not necessarily to one supplier. They also believed that it related only to goods or services that were purchased locally and not to NIW as a whole. NIW staff also told us that they did not have the relevant financial information to monitor this, especially where more than one unit was involved. There was also little evidence that spending on each case was monitored or assessed, either through the use of manually or electronically held data. Contract extensions were not monitored or controlled. NIW informed us that expenditure reports by supplier and Business Unit were always available even in the absence of an automated system. NIAO considers that if the reports had been used procurement breaches could have been prevented.

5.9 The NIW Financial Delegations required all STAs over £250,000 to be approved by the Shareholder Unit with any under that limit requiring CEO approval. There was no evidence of any of the STA cases under £250,000 within the 74 cases being referred by Senior Management to the CEO for approval.

Role of Procurement

5.10 NIAO consider that the Operational Procurement Unit has not always followed best practice in a number of other areas. We noted instances of poor records management. The Unit had also authorised 17 extensions requiring competitive tendering (see Case Study 2) and signed award letters after the commencement of the contract period.

Case Study 2: Irregular extensions of contract beyond original award periods.

The original contract (£0.5 million) for the recruitment of temporary staff was advertised in OJEU in 2004 and authorised appropriately by the Director of Corporate Services within Water Service. There were two valid options to extend which were both authorised by the Procurement Unit, the second option took the contract beyond 1 April 2007 when NIW was set up.

There then followed three extensions requiring competitive tender. The first two were approved by a consultant working in Procurement Unit, and the third extension was authorised on an ongoing monthly basis by a second consultant, also working in the unit.

Four of the five contract extensions were signed after the contract extension period commenced.

5.11 Both Water Service and NIW employed a high number of external personnel in roles ranging from relatively junior positions to senior posts. On the transfer to NIW in 2007, a range of posts became vacant as individuals took the option to remain within the Northern Ireland Civil Service (of which Water Service staff were part). The posts were filled through a mix of external consultants, staff substitutions, contractors, and temporary staff. In some cases, external personnel were employed by NIW for significant periods of time, while others were employed in a range of roles throughout the organisation. This was very evident in the Procurement Unit.

5.12 NIAO found that (during the period April 2007 to December 2009) at least three Procurement Unit posts out of approximately eight were consistently filled by external staff from a recruitment agent. Between 1 April 2007 and 31 March 2008, there were also twelve PricewaterhouseCoopers (PwC) consultants working on transformation projects within the Procurement Unit. PwC informed us that their staff were not involved in 'business as usual' activities within the Procurement Unit.

5.13 Consultants were selected to temporarily fill vacancies, put in place proper controls and systems, and transfer knowledge to NIW staff. The Procurement Unit's reliance on consultants over the years has created a level of dependency. NIAO found instances where consultants were retained for up to 4 years. Indeed we found seven instances where unapproved extensions were signed off by consultants working in the Procurement Unit.

Poor contract management and records management.

5.14 NIAO identified serious instances of poor record management, where key documents such as contract awards/extension letters, tender documents, and business cases were not available on file and in two cases (with spend of £12.2 million), key contract documentation was missing at the time of our review. Much of this material was provided, in the form of photocopies, on the day before this report was finalised. In a third case, the tender documents had been lost in the internal post before a contract could be awarded (see Case Study 1).

5.15 NIW introduced an electronic ordering and contract management system for capital expenditure from 1 April 2007. A similar system for supplies and services was not operational until September 2009. An electronic ordering system introduces automated controls that require all payments to have been approved in accordance with financial delegations, which may have detected and prevented procurement breaches. In the absence of such a system, compensatory robust manual controls should have been in place to provide the level of control and assurance, but were not present in NIW.

Conflicts of Interest

5.16 In validating the procurement breaches identified by Internal Audit, we found a number of cases where there were unacceptable conflicts of interest. These included:

• an external consultant employed by NIW provided work to their own firm (see Case Study 3); and
• a supplier prepared the design and specification of services, subsequently this supplier was the only bidder and was awarded the contract.

Case Study 3 : Conflicts of Interest

In 2006, Water Service entered into an agreement with a specialist recruitment agency, for a consultant to act as leader on a transition project. However, there was no evidence of a contract with this supplier on NIW's files. In April 2007, when additional 'temporary staff' were required, the consultant recommended recruiting five staff fromthe agency. At least three people from this firm were employed. In one case, the 'contract schedule' was signed by the consultant, acting as NIW 'Client representative'.

As there was no approval document, it is unclear who authorised the employment of the remaining 2 contractors. NIW thought that they were employed under the Human Resource Framework Contract in place at that time, but this agency did not appear on the framework.

NIAO confirmed that, as there was no business case or contract in place, this case was an OJEU 'Notice' exception (requiring a notice of award for PART B Service). A total of £500,500 was paid.

Lack of awareness and enforcement of financial controls

5.17 EU Utilities Procurement Regulations permit non-competitive contracts (Single Tender Action contracts) when the supplier is the sole supplier of certain goods and services. However, NIAO found no evidence, other than the Business Unit's view, that the suppliers in question are sole suppliers. In one of the cases examined, we found that around £1 million was spent on parts:

• without a contract in place;
• where there had been no proper competition; and
• where expenditure was in excess of EU thresholds.

There are significant value for money risks where staff assume that providers of maintenance parts or services were sole suppliers.

5.18 NIAO also found two contracts where appropriate tendering procedures had been circumvented by Business Unit staff. In these cases, staff engaged suppliers based on the subjective quality/reputation of the supplier.

The 'Invoice Slicing' Investigation

5.19 In April 2010, Internal Audit completed an investigation into suspected fraud involving potential collusion between NIW staff and a supplier referred to as 'Company E'. The case was identified during Internal Audit's review of Contract Approvals. The review had found that the contract extension in this case was a potential breach EU procurement regulations and Licence requirements.

5.20 Although the investigation did not find evidence of fraud, it did confirm the "deliberate attempt to circumvent financial delegations" on the part of two members of staff which represented "a serious breach of duty". Internal Audit also found wider control issues including:

• lack of evidence to support payments;
• no proper contract;
• expenditure outside budget approvals;
• insufficient information on the invoice;
• no physical checking of work; and
• no challenge function exercised.

The subsequent disciplinary process into the actions of the two employees concerned resulted in no disciplinary action being taken.

5.21 NIAO reviewed the methodology employed by NIW in this suspected fraud investigation. Our view is that, to a significant extent, NIW failed to followed good practice and its own Fraud Response Plan in the conduct of this investigation. For example, NIW's Fraud Response Plan requires that an investigation addresses all aspects of the suspected officers' work and not just the area where the fraud was discovered, this did not happen in this case. NIW disagree

with this and state that the Fraud Response Plan was followed.

5.22 NIAO is aware that the DRD Shareholder Unit was uncomfortable with the choice of the NIW Director of Asset Management as the 'independent director' charged with overseeing the investigation[21]. The Head of Internal Audit also expressed reservations that NIW allowed management to investigate proven or suspected fraud incidents[22]. NIAO considers that significant wider issues arise from this case in relation to the proper conduct of fraud investigations, and we intend to report separately on this matter.

Out of Court Settlements/Confidentiality Clauses

5.23 As a result of our review NIAO identified a number of out of court settlements agreed by NIW, which all contained confidentiality clauses. These included a settlement of a procurement breach, settlement of the bonus payment to Contracting Out, the Steria settlement and a payment to another public body. The Department told us that it was aware that a confidentiality clause had become a common feature of commercial agreements at NIW and had, in one particular case, insisted that an additional clause was inserted to permit disclosure in the event of receiving a Northern Ireland Assembly question.

5.24 DRD approval for the payments was required, and provided, in all cases. In one instance we note that a copy of the settlement was attached to the request for approval. DRD approved this with the knowledge that it contained a confidentiality clause.

Summary

5.25 The issues raised in this section represent significant weaknesses in the financial control environment at NIW:

• NIAO found that an adequate control environment was not established, on the formation of NIW. The fact that NIW did not review and revise Water Service financial delegations for a full year of operation is a major governance failure;
• When NIW issued financial delegations in April 2008 they were incomplete. Authority levels for approving contract extensions were not introduced until June 2010;
• Financial Delegations were not effectively communicated, followed and enforced;
• Proper procurement procedures were not followed by the Procurement Unit and by other business areas for goods and services; and
• The Procurement Unit did not bring significant procurement breaches to the attention of Internal Audit or the Board.

5.26 NIAO considers that the Procurement Unit was not adequately resourced following the transfer of Civil Service staff back to NICS, on creation of NIW. This situation led to an over dependency on consultants within the Unit. The appointment of consultants should have been time-bound, and there should have been a planned transfer of knowledge and expertise. Instead, we have seen instances in which consultants were retained for up to 4 years and were signing irregular contract extensions.

[1] Laurence MacKenzie was appointed as NIW Chief Executive in July 2009 and Accounting Officer on 15 September 2009. Chris Mellor, the then Chair of NIW, acted as Interim Chief Executive from May 2008 to July 2009 following the departure of the previous Chief Executive Katherine Bryan.

[2] Steria was an organisation contracted to provide customer billing, contact handling and mobile work management services to NIW

[3] In cases where Internal Audit found expenditure to be over £100,000 which was not included within the Contracts Database, it assessed expenditure back to April 2007.

[4] Covering all suppliers with expenditure over £100,000 since 1 April 2007 not already examined in the previous 'Contracts Approval' review and a 10 per cent sample of suppliers with expenditure between £30,000 and £100,000 (163 suppliers).

[5] 'Invoice slicing' can be defined as limiting the size of individual invoices so as to avoid proper delegated limits for authorisation.

[6] The basis of the audit opinion included examination, on a test basis, of evidence relevant to the amounts, disclosures and regularity of financial transactions included in the financial statements and the part of the Remuneration Report to be audited. The C&AG was not required to form an opinion on the effectiveness of the Agency's corporate governance procedures or its risk and control procedures. An unqualified opinion on regularity was provided in 2006-07.

[7] 1 December 2005 was the date from which we were able to obtain information directly (see paragraph 1.15).

[8] Contracting Out LLP is a limited liability partnership registered in Northern Ireland on 3 May 2007.

[9] Although there were nine schedules in total, Schedules 4, 5 and 9 were not activated

[10] Including £200,000 final settlement (plus VAT and interest)

[11] Office of Government Commerce (OGC) Guidance on Frameworks Agreements, September 2008

[12] Specifically excluded from the scope was the 'legal and contractual validity of the cost recoveries claim proposed by Contracting Out'.

[13] Government Accounting Northern Ireland and Managing Public Money Northern Ireland (paragraphs 2.1.7 and 3.8.3 refer).

[14] These concerns are set out in an email from the former Commercial Director to the CEO on 14 September 2009.

[15] Emails from the NIW General Counsel and Company Secretary to Contracting Out of 15 December and 16 December 2009.

[16] Mobile Management Services was added later to the original contract

[17] DRD introduced external financial delegations from 1 April 2007 which required NIW to seek departmental approval for certain actions.

[18] NIW Financial Delegations FRXXX from 1 April 2008

[19] NIW Financial Delegations FR009 from 1 November 2009

[20] NIW Financial Delegations FR009 from 8 June 2010

[21] Minutes of Quarterly Shareholder Meeting of 3 February 2010

[22] Minutes of Quarterly Shareholder Meeting of 21 May 2010

Appendix 12

List of Witnesses
who Gave Oral Evidence
to the Committee

1. Mr Paul Priestly, Accounting Officer, Department for Regional Development (DRD);

2. Ms Lian Patterson, Senior Finance Director, Department for Regional Development (DRD);

3. Mr Laurence MacKenzie, Chief Executive, Northern Ireland Water;

4. Ms Nicola Brennan, Head of Internal Audit, Northern Ireland Water;

5. Mr Kieran Donnelly, Comptroller and Auditor General (C&AG); and

6. Ms Fiona Hamill, Treasury Officer of Accounts (TOA).

Appendix 13

Other Papers Submitted to the Committee but not Published in the Report

Correspondence of 2 August 2010 from Mr Paul Priestly – Annex N

Cover Page

Northern Ireland Water - Procurement Plans:

• Northern Ireland Water - First Procurement Plan
• Letter from the Utility Regulator
• Latest Procurement Plan

Reporter's reports on the above Procurement Plans:

• Report on Procurement Plan of January 2008
• Report on Procurement Plan of May 2009

Northern Ireland Water - Procurement Activity Reports (PAR):

• June 2008
• July 2009
• July 2010

Reporter's reports on the above PARs

• July 2008
• August 2009

Report of the Independent Review Team to the Accounting Officers of the Department for Regional Development and Northern Ireland Water

• Contracts Approval
• Contracts Approval addendum summary
• Control Environment – Phase I – Operating Expenditure
• Control Environment – Phase II – Capital Expenditure
• Control Environment – Phase III – Other Financial Delegations and Staff Expenses
• Report of the Independent Review Team to the Accounting Officers of the Department for Regional Development and NI Water