| Homepage > The Work of the Assembly > Committees > Public Accounts > Reports > Measuring the Performance of NI Water and Procurement and Governance in NI Water Volume One | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Volume TwoPublic Accounts CommitteeMeasuring the Performance of NI Water
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mr George Butler |
Northern Ireland Water |
|
Mr John Mills |
Department for Regional Development |
|
Mrs Jo Aston |
Northern Ireland Authority for Utility Regulation |
Also in attendance:
Mr Kieran Donnelly |
Comptroller and Auditor General |
|
Ms Fiona Hamill |
Treasury Officer of Accounts |
1. The Chairperson (Mr P Maskey): We are joined today by Mr Paul Priestly, who is the accounting officer with the Department for Regional Development (DRD). He is here to respond to the Committee on the Audit Office report 'Measuring the Performance of NI Water'. You are very welcome, Mr Priestly. Please introduce your colleagues.
2. Mr Paul Priestly (Department for Regional Development): I am joined today by Mr Laurence MacKenzie, the chief executive of Northern Ireland Water (NIW), by Mr George Butler, who is the director of asset management at Northern Ireland Water, and by John Mills, who is the director of water policy in the Department for Regional Development.
3. The Chairperson: You are all very welcome to today's meeting of the Public Accounts Committee. Mr Priestly, you have been before us a number of times, so you know the procedure. I will start the questions, and we will then open the meeting to the other Committee members.
4. Paragraph 1.13 of the report shows that you support:
"the use of appropriate benchmarking".
5. What benchmarking do you currently use, and what do the results show?
6. Mr Priestly: Thank you for that question. I will begin by drawing the Committee's attention to a recent statement that our Minister made in the Assembly on Northern Ireland Water's performance. It is important that the Committee bears the context in mind. The Minister said: "Northern Ireland Water (NIW) extracts, treats and distributes approximately 614 million litres of drinking water every day to more than 800,000 homes and businesses. It collects, treats and returns safely to the environment over 134 million cubic metres of waste water every year on our behalf.
… the company has met or exceeded many of its key performance indicators during the past three years. For example, the quality of water from the tap is now higher than ever, and we have the highest levels of waste water quality ever. While improving quality, the company has made operating efficiencies of £44 million from the 2003-04 base.
NIW has successfully implemented a capital programme of more than 300 projects in the past three years, including the £160 million Belfast sewers project ... Other investment has resulted in improvements to the infrastructure and services throughout the region and has enabled us to meet our EU obligations." — [Official Report, Vol 50, No 5, p247, col 2].
7. We accept that Northern Ireland Water has further to go in some areas; for example, improvements can be made to waste water leakage and to supply interruptions, and efficiency can be improved. However, just as the Minister has done, I think that it is important to put that quality of performance on the record.
8. As to Northern Ireland Water's performance and benchmarking of the company, as we made clear in the NIAO report, we had some difficulties with the methodology that the regulator used and that the Audit Office carried over into this report. However, the key point for us is that Northern Ireland Water continues to improve on its own previous performance and that it meets the targets that the Executive and our Minister set for it.
9. However, we have looked at the 2002-03 customer service report of the Water Industry Commission for Scotland, which is the Scottish regulator. At that time, the Scottish water industry was a few years into regulation and was in the process of transforming, in the same way that Northern Ireland Water is. It had something like the regulatory and public expenditure regime that we have here with Northern Ireland Water, and it had a similar overall performance assessment (OPA) score. It was generally accepted that Scottish Water has managed the transformation. We think that, for Northern Ireland Water, Scottish Water would be a fairer and more balanced benchmark than English and Welsh companies, which have been regulated utilities that have been gathering income from charges for something like 20 years, in some cases.
10. The Chairperson: As the accounting officer for the Department, can you tell us what benchmarking method you currently use? It is fair enough to talk about companies in Wales and Scotland, but what benchmarking do you use, and what have been the results up to now?
11. Mr Priestly: We tend to use the benchmarking that is in the social and economic guidance that the Executive and the Minister set for the company. That guidance drives the company's current performance against its previous performance, and it is based on the level of funding that the Executive can provide for Northern Ireland Water. Prior to the introduction of that social and economic guidance and up to this year, the benchmarking and the targets for Northern Ireland Water were set out in the strategic business plan. When the company's performance is compared against the targets in the strategic business plan, it can be seen that the results are quite favourable. I think that it is the intention to issue a report later this year on the company's performance against the strategic business plan.
12. Mr McGlone: I just seek some clarity on your comments. You described the benchmarking that the Department "tends" to use, but which is it: tends to use or actually uses?
13. Mr Priestly: I am sorry if I gave a misleading reply. Until this year, Northern Ireland Water's required targets have been set out in the strategic business plan. From this point on, the targets will be set out in the ministerial guidance, which the Execuitve have approved.
14. The Chairperson: That is your answer. However, I am not sure what the level of benchmarking is. Therefore, that issue will have to be addressed. Following on from that point, one of your reservations about benchmarking is the level of investment in the industry in Britain. As we can see from paragraphs 2.3 and 3.4, NI Water has spent about £1 billion on investment. Have you compared that amount with the amount that a company in England or Wales typically spends on such investment?
15. Mr John Mills (Department for Regional Development): As Paul said, the level of investment that was made was necessary to meet the targets in the strategic business plan. The targets were to meet something called mean zonal compliance, which is the GB or UK standard for assessing the quality of drinking water. That investment was necessary to raise the compliance rate in the quality of the drinking water to around 99·7%. That is what that investment represents. We use the same mean zonal compliance process that is used in GB. The English average is slightly higher than ours, and the Scottish average is marginally higher.
16. If we are thinking about benchmarking, we could strive to achieve those GB levels. However, the Independent Water Review Panel, which the Executive announced on the restoration of devolution and which reviewed water and sewerage services, cautioned against pursuing GB targets simply for the sake of it. It has been estimated that it would cost approximately £250 million to achieve the same mean zonal compliance as England. The Executive have accepted that, for the next period, we should maintain the very high standard of drinking water that we have here, rather than pursue the English standard. Therefore, for benchmarking purposes, we are aware of the English standard, but where investment is concerned, the Executive have decided that maintaining the current high quality of the drinking water is sufficient.
17. The Chairperson: It is clear from paragraphs 2.3 and 3.4 that NI Water has spent £1 billion on investment. Is there any difference in the benchmarking that has been carried out in other places, such as England and Wales? Given that £1 billion has been spent, what measures has the Department taken to benchmark against that?
18. Mr Priestly: There has been some historical benchmarking that was primarily directed at exposing whether there was an investment gap that needed to be filled. I cannot remember the absolute figure. However, I can find that out for the Committee to show it that, historically, there was a gap and that Northern Ireland is playing catch up. Those levels of investment are simply allowing Northern Ireland to catch up to the standards that exist in England and Wales.
19. The Chairperson: You say "historical". You are the Department's accounting officer, so do you have figures on that with you today?
20. Mr Mills: The independent review, which I referred to, looked at that historical gap and stated that it was difficult to assess how investment had been here compared with how it had been across the water. The review concluded that there had been an historical gap of about £500 million on the sewerage side. We have been playing catch up on the water side. There is not really a gap now, and that is reflected in the fact that our level of drinking water compliance is more or less the same as that in GB.
21. You referred to greater investment. Investment on sewerage has also caught up, but the independent review still found a £100 million gap in the amount of investment here as opposed to that across the water. It is very hard to discuss the results conclusively, because there are other issues to consider, particularly that Northern Ireland has a much more dispersed network of mains and sewers than exist in England. You could argue that we would have to spend more money even to keep pace with England, simply because we have a much more dispersed population with twice the length of mains for each household. Therefore, it is very hard to come to a conclusion on that point.
22. The Chairperson: Other members will delve into that subject later. I surmise that you would have suspected that this Committee would have asked questions about figures, such as the £100 million. However, you do not have the exact figures with you. If you have those details, I ask you to share them with us in writing as soon as possible.
23. Mr Priestly: In fact, those were the correct figures, but we will send them to you separately.
24. The Chairperson: Originally you did not have them, but when John spoke, it seemed that you had some of them. I would like clarification on the figures in writing so that we can include them in our report.
25. Paragraph 1.16 tells us that the level of service that NI Water provides is unacceptable, but once efficiency gains are made, large-scale improvement is possible. Again, as accounting officer, can you tell us how concerned you are that, according to the report, the performance is poor and costs are very high?
26. Mr Priestly: Obviously, the Department and Northern Ireland Water want the company to be as efficient as possible. We have a shared interest in driving out those efficiencies. In my view, as accounting officer, good progress has been achieved. In my introductory comments, I quoted a figure of £40 million of efficiency savings against the 2002-03 cost base. Therefore, progress has been made. However, there is undoubtedly more to do. In the company's performance targets for this year, the Minister has set it the challenge of achieving the level of efficiencies that the regulator set in his final determination. Therefore, we are aware that more is to be done in driving out efficiencies. We have set a challenge for the company to deliver much higher levels of efficiencies than exist elsewhere in the public sector. It is an organisation in transition, and we are working that through.
27. Mr Laurence MacKenzie (Northern Ireland Water): From where I sit, I would say that there is a lot to do. The organisation is not as efficient as it ought to be. I was attracted to the job because I delivered efficiencies in another utility in Northern Ireland, and I really fancied the challenge of trying to do the same with the water utility. The regulator has an important role to play in effectively benchmarking us and setting us targets to get to where we ought to be as an organisation. That is what the price control process was about. As an organisation, we are absolutely committed to delivering those efficiencies. We are delivering an efficiency this year of 6·5% compared with roughly 3% in the rest of the public sector. Therefore, as an organisation, we are very committed to that process.
28. I want to say something about benchmarking, if that is OK. We benchmark ourselves. One point to note about water utilities is that they all do the same thing. The companies in England, Wales and Scotland are further on in the journey than we are. We regularly benchmark our processes, the way that we do things and the way that we operate against those companies across the water. We benchmark against Scottish Water, Northumbrian Water and Yorkshire Water, which is regarded as one of the most efficient water companies in England and Wales.
29. The slight difficulty that we have at times is that those companies have freedoms in how they operate that we do not have. They have access to funds that we do not have access to. We have to operate within the existing public spending envelope. That makes us slightly different. However, we are committed to the efficiency programme.
30. The Chairperson: Therefore, your response is that there could be some cost savings and improvement in overall performance.
31. Mr MacKenzie: We factored £12·6 million of efficiency savings into this year's budget, which lines up exactly with the targets that the regulator set for us, as well as the efficiencies that we have in our capital works programme.
32. The Chairperson: Figure 23 states that you do not publish your response times for customers with service problems, such water being cut off. Do you think that it is a good idea not to publish those response times?
33. Mr MacKenzie: I am sorry; can I ask you to repeat the question?
34. The Chairperson: The diagram — figure 23 — is in the report. I see from it that you do not publish your response times for customers with some service problems, such as water being cut off. Do you think that is a good idea that those times are not published?
35. Mr MacKenzie: In publishing our annual report, we look at three measures: first, customers who are off supply for between nought and six hours; secondly, customers who are off supply for between six and 12 hours; and thirdly, customers who are off supply for more than 12 hours. We publish that information in our annual report.
36. The Chairperson: It is covered in the annual report. Is that a recent addition?
37. Mr MacKenzie: It was certainly included in last year's annual report as a key performance indicator (KPI), and it will be included in the report that we are about to publish. We can make a copy of that available to the Committee.
38. The Chairperson: I appreciate that. Paragraph 5.4 states that low pressure performance cannot be properly measured because the information that you have is poor. That seems to be the case in many customer service areas. What are you doing to improve the quality of both that performance and the information?
39. Mr MacKenzie: There is no doubt that the quality of our data is one of the fundamental problems that we have as an organisation. I do not want to say that that is an inherited problem, because it is a problem that we own and that we have to own. The former Water Service was never required to publish the level of detail that we are required to.
40. We are definitely on a journey to try to improve the quality of our data. We recognise that, the regulator recognises it and the gentleman who is appointed by the regulator to review our data — the reporter — recognises it. We are on a two-year programme to improve data quality. We absolutely recognise that it is an issue for us, and we are committed to trying to get those data to where they need to be. George may want to go into the specifics of that.
41. Mr George Butler (Northern Ireland Water): Although we may have not published that detail in the past, we have made significant progress. The mains rehabilitation programme, which is about renewing mains around the Province, has reduced the number of properties that have suffered from inadequate pressure — what we term DG2. During the past year, which was 2009-2010, we have removed around 2,150 properties from the DG2 register. That number of properties was removed from a figure of around 5,770 at the start of the year, so the number has been reduced to around 3,626 properties. It is unacceptable for anyone to suffer as a result of low water pressure, but reducing that problem is a matter of continuing investment in the distribution system.
42. Mr MacKenzie: It is worth saying that the target over the next three years is to reduce that number further by around 800 to 900 properties.
43. The Chairperson: According to the report, £30 million per annum is being put into that process. Half the battle is making sure that the right information is shared among people, especially if their houses are in a low pressure zone. Can anything be done to improve that?
44. Mr MacKenzie: The mains rehabilitation programme, which costs £30 million, is aimed not just at reducing low pressure but is targeted at replacing rusty pipes and at reducing bursts. It also has the benefit of improving water pressure. Therefore, the issue is not just about the £30 million per annum on trying to improve water pressure; it is about trying to replace water mains that have been in the ground for 90 or 100 years.
45. The Chairperson: I appreciate your answers. That completes my questions for now. They have set the scene. I open the questioning to the other members.
46. Mr Hilditch: You are very welcome, gentlemen. I want to return to quality compliance and targets for drinking water. Paragraph 2.3 states that drinking water is recorded as being 99·7% compliant. However, the European Union sets standards, so should compliance not be set at 100%? Will going for 99·7% leave us open to infraction proceedings or fines?
47. Mr Mills: That is an astute point. Our target has to be 100%. A lot of money has been spent in England, and is still being spent, on trying to get those last few percentage points on mean zonal compliance.
48. However, it is really a question of balancing priority. If we spend that money on water quality, which is very good, and we do not spend it on sewerage, which is further behind, that is perhaps not the correct investment decision. We are very close to the 100% target. Mean zonal compliance is a basket of 40-odd measures, and we have achieved 100% on many of those. However, there will always be variations, be those to do with changes in weather patterns or changes in the quality of the network that the water goes into. For example, we might have perfect water at the works, but if it goes into a rusty main, it will have suffered when it comes out of the customer's tap. At the same time, some of the standards change. There will always be variations, and it will be very hard to hit 100%. However, your point is correct; we are aiming for 100%.
49. Mr Priestly: We have the best-ever quality of drinking water in Northern Ireland. In an era when resources are constrained, driving up marginal improvements in the quality of our drinking water will cost disproportionate amounts of money. Priorities have to be established and choices made, but at the moment, other bits of the infrastructure are further behind. Priority should probably be given to investing in those areas.
50. Mr Hilditch: Are we open to any proceedings or fines on drinking water compliance?
51. Mr Mills: It would be very unlikely on the drinking water compliance level but not necessarily on other aspects. Infraction is much more likely on the waste water side. In England, there is an ongoing infraction case that could have implications for us. In 2006-07, there were two infraction cases on compliance that were quite advanced, and both were very much on the sewerage side.
52. The Chairperson: Can I ask the witnesses to speak up please? We are trying to get the sound system sorted out. In the meantime, we would appreciate it if you could please raise your voices a little.
53. Mr Priestly: I suggest that George has a chance to speak on this issue.
54. Mr G Butler: Yes; the water quality in Northern Ireland is the highest that it has ever been. Our current compliance figure is around 99·88%. You quite rightly ask about the significance of that 0·12%. England and Wales have been sitting at 99·96% for a number of years, and the chances of infraction of the European standards by the United Kingdom as a whole and ourselves as a province are very low. The water quality is good.
55. The Chairperson: David Hilditch mentioned that some areas might not be compliant with some standards. Do you have details of those areas?
56. Mr Mills: There was an infraction case in the UK recently, but that was to do with the legal transposition of the drinking water directive. It was about drinking water, but it was not to do with the issue of compliance; rather, it was to do with legal issues.
57. Mr Hilditch: I understand the priority issue. I was at a presentation this morning on the Islandmagee, Ballystrudder and Blackhead situation, so I have a degree of understanding. Paragraph 2.10 of the report states that the target recorded for 2013 is still 99·7%. However, you told us that compliance is already at that level and, indeed, above. That does not seem much of a target if you plan to spend £100 million on drinking water.
58. Mr G Butler: That is a good question. The target is set through social and environmental guidance. With a target such as drinking water compliance, the target is set with an element of headroom, so we are slightly above the level at which the target has been set. However, that is what the Assembly asked us to achieve and funded us to do. We would continue to invest for a number of reasons; not only water quality, but issues such as low pressure. If a water main is nearing the end of its asset life and, if it is an iron main that is corroding inside, it needs to be replaced not only for water quality reasons, but other associated reasons. It may cause low pressure and perhaps burst, which would mean interruptions to supply.
59. We have a significant water main infrastructure. There is 26,000 km of water mains, so there needs to be continuing investment in maintenance to maintain the system.
60. Mr Hilditch: It appears that the Utility Regulator thinks that we should be doing better. Do you accept that?
61. Mr G Butler: Representatives of the Utility Regulator will be speaking later, so I would not like to speak for them. However, the target was set by the Assembly, so we will obviously work toward that. We expect to exceed the Assembly target. As I mentioned, we are currently at 99·88%, so that is good news. We do not want to get close to the level of the target; we would like to continue to exceed it. That needs to be done through continuing investment in the existing systems and through operational means: by maintaining our systems and by operating them properly.
62. Mr Hilditch: Paragraph 2.9 states that there is a small difference in drinking water quality between Northern Ireland and England and Wales: less than 1%. Can you explain what that means and what the problem areas are? Why would it cost £240 million to fix them?
63. Mr G Butler: That is the law of diminishing returns. The water quality in Northern Ireland is high. It is at the highest is has ever been. The question is whether to continue to invest at a high level in order to achieve that last, very small amount. There is no benefit to the public health, and a very small risk associated with any health issues in that percentage difference. Therefore, through its social environmental guidance, the Assembly decided that the investment that Northern Ireland Water was being given was sufficient to maintain the system at 99·7%, and, as I have mentioned, we are continuing to achieve that. That allows investment to be targeted at other areas in which there is more benefit, and in which there is perhaps more risk of action against the United Kingdom and Northern Ireland.
64. Mr Hilditch: Can you be more specific about what the problem areas are?
65. Mr G Butler: My colleague alluded to the sewerage system as the Cinderella service.
66. Mr MacKenzie: To treat water and get up to 99·7% requires much greater levels of power consumption. To achieve a 0·2% benefit in the overall drinking water quality, more electricity is required, which has a knock-on impact on operating costs, carbon footprint and the environment. It is about creating an environmental balance between the best possible quality of drinking water and the smallest possible carbon footprint.
67. Mr Lunn: Thank you, gentlemen. My questions may cover similar ground. Both the Drinking Water Inspectorate and the Utility Regulator say that further improvements in water quality are needed, yet I see form paragraph 2.13 that your view is that further improvement would mean poor value for money for the taxpayer. Who is correct, because there seems to be a difference of opinion?
68. Mr Priestly: As I said earlier, we all want to see further improvements in drinking water quality. However, there is only a limited amount of money available for investment, and there are other parts of the system, which George correctly described as the Cinderella. Better value for money for the taxpayer will be achieved by putting the available investment into those areas than by putting significant sums into driving marginal further improvements in water quality. Northern Ireland Water is doing well on water quality, but there are other areas on which it is not doing so well.
69. Mr Mills: The Drinking Water Inspectorate is the expert in that area, but the NIAO report quotes its comments from 2008, and are, therefore, slightly historical. Investment has resulted in much higher levels of drinking water quality.
70. I spoke to the chief inspector of the inspectorate before this meeting to get a feel of what she would say about recent drinking water quality levels, and she does have concerns about whether we maintain the levels of trihalomethane compliance that were a significant problem a couple of years ago. She was also concerned about iron and lead levels, which, as George said, are partly because of the pipes used. The current standard will be tightened by 2015, and it will take continuing investment to attain those very high levels of compliance.
71. The inspectorate has told Northern Ireland Water that overall drinking water quality at the consumers' tap continues to improve, and that a high level of compliance has been achieved. There have been significant improvements, and water quality levels have moved from 99·49% in 2008 to 99·74% in 2009 following the completion of several large water treatment projects. Where standards are met, additional planned infrastructure projects and water treatment works in the distribution service are necessary to further improve compliance. That improvement work will address localised issues where the regulatory standards are not being met for trihalomethanes, iron, aluminium and lead. There will always be concerns, but the chief inspector has acknowledged that improvements have been made.
72. Mr Lunn: I wanted to ask you about trihalomethanes — THMs — and the health risks associated with them. The level of compliance with those levels seems to be dragging everything else down. Paragraph 2.12 of the report states that Northern Ireland Water gets its health advice from the Health Service, which is fair enough. However, what advice was sought and what answers were given, particularly in relation to the long-term risks of THMs?
73. Mr MacKenzie: I agree that the THMs problem has largely been addressed. The report was written in 2008, and a number of water treatment works have come online since then. We now have only one authorised departure for THMs, and that will be addressed later in the year. Therefore, all the THMs zones will have been addressed.
74. On your health question, I will defer to my colleague, George.
75. Mr G Butler: On the health side, the limit set in the drinking water standards is very low compared to the level at which there would begin to be health issues. Therefore, there is a huge safety factor in the drinking water standards.
76. The next point, which has been partially made, concerns the improvements that are associated with THMs. THMs are caused when natural organic matter reacts with the chlorine that is used to disinfect the water to ensure that it remains safe within the network. Those react together to generate trihalomethanes. In the past, that was a problem in Northern Ireland. However, by introducing new treatment processes, the organic material — or humic material — is taken out and, therefore, trihalomethanes do not form. Currently, for 2010, we are at 99·55% compliance for THMs. Even if there was a compliance failure in THMs, it would be nowhere near enough to become a health issue.
77. Mr Lunn: You seem to have made dramatic progress since the report was produced. In 2008, the figure was 86% and you say that it is now 99·55%, which is pretty much in line with the other criteria. Is that because of the new water treatment plants?
78. Mr G Butler: Essentially, there are two reasons. First, it is because of the investment in new water treatment plants by Northern Ireland Water. Secondly, it is because of a public-private partnership (PPP) called Project Alpha, which now provides 50% of the bulk water supply for Northern Ireland and which has invested in new plants. The four major plants, which supply that 50%, have all been upgraded to provide the technology that removes the humic substances. That is why there has been a dramatic reduction in THMs.
79. Mr Lunn: Other water companies in the UK, in which, presumably, the water comes from similar conditions and there are similar levels of peat, seem to have managed to solve the problem years ago and to reach 100% compliance.
80. Mr MacKenzie: We are slightly different from some of those companies, because most of our water is produced from run-off. A lot of companies in England and Wales have ground sources of water that come through deep chalk aquifers that carry out a cleaning process on the water. The problem, as George said, is when the water comes into contact with the humic material that exists in run-off water from the land.
81. Mr G Butler: In England and Wales, there are slightly different sources of water. However, even companies with similar structures tend to have had earlier investment. We have been investing in our bulk water supply and water treatment works from around 2000, while companies in England and Wales received investment during the 1990s. That is why they are ahead. However, I would not like to give you the impression that we are behind. We have caught up in a relatively short period of time. There is still work to do on the distribution system, because, to come back to the comments that were made earlier, we are putting very high quality water into a distribution system that needs some investment. However, the question is whether we in Northern Ireland want to invest a lot more to achieve that marginal percentage in compliance from which, essentially, there is no associated health benefit.
82. Mr Lunn: I hear what you say about chalky areas and their ability to filter water naturally. However, I was thinking more of Scotland, which is pretty similar to here.
83. Mr Mills: The audit report may, sometimes, convey the impression that 100% compliance means that everything is hunky-dory in England. In the English equivalent to our PC10, the look-forward over the next five years means that £40 million will be spent on tackling THMs. Even in England, a 100% compliance rate does not mean that further investment is not required.
84. Mr Lunn: THMs are suspected as a cause of cancer or of having the possibility of being a cause of cancer. How dangerous are they? What is the scale of the danger? I read somewhere that they are designated as a class-B carcinogenic substance. Does a class-A designation denote the highest risk or the next lowest?
85. Mr G Butler: I can see that you have been doing your homework. I go back to the point that I made about the level. Nearly anything will kill you if you ingest enough of it. If you ingest soil, it is not very good for you. We are required to measure the proportion of the level of THMs. You are quite right: at a relatively high level, THMs are carcinogenic. However, at the level that is set by the drinking water regulations, there is no risk to human health.
86. Mr Lunn: There has been a reduction in the number of supply zones with high levels of THMs. The report states that the aim was to reduce those numbers dramatically. At the time when the report was published, the compliance rate was still poor, at 86%. Does that mean that the people who lived in areas with high levels of THMs were subject to a particularly high risk? The compliance rate of 86% is an overall figure, but the level of risk in danger areas has been reduced dramatically.
87. Mr G Butler: One cannot say that there was no risk. However, even though the level of compliance was not good and the investment was required, the levels set in the drinking water standards meant that there was a very low risk to human health. It is about the standards. We are talking about tens or perhaps a hundred times the limit in drinking water at which health issues are associated with THMs.
88. Mr Lunn: I am nearly done, Chairperson. My last question is about the new treatment works. Hundreds of millions of pounds were spent on them, yet the number of drinking water quality incidents that are within NI Water's control is higher than was previously thought. The reason given for that situation appears to be better reporting. What does that mean? Are people reporting things that they did not report before, or does it mean that the system is throwing up the possibility of a problem more efficiently?
89. Mr MacKenzie: The organisation has developed far better mechanisms for identifying a problem and reporting it. The table in the report shows that when water quality was much lower, we had far fewer incidents. Now that water quality is much higher, we have had more incidents. My take on that is that we are reporting more incidents because our processes are better.
90. Mr G Butler: The drinking water inspectorate is more rigorous, on the water side and on the waste water side.
[Inaudible due to mobile phone interference.]
91. The Chairperson: Please bear with us for a moment. Someone is guilty of having an electronic device switched on. Please switch it off.
92. Mr G Butler: The move from the Water Service to Northern Ireland Water has signalled an increase in the level of scrutiny and the intensity of regulation of water and waste water. Although the number of incidents has increased, so has the seriousness of the way in which we deal with them.
93. Lord Browne: I refer, first, to the waste water section of the report; particularly to the waste water compliance figures in paragraphs 3.7 and 3.8. It appears that the waste water quality is below EU standards. The report cites a compliance figure of 90%, which is below that of England and Wales. They are at virtually 100%; however, those works that operate to relaxed standards while they are being upgraded are reported as compliant. If that were taken into account, the actual compliance figure would be 84%. You are reporting the figure as 90% even though, in reality, it is 84% when taking into account the works that are being upgraded. Do you not think, in the interests of accountability and transparency for the public and elected representatives, that that would be better reporting?
94. Mr Priestly: I will lead off on that question before handing over to Laurence and George. We have acknowledged that there is more work to be done on that area throughout this hearing. There has been steady improvement through the investment that has been put in, but there is undoubtedly a lot more to be done. We see that as one of our priority areas. I will hand over to Laurence and George to speak about targets and levels of compliance.
95. Mr MacKenzie: I go back to the point about comparing us with England and Wales. When you are benchmarking, you have to be sure that you are comparing apples with apples. The method of calculation used in England and Wales is different to that which we report under. If you took our figure for 2009, and used the same basis of calculation as in England and Wales, we would be at 97% or 98% compliance. Maybe George will explain the difference in the calculation method.
96. Mr G Butler: I am afraid that it gets a little bit technical at this point, so stop me if I am not clear. The methodology used in England and Wales ignores what we call upper-tier limits. If there is a single gross failure in a waste-water treatment works, that breaches its upper-tier limit. In Northern Ireland, that is counted as a failure for the entire year — one strike and you are out. In England and Wales, they ignore upper-tier failures and measure failure on basic compliance. For example, reasonably sized treatment works would have to fail five times during the year to be considered a failure. Any of those five failures could be upper-tier limits.
97. As Laurence said, comparing like with like, we are far closer to the level of England and Wales. To make the wider point, that is why we think that it is important to use comparative benchmarking. It can give a misleading view in a number of areas if you either do not use the same criteria or do not take into account the different factors in Northern Ireland when making comparisons.
98. Lord Browne: Is it standard practice to record upgraded works as compliant in England and Wales, as we do here?
99. Mr G Butler: Yes; there is a similar approach. Again, to get a little bit technical, we have tended in the past to work with what are called registered discharge standards, which were based on what the actual works could achieve. With the environmental regulator, we are migrating to environmental needs standards that reflect what the environment can cope with as a result of the discharges.
100. When a works is upgraded, it tends to coincide with the time of changing from the registered discharge standard to the environmental needs standard. At that stage, the works may have been passing its registered discharge standard. It has the investment done, and then passes the environmental needs standard, so you do not actually see a compliance benefit. However, you will see a huge benefit on the ground because it is complying with the environmental needs standard.
101. Lord Browne: Thank you. The total number of works undergoing upgrade here is 27. I think that that represents some 10% of the total number. What proportion of total waste processing do those 27 works carry out?
102. Mr G Butler: I would have to come back with an exact figure, but I will give you a general outline. Along with the environmental regulator, the Northern Ireland Environment Agency (NIEA), we have tended to target the larger works and the works that are causing the most environmental damage. The remaining 27 are, generally, smaller and less non-compliant works. Therefore, although those 27 represent 10% of the overall total number of works with greater than 250 population equivalent, they probably represent only 2% or 3%. However, I will come back to the Committee, because I do not want to mislead members. The figure is certainly less than 5%.
103. Lord Browne: What proportion of the works fail to meet the full European standards?
104. Mr G Butler: We might have the figure for the urban waste water treatment directive.
105. Mr MacKenzie: Of our 250 works, 27 currently operate under interim standards.
106. Lord Browne: I will move on to small works. You have 800 small works, many of which are causing local pollution problems. The standard of performance on those is not even reported. Do you believe that provision of sewage services in those areas needs to be rationalised?
107. Mr MacKenzie: They are very small works, and, in some cases, shared septic tanks deal with waste from two houses. We have been investing £5 million a year on those very small works that treat waste from a few homes. They serve less than 2% of the population, and, subject to all the constraints around public expenditure, we intend to invest a further £5 million in each of those three years of the PC10 period. That is £15 million across the piece.
108. Lord Browne: What proportion of the total pollution incidents caused by Northern Ireland Water is represented by those 800 smaller treatment works?
109. Mr G Butler: A very small amount. Those 800 represent less than 2% of the population equivalent, and, therefore, the number of pollution incidents associated with them is not significant.
110. Lord Browne: More seriously, Northern Ireland Water is responsible for a third of all recorded pollution incidents. I accept that it is a large organisation with a large budget and a large workforce. Are you confident that Northern Ireland Water is capable of putting in place a strategy to deal with the lack of control over intermittent discharges? You have failed to do that for the past 10 years. Records show that you reported to this Committee — although there were different faces — over 10 years ago. It criticised Northern Ireland Water because it had no proper systems in place. However, paragraph 3.13 shows that you still have no proper system in place. Why has it taken you so long to get grips with that issue? Given that the Committee is asking the same questions 10 years later, what do you propose to do?
111. Mr MacKenzie: Progress is being made. We have 15,000 km of sewerage network, which, if unwound, would stretch from here to Australia. Our records on that sewerage system, some of which was put in the ground 90 or 100 years ago, were not good. Therefore, we are carrying out a series of drainage area studies to enable us to completely understand discrete parts of the sewerage system, to discover where those combined sewer overflows are and to understand the ones that have unsatisfactory intermittent discharges (UIDs) associated with them. We have made progress. There are 109 drainage areas in Northern Ireland, and we have completed about 90 studies.
112. Lord Browne: You will accept that Northern Ireland Water's record on pollution incidents is the worst in the UK. It caused 56 high and medium severity pollution incidents in 2008. Figure 2 shows that you had a target of, remarkably, 56 incidents for 2009-2010, which was increased from the original target of 11. You increased the target to a level that you are already achieving. Are you doing anything to improve performance? What are you going to do to improve it? Fifty six is a serious number of incidents to have occurred.
113. Mr G Butler: I think that it is a fair challenge. I think that I mentioned earlier that the sewerage service is the Cinderella service. The combined sewer overflows are the discharges from the sewerage system, and that is the area in which we know that we need to make the investment. Work on the bog water treatment works is done, as it is on most of the water networks and most of the waste water treatment works. The waste water networks are the outstanding part that needs the investment. I am afraid that there is no magic wand for Cinderella, so there has to be investment.
114. We are doing some things to try to reduce the costs. We are installing what we call a hawk-eye device that shows whether a combined sewer overflow is discharging in dry weather. That is an indicator of pollution, and if that is the case, our operational people can deal with it. I am afraid that blockages are often caused by inappropriate material being put down the sewers. I accept that that sounds like an excuse, but investment is required in that particular area, which is the fourth area that we look after, and it needs investment over a period of time.
115. Mr MacKenzie: To pick up on George's point about blockages, we get a lot of complaints about sewers backing up. In well over 80% of cases, that happens because people have put inappropriate things down their toilets. We have found things such as large cuddly toys and carpets in a sewer. We have introduced a programme called Bag It and Bin It, and we are working with schoolchildren, elected representatives and others to try to educate people to know that, if they put inappropriate stuff down the sewerage system, it will cause problems.
116. Lord Browne: One of the objectives in creating a Go-co was to remove Crown immunity from prosecution. Paragraph 3.20 shows that Northern Ireland Water has been fined just £13,000. That seems to be a very low sum. Is that a true reflection of what has been paid out to date?
117. Mr MacKenzie: At that time, yes.
118. Lord Browne: Does that include out-of-court settlements?
119. Mr MacKenzie: We do not do out-of-court settlements.
120. Lord Browne: You do not do out-of-court settlements. Therefore, is £13,000 a typical sum to pay out?
121. Mr MacKenzie: Yes.
122. Lord Browne: Finally, we are approaching the time when there will be good weather and some brave people will go bathing. I see that the quality of bathing water has fallen in recent years because of heavy rainfall and despite new treatment works. Is it not Northern Ireland Water's role to deal with heavy rainfall without causing pollution? Does that deterioration not reflect badly on the effectiveness of the new works?
123. Mr Priestly: I will begin with an answer to that, and I will again hand over to those who know the technical details. It must be accepted that several factors are at play in the quality of bathing water. What Northern Ireland Water does is one factor, but run-off from land and agricultural and industrial discharges and those from other sources are also part of it. Northern Ireland Water can be only partly responsible for achieving compliance. I do not think that Northern Ireland Water, on its own, will ever achieve compliance.
124. Mr MacKenzie: If I can just add to that, NIW is one of the factors, but what the accounting officer said is absolutely right.
125. Mr Beggs: Returning to the mains water side of the industry, there has been discussion about the need to invest in the pipework to improve quality. The economic level of leakage (ELL) is a reliable figure that is needed to help calculate figures for investment and returns. That indicates how much water is escaping from the system and, therefore, how much the return and investment will be when renewing mains.
126. I see from paragraph 4.14 that you do not have what I think you refer to as a long-run economic leakage level but that you are working on it in your water resources management plan and hope to have it in 2011. How is that going? When will we have that figure?
127. Mr MacKenzie: The area of leakages is really important, and the report acknowledges that we achieved a steady reduction in leakages. Again, one of the issues that we faced was getting robust data on leakages. The guys had concerns themselves and had very co-operative discussions with the regulator and the reporter to try to get a more accurate figure for leakage levels. We will never get a completely accurate figure, because it is based on a number of estimates that are now based on company-specific inputs. Progress in that area has been good, and I am confident that, having spoken to and worked with the guys, those target dates will be met so that we have a better understanding of ELL by the date that is stated in the report. That will feed into the process for the next price review.
128. Mr Beggs: Is the report due in early 2011?
129. Mr MacKenzie: The target for it is about July 2011.
130. Mr Beggs: That is fine. Paragraph 5.1 states that the guaranteed customer service standards have not been implemented because of what has been explained as a deferral of domestic charges. I would have thought that some of the standards that have been mentioned are fairly basic, such as those on water pressure, interruptions to supply, sewer flooding and customer contact. Are those not basic standards that should be introduced, regardless of whether there is domestic charging?
131. Mr MacKenzie: We are operating to and measuring our performance against those standards. If a company in England and Wales fails to meet a standard, the customer is entitled to a payment. The same applies to electricity companies. The view was taken, and I am sure that my colleagues from DRD could elaborate on this, that we should not introduce such a system as long as we do not have charging. Internally and in the reports that we publish, we absolutely measure ourselves against standards that mirror the performance in England and Wales and in Scotland.
132. Mr Beggs: Do you not accept that the public are paying money at present towards water charges through regional rates?
133. Mr MacKenzie: Absolutely.
134. Mr Beggs: To a degree, therefore, money is changing hands. Given that, should there not be some reimbursement for a particularly bad service?
135. Mr Priestly: That is a policy issue. It is an issue for Ministers, rather than one that we should comment on here.
136. Mr Beggs: OK. Civil servants and chief executives cannot take those decisions. Thank you.
137. Mr Priestly: Those are decisions for Ministers.
138. Mr Beggs: Paragraph 5.6 says that 609 houses were without water for more than 24 hours. That is quite a significant period and by far the worst performance in the United Kingdom. Paragraph 5.7 shows that you attribute that to longer pipes and to a more dispersed population. Do you not think that people in rural areas who have had no water supply for several days would be very unhappy with that huge disruption to their household?
139. Mr MacKenzie: They may not have had mains supply, but when we are faced with a situation where supply is off for more 24 hours, we do not leave people without water. If people contact us to say that they will be without water, we will bowser water or send out bottled water. During the freeze-thaw in December or January, we delivered a huge amount of bottled water to homes. We would do that if a customer contacted us and we thought that we could not get them back their supply within a reasonable time. I know that that is not ideal and that it is not the same as having a mains water supply, but the fact is that the network requires more investment.
140. Mr Priestly: I want to come back to Mr Beggs's wider point. Everyone on this side of the Table accepts that such a situation is hugely disruptive to families and businesses. We would much rather that it did not happen. However, if it does happen, Northern Ireland Water will take action to try to mitigate it. Indeed, the reasons why it happens are set out in the report.
141. Mr Beggs: Paragraph 5.7 states that the burst rates for Northern Ireland Water for each unit length of water main are comparable with the rates in England and Wales. However, figure 22 states that the performance scores for Scottish and Welsh companies are better. There are dispersed communities in those places as well, so how do your figures for burst pipes compare with rates in Scotland and Wales?
142. Mc MacKenzie: Scotland has a number of large urban conurbations. We perhaps do not have conurbations of the same size. For example, Glasgow has a population of two million, and Edinburgh's population is not far short of that. Dundee, Aberdeen and Inverness are all reasonably large conurbations. Their distribution networks will supply far more homes than our rural network will. We have roughly twice the number of properties for each kilometre of water main than the comparable companies across the water.
143. Mr Beggs: I have a question to ask about your customer service. I recently received a letter from a business in my constituency that had contacted you over a year ago requesting that a water meter be installed. That business is not a big water user, yet it is paying large water bills that are based on the rateable value of its property. It was told that the meter could be installed in around a year's time, yet recently, it has been told that nothing is on the horizon. How would you ensure businesses that are not heavy water users are going to survive and are not going to get disproportionate water rates? When will they get water meters so that they will be charged for the water that they use?
144. Mr MacKenzie: We have an ongoing programme of water meter installation. If any Member has a constituent who is concerned that we are being slow, they can come to me, and I will make sure that the matter is pushed forward.
145. Mr Beggs: I appreciate the offer to resolve individual cases, but if a commercial business requests a meter, how long should it have to wait to have one installed?
146. Mr MacKenzie: I would say that it should not have to wait for more than three months.
147. Mr Beggs: OK; thank you very much.
148. Mr MacKenzie: That is the target that I want to work towards.
149. The Chairperson: I am dealing with a couple of customers in my constituency, one at the Kennedy Centre and one in Kennedy Way. On one occasion, their water bills doubled or trebled, and they have had difficulty in even getting through to someone to try to resolve the situation. It is a major issue if a customer has to go to an elected representative. It is OK to say that we should go to you, Mr MacKenzie, but customers must be dealt with efficiently and professionally if they go to NIW as a first point of contact. If that is not happening, it is wrong.
150. Mr MacKenzie: I agree. Having come in to the organisation relatively recently, one of the things that keeps me awake at night is the impetus that we need to give to customer service. I believe that we have far too many handoffs and handovers for customers. We have an outsourced call centre that tries to hand the customer's problems into the organisation, and we need to look very carefully at our processes. We have recently appointed a very experienced person in this area who I think will bring a lot to the organisation.
151. Mr Shannon: Thank you. I apologise for not being present for the first part of the session. However, I suppose that I did not need to be here, because I knew what I wanted to ask you.
152. As an introductory comment, I should say that I met some officials from Northern Ireland Water who said that you had the record for having the most queries, questions and complaints. I was overtaken on that for at least two weeks by Barry McElduff around the beginning of this year when there were problems with the water supply in his area. I understand that a lot of issues and complaints come through all the time, but there needs to be an improvement in the method by which problems are sorted out. As elected representatives, whether we are MLAs, MPs or councillors, we think that there has to be an improvement in that situation. I think that you realise that there needs to be improvement, and the Chairperson said that clearly. I want to be on record as saying the same thing.
153. The Public Accounts Committee has carried out previous inquiries on Northern Ireland Water. One report in 2002 specifically targeted the issue of leakage, which, at that time, was massive. I realise that there has been some improvement. However, for any business, which in this case is a government body, measuring leakage should be a bread-and-butter issue. Therefore, why has it taken so long to sort out the basic measurement and recording issues?
154. Mr Priestly: The reason is that it is not simple.
155. Mr Shannon: You sidestepped that.
156. Mr MacKenzie: When I was coming into the industry, I thought that leakage must be a very easy thing to measure. However, I now realise — as will the Committee, having received a presentation from our guys — how complicated it is. A lot of inputs are involved. It is not as though we are in a very simple world where every customer is metered and we know what we are putting into the distribution system and where we can measure what customers use and know accurately what the leakage is. We do not have that. Leakage is based on a number of estimates. There is a top-down method and a bottom-up method, the details of which I will not bore you with. However, it really is quite a complicated area. If you ask the same question of the representatives from the Utility Regulator when they are giving evidence, I am sure that they would probably agree that measuring leakage is not straightforward.
157. Companies in England and Wales also struggled with trying to get a good, reliable method of calculating leakage. Effectively, our plan was to deliver the ELL within two years, and we are pretty much there, subject to the reporter's validation. Therefore, we have made good progress on calculating leakage. George Butler may wish to comment on that.
158. Mr G Butler: I have nothing to add to that.
159. Mr Shannon: I accept that it is not simple. However, if there were a water leakage in a field on my farm, at the end of the year, you would come and tell me that I had used much more water than I thought. I know that you have sometimes been very accommodating to farmers from my neck of the woods. However, on many occasions, you are anxious to hand out a bill that is perhaps two or three times the size of the previous bill. I would be happy to see some improvement in that area. However, I accept the issues that you put forward, and I understand why work on this matter has taken so long.
160. You reported in 2007-08 that you reduced leakage to 157 million litres a day. My goodness, if we had 157 million pennies, we would all be rich. However, I see from paragraph 4.3 that, when the Utility Regulator challenged the figures, the reported leakage went up to 181 million litres a day. There was a decrease in the leakage, and a conscious effort was made to secure that. However, there has been a dramatic increase in the past year, despite all the work that you are doing. What can you do to convince the Committee and the ratepayers that you are doing your best to address leakages, given that you tried hard but the figure is up again?
161. Mr Priestly: If you look at the figures, you will see that, in fact, there has not been an increase in leakage; there has just been a more accurate calculation of what is being leaked. The level of leakage has probably always been that high, it is just that we did not have an accurate estimate. We now have a more accurate estimate. Does that make sense?
162. Mr Shannon: It is all ultimately about the choice of words, Paul.
163. Mr Priestly: I would like to try to get across to you that our pipes have not suddenly started spouting more water.
164. Mr McLaughlin: They were doing it all along.
165. Mr Shannon: If the figures are accurate, they show that, in eight years, you have been able to reduce leakage by only 70 million litres. That concerns me. Are you satisfied that you are doing your best to reduce leakage?
166. Mr Priestly: No, we are not satisfied. There is more work to be done on leakage. To some extent, the issue was covered in the earlier part of the session, when we gave details of the work that is in hand to deal with water main replacement and other means of tackling leakage in the system.
167. Mr MacKenzie: We have been set a target for the PC10 period to reduce leakage from 184 million litres to 166 million litres, and we have plans in place to address that. It is basic stuff; it is about finding leaks and replacing pipes in the ground. An internal team and our contractors are working on that very focused programme.
168. Mr Shannon: People can understand the situation much better in this context. Paragraph 4.2 states that you estimated the cost of leakage to be £5 million in 2009. Wearing my other hat, I sat through the Budget debate at Westminster yesterday and heard about all the changes that will come and the clear reductions that every Department will face. Do you not feel that that £5 million worth of leakage in 2009 was unacceptable? That perhaps seems like a low figure, given that it is calculated to be over a quarter of all treated water. What is your current estimate, based on the revised leakage figure? How is that new figure costed? In other words, is it possible that the figure is more than £5 million?
169. Mr G Butler: I will go back to the point about the economic level of leakage. We have to get to a point where it would cost us more money to reduce the level of leakage than it would to maintain the current level. That is when you reach the economic level of leakage. I am sorry; I will try that again. You get to the point where you spend more to reduce the level of leakage than you save from the water that is leaking out. That is the economic level of leakage. Therefore, we have said that, by next year, we will have defined that. In the short term, we are working with the targets that are set down in the PC10 arrangement. Those will reduce the level of leakage to about 166 megalitres by the end of the PC10 period in 2012-13. The actual long-term economic level of leakage may be below that, and, therefore, it will make sense to invest even more in the network to reduce the level of leakage. The other point to consider is the level of leakage on the supply side or the customer side. That perhaps needs to be addressed in the future.
170. Mr Shannon: You say that that issue will need to be addressed in the future. Can you give me some idea of what that means?
171. Mr G Butler: It is really a policy decision. The supply pipe from the edge of the property belongs to the customer, and, if it is leaking from that side, there is no cost to a domestic customer and, therefore, no strong incentive for them to repair that pipe. There might be an argument to, in the future, take a view on whether there should be a supply pipe replacement programme, because it makes economic sense to do the customer's side while we are doing our side.
172. Mr Dallat: I am tempted to ask a question that is influenced by every response that we have heard today. Before Northern Ireland Water came along, was the former Water Service all that bad?
173. Mr Mills: It is probably fair to say that Northern Ireland Water has achieved a higher level of performance and efficiency than the former Water Service. Had there not been change, a couple of issues in Water Service would have had a big impact on the Executive's funding position. The UK would have been infracted because Water Service was part of government and, therefore, could not be prosecuted. As has been mentioned, the former Water Service had Crown immunity. If that had continued, the Government would have been infracted. Infraction costs are absolutely enormous and run into millions of pounds. Moreover, the costs of financing capital investment would have been significantly higher if Water Service had continued. As the independent review panel commented, the change to Northern Ireland Water was saving the Executive £100 million a year, and that sum was rising. Those are the two examples that I would use to support the difference between the former Water Service and Northern Ireland Water.
174. In addition, the regulatory regime and requirements that apply to Northern Ireland Water are a lot more stringent than those that would have applied to Water Service. That has meant that some stones with uncomfortable messages have been overturned, but that has resulted in improving data and performance.
175. Mr Dallat: The point that I am trying to make is that it becomes a bit tedious after a while to hear every single response prefaced with comments on the unsatisfactory mess of the past. Even today, you do not want to be benchmarked against English companies. When are we going to accept a benchmark, move on and discuss the matter seriously, rather than rehearse a history that, quite frankly, must have been awful?
176. Mr Mills: If the Executive wanted to decide to put in the investment to match English performance targets simply for the sake of matching them, it is open to the Executive to make that decision.
177. Mr Dallat: There is a tendency to live in the past, but it can be overdone. It is perhaps time that we moved on. I see that you did not keep any records about sewage spillage until 2007. Such records came into being only after the regulator appeared on the scene. When will you be able to measure spillage performance, given that sewage spillage is about one of the worst things that can happen to any of your customers? I can think of nothing worse.
178. Mr Priestly: In a sense, your question is reinforcing the case for a system of economic and environmental regulation, which kicked in in 2007 when Northern Ireland Water was set up. However, on the specific issue of spillage —
179. Mr MacKenzie: I absolutely agree with you, Mr Dallat. Sewage spillage is a terrible thing, and we have been making investments to try to avoid it. The 50 new sewerage systems in Belfast and the 10 km Belfast tunnel underneath the city will take away significantly from out-of-sewer flooding in Belfast. East Belfast is the next area that we need to move on to, and we have started a drainage area study there. We know that we have significant investment to make in that area as well. My commitment to members is that when a sewage spillage occurs, we do our very best to get on the ground and help customers to deal with it.
180. Mr Dallat: A number of rivers where I live have been polluted from time to time. It is always the same problem — a pump malfunctions. It seems to me that whenever you do the preparation, you can influence, or at least reduce, the number of disasters. When will you be in a position to control that sort of thing in such a way that means that we do not have the absolute horrors of sludge flowing in people's back doors and out their front doors or of fish being killed in the rivers?
181. Mr MacKenzie: I take your point about pumps. Again, I agree with you that, in many cases, an incident is caused by a blocked pump, which may have been blocked by something inappropriate. Those pumps are designed to do a particular job. They are not designed to cope with a large cuddly toy, for example.
182. Mr Dallat: Or a carpet.
183. Mr MacKenzie: Or a carpet.
184. Mr Dallat: That probably suggests that it should not be possible to put a carpet or cuddly toy in the sewer in the first place.
185. Mr MacKenzie: People lift manhole covers and put those things down.
186. Mr Dallat: That is disgusting.
187. The Chairperson: If sewage is coming on to customers' property, they can contact either me or any other member in this room. That way, they can use the elected representatives line, which is a very good service.
188. First, is it raw sewage or is it just water? How can I or a customer know? That is one of the first questions that you are asked. Secondly, if there was an emergency, there used to be a six-hour turnaround and, if I am correct, that has changed to 24 hours. Raw sewage is a health and safety issue.
189. Mr MacKenzie: I do not think that those timescales are correct.
190. The Chairperson: That is what customers have been told, and that is what constituents are telling me. Is there an issue around why it used to be six hours and it is now 24 hours? I have been given that information over the telephone.
191. Mr MacKenzie: I can guarantee you that if we think there is raw sewage in the street, we will not wait 24 hours.
192. The Chairperson: I can assure you of that fact, and I can give you the cases after the meeting. It used to be six hours, but I have been told on the telephone that it is now 24 hours. I have casework on that. If you check the records of when I have reported incidents in my constituency, you will find that I have been told that it is 24 hours. On some occasions, it has been longer. However, if you check with the hotline or the elected representative, that information will be available.
193. Mr Dallat: That leads on very conveniently to the issue of customer care. We all have our stories. In the past, there was an incident with a manhole cover in Ballykelly. It has been resolved now, thank God. However, when people phoned in, the operator wanted to know the postcode of the manhole. Manholes do not have postcodes, and that was a silly question.
194. You do not have a wild lot of customers compared to English companies. Is there a determination to ensure that you become more customer friendly?
195. Mr MacKenzie: We have 800,000 customers, and if I look at the three or four big items on my agenda, customer service and making improvements in it is right at the top.
196. Mr Dallat: I would love to accept that assurance. However, during the cold spell that we had a few months ago, an area outside Limavady was without water for more than a week. The most difficult issue was getting information as to when the water might be back on again. Is there an acceptance that there is room for improvement?
197. Mr MacKenzie: To answer your question in a word: yes. There is room for improvement. To take your point about the recent freezing weather, we experienced the coldest winter in Northern Ireland in 50 years.
198. Mr Dallat: I accept that.
199. Mr MacKenzie: I was really encouraged by the response from the guys on the ground — the people who came out — over the Christmas and new year period. We were dealing with a fairly major incident. I kept close to events, and we made sure that a senior person was manning the incident centre throughout that time. Particular incidents could have been handled better but, in the round, I thought that we handled the situation reasonably well.
200. Mr Dallat: Is there reliable data to inform you of the positions of the mains that have been there so long that they are rusting? During the bad weather, as soon as those men who had worked outside 24 hours a day repaired a pipe in one area, it bust down the road again. Have you reliable data, and do you know what investment is needed to give us a network that will not experience those embarrassments?
201. Mr G Butler: We have a geographical information system that maps all our underground assets, namely sewers and water mains. It is pretty reliable and it will tell us where the mains are and what material is used, and it sometimes gives us information about age and condition. However, we would always like more information. We tend to work on the principle that when there is a serviceability failure — either a burst or discoloration of the water — the asset needs to be improved, and that goes into our asset management plan. We would have liked to have had more mains replacement in the current period had the funding been available.
202. Mr Dallat: We had the recent announcement about Blue Flag status on the beaches, and I represent an area that covers a fair bit of the coastline. Do you accept that the loss of Blue Flags is absolutely devastating from a tourism point of view? Do you pay particular attention to that situation in your determination to ensure that sewage does not run into the sea and onto the beaches?
203. Mr MacKenzie: Yes, we prioritise on that basis.
204. Mr Dallat: Presumably, that influences your capital expenditure for the future.
205. Mr MacKenzie: Yes, it does.
206. Mr McGlone: I will start with some themes that have been touched on by you and by Mr Shannon. Although these could be determined to be individual constituency cases, they are not. I have 16 cases in front of me, and a pattern is emerging. Test meters seem to have been attached to individual properties, usually smallholdings of perhaps a few acres of land, in 2007. A retrospective bill was applied to those properties this year, and I will read some of them. A bill for £710 had to be amended to domestic status because a domestic allowance of 200 cubic metres per annum had not been applied to it and was therefore not deducted from overall consumption. That bill was reduced to zero. Another bill was for £1,200 — it was amended to a domestic bill and reduced to zero. A third was for £583 and was reduced to zero. A fourth was for £655 and was reduced to zero. A fifth was for £1,324 and was reduced to £665. Finally, there was a bill for £1,200 for a property where there was no meter. All of those people have approached me, and quite a significant pattern and problem is arising.
207. In one case, a pensioner who is receiving pension credit obtained £700 from a credit union to help defray a £1,200 bill and she was at her wits' end as to how she was going to pay the rest of it. On investigation, it was discovered that she did not have to pay anything because she had been billed wrongly. At this point, I must compliment Mr McClean of your customer services department for his prompt response. Given that there is a very significant pattern emerging in the 16 cases that have come my way, how many people have been subjected to test meters and have wrongly received a hefty bill? In these times, I would rate any bill above £600 as hefty. The 200 cubic metres per annum allowance equates to £560 upwards, plus standing charges. Do you agree that decent people may have received such bills and paid them?
208. I am concerned, bearing in mind that I have received details of 16 cases, that there may be hundreds or thousands of others, where there have been applicable test meters, in which people automatically paid their bills.
209. Mr MacKenzie: I entirely agree that what you have described is not acceptable. The basic problem is data. We believe that a particular meter links to a customer who should be paying, and there are occasions when that person turns out to be a domestic customer. That is not right.
210. We have billed around 2,000 test meter customers, so the number is not in the hundreds or thousands. I can confirm the exact number. People have been contacting us, because if someone suddenly gets a bill that is backdated to 2007, they will wonder why they have received such a bill. We took a policy decision to maximise our revenue from customers to offset the need for public funding, and in the instances that you mentioned, Mr McGlone, we got it wrong.
211. Mr McGlone: I know some of the people concerned quite well, and the meter was very close to their house. It did not take rocket science to know which property was being tested. I have been told of 16 cases; but what about the other approximately 1,900? How many of those are, in fact, people who should have had the domestic allowance applied to them? I would wager money that a number of them are in the same boat as the cases that I have mentioned. That is a big concern for me. You said that 2,000 is an approximate figure, and you will probably want to get a precise figure. I seek assurances from you about what you will do about those more than 1,900 people, who, by and large, are people with smallholdings. What will you do to ensure that there is not a parallel performance in other areas in which meters have been installed?
212. Mr MacKenzie: The Consumer Council is working with us on the issue.
213. Mr McGlone: That is because I passed the issue to the Consumer Council.
214. Mr MacKenzie: I will come back to you individually, or to the Committee, if the Chairman wishes, to explain what we are doing with the Consumer Council to address the issue.
215. Mr McGlone: It would be appropriate for that to come through the Committee, because I am sure that other Committee members will have constituents who are affected by the issue.
216. The Chairperson: I would appreciate if that information came through the Committee because I am also dealing with some similar cases.
217. Mr McGlone: Thank you for that. Paragraph 6.3 of the report brings me back to the point that Mr Mills touched upon. It states that the efficiency of NI Water should not be compared with companies in England and Wales because it is mostly publicly funded and is constrained by public expenditure controls. I want to ask about the consequential theme from that. Is it your conclusion or determination that, because Northern Ireland Water is publicly funded, the efficiencies that were achieved in GB are not possible here?
218. Mr Priestly: That is not quite what we are saying. We are saying that, for as long as Northern Ireland Water exists in a public expenditure regime, it does not have the freedoms to bring in money to use to invest. It is subject to the money that the Executive can provide. It does not have the managerial and financial freedoms that it would have if it were a private sector company.
219. Mr McGlone: Are you totally and absolutely constrained to the point that you cannot move any further?
220. Mr Priestly: No; we have a shared interest with the Utility Regulator and with the company in driving forward efficiencies. As we said at the outset, we have accepted the Utility Regulator's recommendation for 2010-11 on what those efficiencies should be. They are well ahead of the rest of the public sector.
221. Mr McGlone: You mentioned the Utility Regulator. Can you describe the relationship between the Department and the Utility Regulator? Forgive my naivety, but I am trying to explore that issue.
222. Mr Priestly: I shall certainly try, and I shall hand over to John to provide more detail. The legislation sets up a regime of economic and environmental regulation for Northern Ireland Water. When that legislation was being passed, it was predicated on the assumption that there would be charges. If Northern Ireland Water were generating its income and revenue by charging customers, a pure system of economic regulation could be used, through which the regulator would set efficiency, service and performance targets that Northern Ireland Water had to achieve based on the level of revenue that was generated. That system does not exist; water is still being funded by public subsidy.
223. Mr McGlone: That is fine, but I am trying to determine the nature of the relationship between Northern Ireland Water and the Utility Regulator. Is it complementary? Do you see it as productive, useful or positive?
224. Mr Priestly: The Department supports economic and environmental regulation of the water industry, so we have to work co-operatively and sensibly together. Inevitably, there will be rubbing points. We have set up a water stakeholders' steering group through which we try to work co-operatively and pragmatically through the current arrangements.
225. Mr McGlone: So the relationship is co-operative. Picking up on the penultimate point, paragraph 6.5 outlines the Utility Regulator's assessment that Northern Ireland Water needs to halve its operating costs to match the efficiencies of those GB companies. Figure 26 shows that that would deliver savings of hundreds of millions of pounds a year. Paragraph 6.5 states that stakeholders agree that there is a significant gap between the operating efficiency of Northern Ireland Water and companies in England and Wales. Do you agree with that?
226. Mr Priestly: Of course. We have a shared interest with the Utility Regulator in driving forward operational efficiencies in Northern Ireland Water. For the Department, it is simply a matter of the timescale over which that is likely to be deliverable.
227. Mr McGlone: I am not asking whether you agree with the concept; I am asking whether you agree with the figure.
228. Mr Mills: Sorry; what figure is that?
229. Mr McGlone: The figure of £100 million.
230. The Chairperson: It is at figure 26 in the report on page 63.
231. Mr McGlone: I pointed it out when I was speaking.
232. Mr Mills: Are you asking whether we agree with that graph? We agree with the figures in the graph; yes.
233. Mr McGlone: An answer will do, please.
234. Mr Mills: We have agreed with the Utility Regulator's recommendation on the efficiency targets that should be applied to Northern Ireland Water for 2010-11. For the two years following that, the Executive have not yet agreed a Budget, and DRD does not know its budget. Therefore, it cannot tell Northern Ireland Water what funding will be available, and we are unable to agree any specific figures. Some 75% of funding comes from public expenditure.
235. Mr McGlone: That is because you do not have those figures yet?
236. Mr Mills: Yes.
237. Mr McGlone: That answers my next question. Paragraph 1.10 of the report states that you have taken account of the Utility Regulator's price determination in setting funding requirements of £1·2 billion. Have you reflected the Utility Regulator's efficiency recommendations in full, or have you included additional funding in that figure?
238. Mr Mills: We have accepted the Utility Regulator's recommendation for efficiency in 2010-11.
239. Mr McGlone: Have you factored in the second part of my question?
240. Mr Mills: Sorry; what was the second part of your question?
241. Mr McGlone: Have you reflected the Regulator's efficiency recommendations in full, or have you included additional funding in that figure?
242. Mr Mills: We have reflected the Regulator's efficiency recommendations.
243. Mr McGlone: In full?
244. Mr Mills: Yes; we have reflected them in full for 2010-11. The determination covers three years, so it does not cover 2011-12 and 2012-13, but we have agreed them for 2010-11.
245. The Chairperson: Thank you very much. We will now ask you to vacate the table because we are bringing forward representatives of the Utility Regulator. There is a possibility that we may ask you back to the table.
246. Mr Osborne and Mrs Aston, you are very welcome to the meeting. I am going to go straight to members' questions.
247. Mr McLaughlin: You are very welcome. I wanted to follow in the direction of the previous questions. From your perspective as the Utility Regulator, the Comptroller and Auditor General's report reflects, in paragraphs 1.6, 1.10, 1.16 and 6.4, that the Department has queried the status of economic regulation. We have just heard some comment on that in the absence of domestic charging. Can you explain how you see your role in the current situation whereby the majority of funding comes through the public expenditure system?
248. Mr Iain Osborne (Northern Ireland Authority for Utility Regulation): Certainly. Before I begin, would it be possible to have some tap water? I notice that there is only bottled water, and I would rather have some tap water.
249. The Chairperson: Yes; we can get that for you.
250. Mr Osborne: We are dealing with a major industry in Northern Ireland that has many problems that developed over a long time. One has to ask what it was about the pre-2007 arrangements that enabled those problems to develop.
251. Part of the reason is underfunding. If the capital funding was not put in, the network cannot do what it should. However, to have got to a point where the operating costs are double what they need to be, customer service is not what it should be, and the company does not have the basic data that it needs to know what to do next, is not about underfunding — that is about a lack of accountability. It is common sense that if you want a fair measurement done, you do not have it done by a party has an interest in a particular outcome.
252. The key thing that changed in 2007 was the creation of arm's-length independent regulation. What does regulation mean? First of all, it means transparency. We measure a lot of things. However, we do not just measure them and keep them to ourselves; we publish a great deal, and we consult about what we are going to do before we do it. Secondly, regulation means accountability. We do not have a vested interest in whether the company looks good or bad. We exist for customers. Therefore, if the outcome is good, we will congratulate the company, but if it is bad, we will say that it needs to improve.
253. Those things are of value, whatever the corporate structure and whoever is paying the bill. We have seen in Northern Ireland and other sectors, and in the water sector across the rest of the UK, that, when those conditions are in place, you set up a virtuous circle of improvement. We are only three years in, and the point that one cannot complain that a body has not achieved in three years what others have achieved in 20 is perfectly reasonable. It is like criticising a three-year-old for not being able to what a 20-year-old can do. However, we need to do the measurement, because you want the three-year-old to grow to the stature of the 20-year-old, and as quickly as possible.
254. Independent regulation, by being transparent, broadens the terms of the debate. We make it easier to say not what we, as a small number of people huddled around a table in Northern Ireland, think we should do next but that we should look around. What have other people done in other places, and how quickly can we move forward?
255. The companies that went into regulation in England in the early 1990s had to invent a lot of wheels. They were at the forefront at that time. We do not have to invent the wheels here; all we have to do is steal other people's ideas. We saw in Scotland that, because a lot of the basics of how water companies should be run are well understood, Scottish Water went up the curve tremendously quickly: much quicker than the English and Welsh companies.
256. That is the sort of step change that is possible now, and the advent of the independence, transparency and accountability that we have had since 2007 has enabled that. It is very much as Mr Priestly said: we would not expect to agree on everything with the Department, which is, of course, the shareholder as well as the policy team. However, that is the kick-about on the pitch. That does not mean that we disagree about where the boundaries are.
257. Mr McLaughlin: The report, maybe more than we would normally experience, reflects the predictable tension with regard to your regulatory function. In this case, the water company appears to indicate that there are unresolved issues. Are you confident that, until the status quo changes, the same level of creative tension that we see in other areas of regulation can, in fact, be brought to that?
258. Mr Osborne: Yes, I am. Regulation is not a single thing. I talked about the principles; however, my office regulates gas and electricity, and we do different things in those sectors to reflect the circumstances. In water, there is some quite creative work going on around how to regulate a company that is publicly funded. Some aspects of that are novel, but obvious. In light of the Budget, we clearly need a system that is capable of flexing if there were, for example, major cuts in capital. We have experienced underfunding in the past and I hope that we will not see that again. However, we clearly need to be able to deal with those issues.
259. The non-departmental public body status of Northern Ireland Water means that it does not have financial flexibility from one year to the next. In the context of a privately owned company, such as NIE, if there are bumps in the road in a particular year, very frequently, the shareholder is expected to soak it up and, in exchange, is allowed to make a profit in the good years. That cannot be done with a publicly owned company. Therefore, the framework needs to operate a bit differently. Having a framework that runs over a number of years is fundamental for an asset-intensive business. Such a business cannot, for example, conduct an efficient asset strategy unless it can commit to the outsourcing partners that it expects to do the civil engineering work that will be needed the next year and the year after that. In signing a contract with civil engineers, such companies are expecting them to go out and hire people and make financial commitments on their part. Therefore, if we want them to come to us with an attractive offer, we have to be able to offer them some certainty.
260. The multi-year aspect is clearly important and, on planning, other aspects of the business are equally important. Working co-operatively with the Department — "co-operatively" is an important word this afternoon — we are trying to figure out how to maintain a clear trajectory of efficiencies. We have made it absolutely clear that the company operating costs in particular are much too high, but that there is also substantial scope for capital efficiency. We expect the company to go down that efficiency trajectory. The Department, in the budget and targets that it has given the company this year, signed up to that trajectory, which was very welcome.
261. This year is easy, because we know that the unknown nasties have not happened. However, those might happen next year and, therefore, we have accepted, as a regulator, that there is a need to annually review the unknown nasties, such as major risks popping out of the woodwork or cuts to the capital budget. If that happens, we will have to adjust the financial envelope to deliver year 2 of the trajectory, plus or minus the risks that have or have not emerged.
262. That is innovative. It is not the way in which we regulate other sectors and it is not the way in which other UK regulators operate. Personally, I think that it is an interesting and important piece of work, because it perhaps casts light on how we could work with other parts of the public sector to drive an efficiency agenda. However, we will try to work it out for water first.
263. Mr McLaughlin: Have the objections and disagreements around the parameters of your role had an inhibitive effect?
264. Mr Osborne: It has meant that things have taken longer. However, trying to do something innovative does take longer.
265. Mr McLaughlin: We have had some discussion on the price control regime. Can you give us the Utility Regulator's perspective on that process?
266. Mr Osborne: A lot of what I said is relevant to the philosophy behind the price control determination that we made. Whenever people carry out a price control exercise, there is always a great deal of discussion about whether what they are doing is reasonable. I am happy to talk about that if you are interested. The key point is that, when we got to the end of the process, the company did not feel that it was able to accept the control. That happened not because it felt that the targets were unachievable or that not enough funding had been provided but because of the framework issues that are associated with being a regulated, public expenditure-funded company. However, the company is not entirely funded from public expenditure; we must not forget that 28% of its revenue comes from businesses. However, that has meant that we have not yet had the control accepted.
267. Through our co-operative work with the Department and the company, it is clear that we will somehow have to recast the determination to allow that annual process. I also expect the regulator's role in laying out the efficiency trajectories and service trajectories — plus or minus the bumps in the road that I described — to be recognised as the way that we will work for the period when the company will operate as a non-departmental public body (NDPB).
268. Mr McLaughlin: What can we do about the impact that that will have on the budget-setting process and departmental allocations? It seems to have protracted the process.
269. Mr Osborne: In the first instance, that is between DRD and the Department of Finance and Personnel (DFP).
270. Mr McLaughlin: Is there a regulator view on what we can do about that? I understand that you cannot say too much.
271. Mr Osborne: We are outside the Executive, are accountable to the Assembly and are a resource for Northern Ireland society as a whole. We do not work in secret. We make our views known, and the published determination contains a wealth of information about what the company is capable of delivering. That is a resource for all the people who are involved in the discussions.
272. Our role relates to the people who pay bills. As we discussed earlier, those people are members' constituents. We have a role to play in ensuring that they pay only according to what we have been laid out in the determination as being necessary. If next year is a bit different because the capital budget has been scaled back, for example, we will have a role to play in making sure that the scaling back benefits everybody equally and that, if the public purse is paying for fewer capital works, businesses are not unfairly expected to carry that. Our role is locked in by our approval of the company's scheme of charges. We give that in advance of each funding year. If we go into next year on a hybrid basis, we must do that by the end of March next year to ensure that next year's business bills are properly cost orientated.
273. Mr McLaughlin: The subsidy is agreed at Executive level, and businesses contribute and ordinary ratepayers make a contribution through the rates system. Does the regulator take that into account?
274. Mr Osborne: That is very much on the Executive side of the bargain, and we do not have any particular expertise on that. I know that the Hillyard panel analysed the proportion of the rates that should be attached to water. However, that is very much for the Department and the Executive.
275. Mr McLaughlin: Given that an element of your remit relates to the consumer interest, there may be a general perception that, at a domestic level, people are not contributors and, therefore, do not have consumer stakeholder interest. I think that they do. Has the regulator considered that, or should it consider that?
276. Mr Osborne: Our statutory duty is to consumers as consumers of the service. That is a very wide remit. We have talked about the quality and the customer service issues, and people have an interest, regardless of whether they pay a bill. Although an organisation can have a statutory duty, it is a bit of a moot point if it does not have any financial functions. Our financial functions are about approving the scheme of charges and determining the trajectory of business bills.
277. Mrs Jo Aston (Northern Ireland Authority for Utility Regulation): Where price control is concerned, we seek the views of and work with the Consumer Council and, indeed, the company, to ensure that there is consultation and that the views of the general consumer are considered and taken on board. That feeds into the Minister's and Department's social and environmental guidance, which the Executive have also signed off on. Having the consumer voice heard in the process and in investment decisions is very much part of our process and its openness.
278. Mr McLaughlin: Thank you. I will just move on to the recurring issue of benchmarking and comparisons with investment in other parts of Britain. It is common sense; the investment profile in Britain over a longer period of time has had beneficial impacts on service delivery in those regions. How do levels of investment in NI Water compare? Do you consider that we get value for money from that investment?
279. Mr Osborne: I echo a lot of what the previous witnesses said. You have to caveat anything that you say by explaining that, if the population is more dispersed, you have to expect to spend more capital to deliver water to them. That is permanently true — it will be true for ever. There was a backlog for each household, and that has been caught up.
280. We have a lower quality of service. That is driven by the population distribution to some extent, but we also think that the efficiency of capital spend could be significantly better. In the determination that we published in February, we set targets to improve that efficiency quite quickly.
281. Mr McLaughlin: If the issue of benchmarking was not a conflict, it must have come very close to being one. Has that been resolved, or how will it be resolved?
282. Mr Osborne: You need to understand why you are benchmarking. If people want to use a comparison methodology that they can beat Northern Ireland Water over the head with and say that the company should be better, there are all sorts of ways that that can be done. That is not why we benchmark; that reason does not interest me much. We benchmark to try to find out how much better overall an activity or the company could be, and then, bit by bit, we try to ascertain what "better" would look like.
283. Benchmarking is partly a question of relatively high-level comparisons of data, but it is also enormously powerful. If the gap in a particular aspect of running the company is x, benchmarking tells you who the best companies are so that you can look at what they are doing. You then figure out how you can adopt that company's procedures. Therefore, benchmarking is a methodology that will enable NIW to fundamentally bootstrap itself. However, I am getting beyond a discussion of the regulatory role. The point is to consider how regulation meshes into the improvement process in the company.
284. We view benchmarking in two main ways. The first is the way that we have compared operating costs (opex) by very much using Ofwat data, and the second relates to the way that we have compared service quality. There has been debate, particularly on the latter, which is the so-called overall performance assessment. Our view on OPA is that it does, helpfully, reveal and boil down the scale of the gap to something that is relatively simple and manageable.
285. We spent some time thinking about whether we should develop a Northern Ireland-specific way of measuring where we stand. We ended up feeling that that was not worthwhile, chiefly because there is a danger that, if someone develops a specific methodology, people start spending a lot of time arguing about how to take the measurement, rather than focusing on what is being measured and trying to improve it. There is also the suspicion that you have arranged the methodology to produce a particular result. Using a widely accepted methodology means that there is a great deal less argument about it.
286. We expect the company to make very substantial improvements during the three years that are covered in last February's determination. That is one of the themes we have heard about this afternoon. Things are far from perfect in the garden, but we now have a framework that is delivering steady improvement, and there is an opportunity for substantial improvement to be made in service standards in the next three years. However, we will still not be where we need to be on either OPA or operating costs. It will take at least another five years before we get the company towards the frontier of performance. However, we will get there, as long as we stick to the trajectory that has been mapped out in the February determination.
287. Mr McLaughlin: I want to establish whether benchmarking against the most cost-efficient delivery in comparable regions, within reason, is the measure that is being used, despite the disagreements that have emerged.
288. Mr Osborne: I will tell you more about the work that we are doing in co-operation with the Department on how the annual review process will work. That work is not about what benchmarking methodology we would use or about unpicking the determination to see whether we could benchmark differently. Frankly, that is not a conversation that we would be willing to have. We are working with the Department to determine the risks that are likely to come up from one year to the next, for example, and to ascertain how we would deal with a cut in the PE envelope or with acts of God, such as a big flood or a major public health issue. We are looking at things that might come along and knock the company's economics for six. Indeed, such things happen in the best-run companies. We then look at additional pressures, such as a new law or something.
289. We are in a discussion that is consistent with the overall schematic that the trajectory has laid out. We then have an annual review to identify a delta that has resulted from that. We have not, as yet, agreed it all. Therefore, I cannot tell you that it is settled. However, it is a good conversation to be having, and it is what you should expect us and the Department to be doing. We are doing something innovative, in that we are trying to regulate in a PE context. People are working collaboratively to make it work.
290. Mr McLaughlin: I will leave it at that, but I will come back to Mr Priestly later, if I have the opportunity to do so.
291. The Chairperson: Are there any other questions?
292. Mr Dallat: I have listened to what Iain said. However, we have had this new and baby water company for three years, so surely it should, at least, be walking and toilet trained.
293. Mr Osborne: That is a good metaphor.
294. Mr Dallat: I was just continuing with your analogy.
295. Mr Osborne: Absolutely. One sometimes hears loose talk about a Third World water system. We have a water system that is delivering high-quality, safe water for everybody. It is also, on the whole, clearing up the mess from a whole society. It is not as good as it should be, but it is operating reasonably well. We came in in 2007 in a context where the company had not been expected to run its operations very effectively. I can give you dozens of examples. If one does not know the location of the houses that get sewage coming through their front doors, one does not know what engineering work is needed. Therefore, it takes a chunk of time to go through thousands and thousands of records to work out the patterns and translate that into a pattern of engineering. The same applies to combined sewer overflows, water pressure and a whole range of other matters. That all has to be done in the context of the company's having to deliver a very large capital programme. Would we want it to be better today? Yes, of course; who would not want it to be better? Are we on the right trajectory? Yes, we are.
296. Mr Dallat: Therefore, in five years, you could really get down to business and have proper benchmarking and the public would know that they were getting value for money and we would not need to have the history talk all the time.
297. Mr Osborne: We can benchmark with quite simple data. For example, we have the data to benchmark robustly on the operating costs. The key data gaps are those that require knowledge of what exact interventions are needed in the network, such as what has to be built and fixed to produce changes in customer service. That will improve progressively. The next two-and-a-half years is a key period, because we have set the company a major task that is to be achieved by the time of the next big price control review.
298. Ms Purvis: Next week, the Committee will consider governance issues in Northern Ireland Water, and I have some questions to ask about that subject. According to the consolidated licence, the regulator has to receive a copy of Northern Ireland Water's procurement plan. Did you receive and sign off on a copy of that procurement plan?
299. Mr Osborne: We did indeed.
300. Ms Purvis: Have you received revised and updated procurement plans?
301. Mr Osborne: I will hand over to Jo in a minute to explain some of the detail about what we are doing in response to some of the company's procurement difficulties. However, I will make one introductory remark about our role. We do not check that the company is complying with all its legal obligations. We do not carry out health and safety checks; that is done by the Health and Safety Executive. We do not deal with issues to do with environmental law; the Northern Ireland Environment Agency (NIEA) does that. Similarly, we do not enforce issues that are to do with the Companies Act 2006, because those are essentially for the shareholder.
302. If we were to get involved in governance, it would be specifically because we thought that a failure in governance was likely to lead directly to a failure in performance. For example, almost two years ago, when we identified that the company's information on governance was particularly poor, we went in quite hard and used formal enforcement powers. Jo can talk about the wider procurement issues.
303. Ms Purvis: I do not want to discuss the wider issues; I want to ask you about the terms of the licence. You have a copy of the procurement plan. Have you received revised and updated procurement plans since you got the initial procurement plan?
304. Mrs Aston: Yes, Northern Ireland Water has fulfilled its regulatory obligations.
305. Ms Purvis: Have you received written reports on procurement activities?
306. Mrs Aston: Yes, we have received everything from the company that we are required to on the procurement plan. However, the procurement plan in the licence fulfils a different purpose to the procurement review and the governance issues, which the PAC will discuss next week. The procurement plan has a much more forward looking view at procurement issues.
307. Ms Purvis: I am trying to clarify that you received the initial procurement plan and an updated procurement plan.
308. Mrs Aston: Another procurement plan is due in September 2010.
309. Ms Purvis: Have the revised and updated procurement plans that you received had a full schedule of the number and content of the contracts that have been let or the activities that have been brought in-house?
310. Mrs Aston: If that is a stated requirement, yes. I need to check the full detail of the report, but, yes, the full regulatory requirements of the licence have been fulfilled in those reports.
311. Ms Purvis: Have you come across any case in Great Britain where the head of a regulated utility body has been part of a team that has conducted a review of an area in another regulated utility?
312. Mr Osborne: The nature of the review that DRD commissioned recently is quite unusual, because DRD's status is quite unusual. I shall broaden the focus of my answer and say that, in general, it is usual for a shareholder to call in some help from serving or, frequently, recently retired, senior utility figures to improve the company. You need someone who knows what a well-run company looks like. That does not seem to me to be unusual.
313. Ms Purvis: That was not what I asked.
314. Mr Osborne: To answer your question literally, I would have to say that the recent review was sui generis; it was unique. Therefore, there is no comparison to be made.
315. Ms Purvis: Have you never come across such a case?
316. Mr Osborne: As I said, this is the only one of its kind, so a comparison cannot be made. Northern Ireland Water's status is unique.
317. Mr McGlone: I found that to be quite a diplomatic answer, but the Committee will come to those issues in more detail next week.
318. Mr Osborne, you discussed aspects of benchmarking, and I know that you have extensive knowledge of it. Given your unique experiences and that you now have taken NI Water under your wing, can you say that the company could have undertaken benchmarking exercises that are similar to those that have been done in other utilities in other areas, yet they remain to be done?
319. Mr Osborne: Undoubtedly.
320. Mr McGlone: Will you provide the Committee with some examples?
321. Mr Osborne: I described how powerful benchmarking is as a methodology. Very few comparisons were done with other places until some time in the past few years, because the former Water Service was quite an inward-looking organisation. It may be unfair of me to say that, as I was not really involved then. To some extent, the company has management plans on how it will deliver efficiencies, but those are clear only over the first two years. Perhaps that question should be put to Mr MacKenzie.
322. To get the company to where it needs to be, which is up with the best in the country, much more needs to be done so that it can be shown that certain activities cost too much, do not produce a good enough service, or both. A lot also needs to be done to find out and examine how the best people operate. Indeed, that will be an increasingly important part of how the company figures out the increasingly challenging efficiencies that we expect it to find over not just the one or two years but a number of years.
323. Mr McGlone: Coming back to my question, can you provide specific examples of areas of benchmarking that you know are being carried out in other places and that could be done by Northern Ireland Water?
324. Mr Osborne: The outputs of a particular activity, such as water treatment in different parts of a company could be compared, and it could be established whether that costs more in one area than in another. Indeed, the company has the advantage of including a public-private partnership operation, which means that it can establish how another company has performed in a Northern Ireland context and whether it costs more to perform activities in different areas.
325. If the company feels that it has exhausted that area of benchmarking, it can then look externally at an organisation such as Yorkshire Water, which appears to be at the frontier of providing clean water.
326. Mr Osborne: The company can then establish what Yorkshire Water is doing that it is not.
327. Mr McGlone: That is my point.
328. Mr Osborne: I would certainly expect that. However, anyone who runs a substantial activity understands that it takes time to make those changes. Those changes sometimes mean building big stuff, but they also involve persuading, training or recruiting people. It also can mean moving people around so that they behave differently, sometimes substantially differently, over time. If you were to talk to those working in the water or gas sector in GB and ask them how things have changed since they were apprentices, they will tell you that their jobs have changed massively. It takes time to bring human beings along, as well as to make the physical changes that are needed to achieve that.
329. Mr McGlone: I need to get complete clarity in my own mind. You gave an example of benchmarking, but, to the best of your knowledge, is that not being done in NI Water?
330. Mr Osborne: To the best of my knowledge, no.
331. Mrs Aston: I used to work for Northern Ireland Water, and I am absolutely sure that it is looking at and learning from how other companies benchmark. I am sure that if you asked Laurence about that, he would say the same. Another big factor that will assist Northern Ireland Water greatly over the next period of time is the building up of its information systems and data, through which it will have information to interpret and will be able to, perhaps, target expenditure and deploy its workforce much more effectively to get the return of an efficient service and value for money from its investment. That is one of our great challenges to the company for the next period of time.
332. Therefore, it is not all about benchmarking. Our point of view is that benchmarking acts like the absence of competition. It gears companies, shows them how other companies work to a reasonable standard and level of efficiency and tells them that they had better be as efficient. The company must then start to look internally and work out how to get to that point. The building up of systems and information is critical.
333. George said earlier that he would have liked more money for mains rehabilitation. We did not support an increased spend on mains rehabilitation because no robust business plan was put in front of us that linked asset failures to improvements and to where the money needs to be spent. We need to identify the failures and problems in the assets and link cost to where they need to put the investment. That is the sort of shift that we are looking for before the next price control process, and I have no doubt that the company is focused on that and is making progress in many areas.
334. The Chairperson: Iain and Jo, thank you very much. I invite the departmental officials back to the Table.
335. Ms Purvis: There seems to be an anomaly in the legislative framework in that DRD and the Minister do not have statutory powers to set targets for Northern Ireland Water. However, since it was reclassified as a non-departmental public body, the Minister and the Department can now set targets for Northern Ireland Water. Is that correct?
336. Mr Priestly: Under the legislation, the Minister has the function of agreeing social and economic guidance and getting the Executive and the Assembly to approve it. It sets the targets, the high-level framework and the direction in which we want Northern Ireland Water to go.
337. Mr Mills: The legislation that governs NIW is for a regulated utility. Therefore, for a non-departmental public body such as, for example, the Police Service, the Minister would normally have had to set and monitor specific objectives and targets. That does not happen with the Department. You are right; the Department does not have the normal legislative set-up for an NDBP. As Paul said, the Minister can issue guidance that gives a strong direction. However, the regulator should set the detailed targets.
338. Mr Priestly: We are trying to operate a system that was designed for a specific environment. However, that environment no longer exists. Economic and environmental regulation was designed for a utility that gathers its income from charges. That is absolutely right; let us not make any bones about it. The legislative regime that is in place is designed for that.
339. The fact that we do not have that regime means that we have to be pragmatic and continue to work our way through it, with all its complications.
340. Ms Purvis: I understand that, but I wonder how you view the Utility Regulator's role. Is it a case of picking out parts of the Utility Regulator's role that we like, and leaving the rest? It seems to me that there is a clear role for an independent regulator that can set targeted efficiencies, but there appears to be uncertainty around the rest of the role. Can you clarify where you see the role of the Utility Regulator, particularly with regard to securing efficiencies and setting price controls?
341. Mr Priestly: I will go back over the points that I made earlier. Our policy is to support economic and environmental regulation of the water industry. That means that we support the role of the Utility Regulator. We have a shared interest in making Northern Ireland Water as efficient as it can be in the interests of the consumers of water in Northern Ireland. We support the idea of a regulator that sets stretching efficiency and performance targets for Northern Ireland Water. We rub up against each other at the point where we do not know what our budget will be beyond the three-year period that ends this year. We cannot sign up to a determination that lasts three years. The Minister cannot tell Laurence to sign up to that determination, because there is no guarantee that we will be able to give Laurence the funding that he needs to deliver the performance standards and the efficiency challenge that Iain has set. We are trying to be pragmatic and to work through that in a co-operative way. That does not mean that we do not support the role of economic regulation.
342. Ms Purvis: I see a very difficult working environment for a company that was set up to do a job, but is now being dragged back and prevented from doing it. The work of the Utility Regulator, which was set up to regulate what should have been a Government-owned company, is now being hampered because of the reclassification. I am not making a judgment about the reclassification, because my views on the privatisation of water are widely known.
343. You said earlier that you disagreed, or were not content with, the Comptroller and Auditor General's report on benchmarking. You have conflicted with the Utility Regulator on the issue of benchmarking, and you said that Scottish Water would be a fair benchmark for Northern Ireland. The Water Industry Commission for Scotland (WICS), which is the regulator in Scotland, uses overall performance assessment (OPA) targets. However, you have not signed up to those either.
344. The Assembly has a scrutiny role that allows the public to see how Northern Ireland Water is performing, set against how it performed previously. In comparison with other companies that have been set up, surely it is in the interests of openness, transparency and accountability to have benchmarking. However, as Laurence or George said earlier, if the same data or benchmarking is not used, it presents a misleading view of performance. Why not step up to the mark straight away and use the same model — Scottish Water is a fair benchmark — to enable those performance indicators to be in place so that people can compare like with like?
345. Mr Priestly: I welcome the opportunity to come back on that. There is not a million miles between us. In Iain's evidence to the hearing, he said that the Utility Regulator does not use benchmarking to clobber Northern Ireland Water. That is not the intention. It uses benchmarking to identify the gap between where Northern Ireland Water is and where it needs to get to. Laurence also set out a number of companies in Great Britain against which Northern Ireland Water benchmarks itself exactly for the purpose of evaluating why we are so far off the mark if those companies deliver the service for that price and to that standard. No one could have any difficulty with that.
346. The difficulty that we have with the OPA as it was used in the NIAO report is that it does not compare like with like. It does not take account of where Northern Ireland Water is. Taking a specific example — I will hand over to John for the detail — there have been very significant improvements in drinking water quality in Northern Ireland. The Utility Regulator and we have said that, and I think that the Northern Ireland Audit Office acknowledged it. I cannot remember the detailed scores in the OPA.
347. Mr Mills: Using the OPA methodology, which attaches an overall score of about 300, and the maximum score for water quality is 50, English companies, on average, score 46 out of 50 and Northern Ireland water scores five out of 50. The differences between Northern Ireland Water and the average English company's performance are really quite marginal. The OPA exaggerates those immensely to give Northern Ireland Water a completely damning assessment.
348. If we followed that methodology and based investment decisions on it, we should say to ourselves that we should pour money into drinking water quality. However, that is not reality: we know that the sewerage needs more catch-up than the drinking water. The drinking water is nearly there. The methodology was designed to measure marginal differences among various similar English companies, so Northern Ireland Water ends up with a perversely low score. It gives Northern Ireland Water a better score in areas like unplanned interruptions to supply. One would think that not as much investment were needed in that area, but we know that, in reality, Northern Ireland Water is not as good on unplanned interruptions as it is on drinking water quality. We are all for benchmarking and rigorous methodologies, but not when they produce results that are contrary to common sense.
349. Ms Purvis: In the report, the Utility Regulator explained very clearly why there was a low score for water quality, and I agree with the statement:
"A major advantage of the OPA score is that it provides a single easily understood measure of how NI Water is performing against a wide range of targets".
350. You said that you benchmark against other companies, and Laurence has listed them, but is it selective benchmarking? Is it looking at a company that is similar to you in one particular area, such as Yorkshire Water, taking that benchmark and comparing it to you, and then taking another from a different company and comparing it to another area? Why not have an OPA range that people can compare? I acknowledge and accept absolutely that Northern Ireland Water's performance has improved in very difficult circumstances. However, as regards the Assembly's scrutiny and the ability of the public to see, and others to measure, how Northern Ireland Water's performance improves over time, why is there an issue around the difference in benchmarking?
351. Mr Priestly: We just do not think that you are comparing like with like. Those companies have had 20 years of economic regulation. They operate in a different context: they bring in revenue through charges and can go to the market and borrow money to invest to improve things. Northern Ireland Water is not like that. It would be helpful if Laurence said something about the companies against which he benchmarks and disproves the idea that he chooses —
352. The Chairperson: Has there been any comparison, for example, of when Scottish Water was three years old to what it is like now?
353. Mr Mills: Yes, in around 2002 or 2003, we looked at the performance of Scottish Water when it was in a similar position to Northern Ireland Water. Under the methodology that is used in OPA, it had a similar score to the score that Northern Ireland Water has now. The position of Scottish Water five years ago is a much more reasonable comparison with Northern Ireland Water now. A comparison between Scottish Water then and Northern Ireland Water now would show that Northern Ireland Water is doing well by comparison on water quality. Northern Ireland Water is worse now on interruptions to supply that Scottish Water was about five or six years ago, so that indicates that we need to look at that, whereas we do not need to put much investment into water quality because we are already way ahead of where Scottish Water was.
354. Scottish Water seems a more realistic benchmark than Yorkshire Water or the average English company, which receive much more investment and continue to make investment. There is a catch-up issue: the English settlement for 2010-15 has just allocated £25 billion of investment. English companies are not standing still, so it is difficult for us to use them as a benchmark. The position of Scottish Water five years ago appears to be a much more realistic and informative way of benchmarking. A common methodology is used everywhere. For example, water quality everywhere is measured by mean zonal compliance, so, in effect, benchmarking takes place in that area.
355. The Chairperson: It would be useful to the Committee if the comparisons could be sent to us.
356. Ms Purvis: I know that comparing Northern Ireland Water with companies in England and Wales is comparing apples with oranges. Those companies have had more time to develop their performance and so on. In the NIAO report, the Utility Regulator states:
"OPA targets set for the regulatory price control take account of historical performance and reflect the level of investment available to NI Water over the price control period. Adopting this approach, which is consistent with both WICS and OFWAT, facilitates the setting of appropriate targets for NI Water as well as robust comparisons. It challenges the company to outperform its targets in striving to reach higher industry performance standards."
357. If the company does not take that approach already, it should strive to introduce and implement it. I accept where you are coming from, but the governance issues and how Northern Ireland Water does the job that it was set up to do could be looked at.
358. Mr Priestly: Perhaps I can resolve that point. The Utility Regulator is independent, and I have little doubt that it will continue to use the OPA. We continue to say that the context should be taken into account.
359. Ms Purvis: As Jo explained in the previous session, the difficulty is that, if you are not collecting data to measure a particular target or indicator, at the time of the next business plan, the Utility Regulator will not have been presented with a business case because no data or information had been collected. That will not work because the Utility Regulator will say that there is no business plan because you have not collected the proper data and, therefore, it is not directing resources at that.
360. Mr MacKenzie: We need to watch the word "benchmarking" and consider what it means. This year, I am faced with having to reduce operating costs effectively by £12·6 million. That is at a granular level. I am sitting with that target and wondering how to hit that reduction in costs. We are doing basic things such as moving out of city centre offices in Belfast and relocating to an office that we own in north Belfast. By doing that, we will save over £1 million in rent. Efficiency is, first, about innovation; it is about the management of the organisation asking how it can do things better. It is about reducing the number of mobile phones and vehicles that we have. It inevitably means having fewer people in the organisation. That is a benchmark with yourself, if you like.
361. If there is any level at which there is a particular problem, such as a billing or a complaints issue, one could look at the best company that can be found, and ask how come Yorkshire Water's level of complaints is so low and what is it doing in its customer contact centre that is different from ours? We can look at that company's processes and try to learn from what it is doing. I call it "stealing with pride"; we take that back and try to apply it to our organisation.
362. There is a different kind of benchmarking, which is the benchmarking that the Utility Regulator does. The Utility Regulator does not lift the lid on the company, look at our processes and say that we should do this process or that process better. The Utility Regulator knows that that is our job; that is what we are paid to do. The Utility Regulator benchmarks us at a very high level on our overall operating and capital costs against other companies. That is how economic regulation works.
363. There is a fourth kind of benchmarking, which is like a slightly contrived OPA, in which we are set particular targets through the environmental and social guidelines. We try to hit those targets, and because we hit the targets, which are not the same as those in England and Wales, we end up with a relatively low score. I was interested to hear Mr Osborne, because he has chosen to use the England and Wales OPA. Scottish Water is regulated by WICS, which decided to use a different OPA that is felt was more appropriate for the situation in Scotland. That is how I think benchmarking works. There is high-level stuff; there is benchmarking that looks at processes used by other companies; and there is what I call benchmarking with ourselves, which involves asking ourselves what it is that we can do better.
364. The Chairperson: Anything further, Dawn?
365. Ms Purvis: We are going nowhere.
366. Mr McLaughlin: I want to return to this topic. At this stage, you probably have a very clear idea of the Committee's thinking on this issue. For me, the issue that the Executive and the Department have to address is the question of subsidy. That requires specific calculations. How do we know how much the Executive should set aside to continue their present policy, if, in fact, they cannot set that against the benchmark of the most cost-effective utility in another region, which is setting a benchmark that we should at least aim at? That allows you, not so much to temporise, but to take account of the consequences of the historical underinvestment and the time required to repair or to upgrade systems.
367. I acknowledge that there have been improved consequences as a result of the investment and the efforts that have been made over the past number of years. However, we are all, including Executive Ministers, dealing with the danger that, if we use the type of benchmark that you suggest, we will get, at best, a distorted and possibly a misleading figure for the sum that has to be allocated. Should we not be measuring that against —
368. Mr Priestly: Could we try to separate the two matters? The term "benchmarking" is getting us into difficulties.
369. Mr McLaughlin: Well, give us another word.
370. Mr Priestly: I would put it as the targets that are set for the company. Over the past decade, the targets have probably been predicated on keeping us out of trouble with Europe and avoiding EU infraction. That is the reason why such a huge investment has had to go into water. If we end up being infracted by the European court, it will cost us even more. That is separate from benchmarking. We have no difficulty with benchmarking if it is to measure how well Northern Ireland Water is doing. However, that has to be done in a reasonable, balanced and fair way that asks how a company, at a stage of transition, would be expected to be doing, rather than benchmarking against companies that are at the forefront.
371. Mr McLaughlin: With respect, I am not sure that I accept that. The reason why other utilities are not in danger of infraction is that they have achieved certain levels of performance, efficiency and quality. It is absolutely appropriate that you prioritise where you must supply your limited resources to avoid further cost, and avoiding infraction is a legitimate goal to set. However, there is an overall picture in which, because of different circumstances, resource issues and the timelines involved, certain utilities are outperforming this utility. You can set out rational explanations for that. However, I am trying to get to whether we should have a rigorously clear-headed view that, if someone can produce and treat water at a quality and for a certain unit cost, that provides an absolutely perfect comparator for us. We can explain why the gaps exist and take responsibility for those gaps without taking the blame. That is what this circular argument is about. Let us aim to do at least as well as the best performer that we can find.
372. Mr Priestly: We have tried to give you assurances that that is being done.
373. Mr McLaughlin: You are not assuring me.
374. Mr MacKenzie: That is what the price control intends to do. The Utility Regulator has set efficiency targets based on benchmarking against companies in England and Wales.
375. Mr McLaughlin: However, you are in dispute about that.
376. Mr Priestly: No; we have accepted it for year 1.
377. Mr McLaughlin: You have a most novel way of saying that you have accepted something, because it does not sound as though you have.
378. Mr Priestly: Northern Ireland Water also goes out and looks at those companies at the forefront that are doing the very best. It then compares its performance, at a detailed level, against those companies to see what they do that we can learn from. Then, as Laurence said, he, without embarrassment, steals those ideas.
379. Mr McLaughlin: Would it not help in your engagement, through your Minister, with other Executive Ministers such as the Finance Minister, to be able to cite those exemplary examples to show what you have to achieve? That cannot be done through one year's investment and it cannot be done over a three-year price control period. It will take longer than that. However, those are goals that can be set that take account of the economic and resource realities and of where we are starting from. However, you have to be very clear about where you are going.
380. Mr Priestly: I honestly do not think that there is much between us. That is, in practice, what we are doing with Iain. As we cannot give Laurence a guarantee of his budget, we are trying to work through it annually. That is what we are doing.
381. The Chairperson: There is an issue about whether you are answering correctly or not. However, we could be here all night. I want to get to the truth of the matter. Therefore, I ask Mr Osborne to come back in with any thoughts that he may have at this stage.
382. Mr Osborne: We are entitled not to agree with each other. Whose job is it to do what? It is our job to say how much money we think the company needs to be able to deliver the standards that the social and environmental guidance sets out. We do that in a very detailed way. The discussion about OPAs is slightly surreal, because we do not use OPAs to build targets. We build targets in a very detailed way around the engineering interventions that will be required to get particular outcomes. OPA is not the icing on the cake; it is the cherry on the icing on the cake. OPA is a very simple way of flagging how things are going. In Northern Ireland, no money is attached to that. Incidentally, Welsh Water pays its management team on the basis of whether it hits OPA targets, but that is another matter.
383. I wanted to intervene in order to encourage the Committee not to obsess about the OPA. The point is that we must work out whose job it is to set the service standard that should be delivered according to the social and environmental guidance. It is then up to the Utility Regulator to set out the amount of money that is required to meet that standard and the efficiencies that must be hit in order to deliver the targets with the money that is available, as well as to determine whether we are measuring effectively in comparison with other places.
384. We are using and will continue to use the OPA. The Department is entitled not to agree with us, but it is not its job to decide whether or not we use it. Nevertheless, it is entitled to its view about how that should be interpreted. The Committee needs to have confidence that the OPA works as a process. Ms Purvis asked this key question: is there a risk of certain data not being collected, because the Department takes a different view from us, and, consequently, will no data be available the next time round to set the targets? The answer is no. We will make sure that the data are collected on the things that we will need in order to set the targets.
385. Even during the first price control process, which was a relatively truncated one, we gave the company a requirement statement early that fed into a data submission. That was a slightly scrambled process, because we were doing it in a shorter time frame. However, there will be plenty of time this time around to ensure that the company has got and is collecting the data that will be needed the next time. I think that that will work.
386. Mr McLaughlin: I wish to move on to something else altogether.
387. The Chairperson: John, do you wish to ask a supplementary question on that issue?
388. Mr Dallat: I have to admit that I am suitably confused at this time. It seems that the water company wants to be in the premier division, but it is actually playing in the fourth division. We are leaving this meeting without any clear idea of how we are supposed to measure performance in the future and what we are supposed to compare that with.
389. Mr McLaughlin: I have a separate question that may be slightly left of field. However, it is not intended to make anyone uncomfortable; rather, it is simply to satisfy my curiosity. Recently, I was briefed on a proposition to roll out fibre-optic broadband technology using the sewerage network. That process would reduce costs, because it would avoid the excavation and filling in of ditches, and trenches; rent would be paid so there would be revenue; and the sewers would be cleaned as part of the installation. Have you already considered that or are you prepared to consider it?
390. Mr G Butler: Yes. A company approached us about using the sewers. We are aware that that has been done in Scotland, where it took about six years to go through. First, in considering whether or not to put fibre-optic cables in the sewers, we must take into account any potential damage or blockages that that might cause. We have been discussing those technical aspects along the way. However, we are now reasonably content that we can overcome any of them.
391. Secondly, we must consider the whole commercial aspect. We are a public company with public assets so, if we were to rent them, we would have to get the best value for money for them. We, therefore, cannot give that work to a single company, and there will have to be some type of procurement process in order to guarantee that we get value for money.
392. Thirdly, we will inevitably have to go through a commercial process. Given that all the agreements are quite complicated and technical, we will need to use a framework agreement that addresses which sewers are chosen and the issues of ownership and access. I am sure that members can imagine the whole range of issues that need to be addressed. We are in that process, and we are positive about it for many of the reasons that Mr McLaughlin mentioned, such as the opportunity for revenue. I do not want to mention that because it is non-regulated revenue, so the Utility Regulator will have a view on how that revenue was actually used. That aside, we are taking a positive approach to it. There is — how can I say this delicately? — a drive on behalf of the contractor to do that very quickly, but there is drive on our part to do it properly.
393. Mr McLaughlin: There will be wider strategic interest, if we can deliver the technology that enhances the competitiveness of the local economy. I want to know whether you are aware of it, whether you are looking at it and if you are, generally, positive towards it.
394. Mr G Butler: We are generally positive towards it. A detailed paper, which deals with the technical, financial and procurement issues, will be going to our executive committee on Monday. We will also need to talk to the Utility Regulator about non-regulated income.
395. Mr McLaughlin: I have written to you, Laurence, so you know what it is about, and I have written to your Minister and to DETI.
396. Mr Beggs: I have a question that goes back to the current status of Northern Ireland Water as a non-departmental public body. There are possible implications with regard to the availability of future capital funding to enable improvements to be made. I understand that its status and expenditure is also affected by Treasury accountancy rules and, in particular, the depreciation in the cost of assets going back to the Treasury. My question to the permanent secretary, Mr Priestly, is: how much will Northern Ireland Water's remaining in such a status cost the Northern Ireland block grant? I dare say that Mr Priestly will require guidance from the Treasury Officer of Accounts on that question.
397. Mr Priestly: Some of the consequences that you have alluded to carry risks. As part of the process of agreeing the Department's annual accounts, we go through a process with the Northern Ireland Audit Office to look at those risks and whether they will materialise. So far, they have not materialised, so they are hypothetical at the moment. John will know more accurately than me the figures attached to the risks. I want to emphasise, however, that those risks have not materialised.
398. Mr Mills: It depends on what assumptions are made, but our best estimate is that an adverse change in the asset valuation will mean a cost of about £200 million over the next three years.
399. Mr Beggs: What determines whether that risk kicks in? I put that to the Treasury Officer of Accounts: what determines whether Northern Ireland gets an additional £200 million bill? We need to know that; we need transparency.
400. Ms Fiona Hamill (Treasury Officer of Accounts): That is continually under consideration, but I will have to come back to you on the detail; it is pretty complicated.
401. Mr Priestly: A series of technical accountancy considerations will determine whether the risk materialises. It would be better to come back to you.
402. Ms Purvis: I would like to finish off on the benchmarking issue. Could Laurence tell us which business areas are benchmarked against which? I do not want that information now, but could you forward it to us?
403. Mr MacKenzie: We can give you a list of the companies with which we benchmark specific areas.
404. The Chairperson: We will benchmark this week's meeting after our next meeting. [Laughter.] There are many complexities, and we have heard about some of them today. We are discussing a very important issue, which affects every household and business across the North. It is important, therefore, that the work is done and that we spend a considerable amount of time on it.
405. Thank you all for attending this afternoon's meeting. We expect to receive some written correspondence from you, and we will reply to you. Thanks also to the Hansard staff for reporting the session.
Mr Paul Priestly |
Room 371 |
15 July 2010
Dear Paul,
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.
1. The precise figures regarding the gap in investment identified by the Department through historical benchmarking of the Water Service.
2. An overview of the response times as referred to in your annual report relating to service problems and the target you are reporting against; and a copy of your imminent annual report when completed.
3. The percentage of waste processed by the 27 non-compliant waste water works.
4. The number of customers billed for test meters and the work being undertaken with the Consumer Council to ensure that customers are billed correctly.
5. A comparison of the performance levels of Scottish Water in year 3 to that of NI Water now.
6. An overview of the business areas in NI Water that are benchmarked against comparators; which companies are used as a comparator in each case; and an assessment of NI Water's performance against them.
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
The Independent Water Review Panel (IWRP), established by the Minister in 2007, considered whether there was a gap in investment in infrastructure between Northern Ireland and the rest of the United Kingdom. The IWRP concluded that such a gap did exist, and that between 1989/90 and 2000/01 the underinvestment amounted to £433m, compared with England and Wales (E&W), and £414m compared with Scotland. Significant investment since 2000/01, however, meant that by 2006/07 the investment gap was reduced to £109m, compared with E&W, but a gap of £413m remained with Scotland, where increased investment has also taken place in recent years. The total level of investment per connected property over the period 1989/90 to 2006/07 was £3,117 in Northern Ireland, £3,369 in E&W and £3,708 in Scotland.
The Department would emphasise the point, which was recognised by the IWRP in its report and by Mr Osborne during the evidence session, that the scattered, rural nature of Northern Ireland's population is likely to mean that a greater level of investment is necessary here, compared with Great Britain, to achieve a similar level of performance. However, the figures above show that water and sewerage infrastructure in Northern Ireland has continued to receive proportionately less investment over the last 20 years than that in the rest of the United Kingdom.
A copy of the IWRP Strand 1 report is attached.
In the Northern Ireland Audit Office (NIAO) report a comparison was made between NI Water's performance on customer contact and that of the average water company in England and Wales in 2007/08 and 2008/09 (Figure 23 of the NIAO report).
Outturn figures for 2009/10 and targets for 2009/10 and 2010/11 are included in Annex A of NI Water's 2009/10 Annual Report. The relevant extract is included below at Table 1. Annex A of NI Water's Annual Report also contains performance data related to the duration of unplanned interruptions.
A copy of NI Water's Annual Report for 2009/10 is attached.
The 27 non-compliant wastewater treatment works referred to at the PAC hearing are listed in Table 2 below. These 27 works equated to 5.15% of the total sewage loading (population equivalent) processed.
| Wastewater Treatment Works | Population Equivalent |
|---|---|
| Annahilt | 1,383 |
| Annesborough Old | 1,494 |
| Ballygowan | 2,635 |
| Ballykelly | 4,562 |
| Ballymonie | 479 |
| Belleeks (Armagh) | 350 |
| Brockagh Terrace (Dungannon) | 253 |
| Cabragh Dungannon | 483 |
| Carrowdore | 1,088 |
| Castlewellan | 3,352 |
| Cloghmills | 1,664 |
| Clough | 483 |
| Coalisland | 8,677 |
| Creagh | 599 |
| Derrylin | 708 |
| Downpatrick | 21,189 |
| Forkhill | 606 |
| Hamiltonsbawn | 1,017 |
| Hillsborough | 3,360 |
| Keady | 4,157 |
| Killen | 292 |
| Magheralin | 1,700 |
| Moygashel | 50,810 |
| Mullaghbane | 618 |
| Seaforde | 318 |
| Stewartstown | 1,027 |
| Swatragh | 712 |
In operating its water infrastructure, NI Water must understand the performance of the water network and the demands placed upon it. Prior to the formation of NI Water in 2007, Water Service had a policy to install meters for the purpose of monitoring consumption in certain circumstances, and such meters were classified as 'test meters'. Test meters are outside the charging system and are installed for consumption monitoring purposes. Typically, these would have been installed on long service pipes or on shared supplies (for example, a single service pipe serving a terrace of houses).
An exercise is underway to review the classifications attributed to meters and includes a review of those instances when a meter has been classified as a 'test' meter. This review has found that many 'test' meters were fitted for monitoring purposes and will not result in a switch to billing. There are also those which are confirmed as being on supplies used for non-domestic purposes and we reclassify these from 'test' to 'billed'. Best endeavours are made to establish if the water supplied is being used for non-domestic purposes, but on some occasions it may not be possible to determine beyond doubt, and judgement will be exercised.
To date, 5,222 meters have been reclassified from test meters to operational meters and 712 customers have been billed as non-domestic customers. This survey and analysis work is due to complete by the end of December 2010. System update and billing activity is due to complete by March 2011.
Of the 712 sites which have been surveyed and reclassified as billable, none have had a rateable allowance automatically given. At present, we do not apply the rateable allowance to non-domestic bills automatically as we require the customer to provide a copy of a valid rates bill as evidence of their eligibility. However, any future letters to inform consumers of their meter reclassification to non-domestic status will explain availability of domestic allowance and encourage the customer to apply for the allowance.
NI Water has consulted with the Consumer Council to develop the process for meter reclassification and customer communication following reclassification, including dispute management.
The agreed process steps, once a survey is completed and a meter identified as non-domestic, are:
In addition, NI Water's billing department is working closely with elected representatives and other consumer bodies, such as Ulster Farmers' Union, to manage these queries.
Tables 3 & 4 detail the OPA scores for each company for their first 3 years of operation. The OPAs produced by Northern Ireland Utility Regulator (NIAUR) and the Water Industry Commissioner for Scotland (WICS) are calculated using different sets of parameters. The parameters above the red line are used by both regulators and the parameters below the red line are used by only one regulator and are not comparable. The relative weighting given by NIAUR and WICS to some of the parameters is also different, based on their assessment of the local importance of the particular issues and the quality of data available.
In Year 3 NI Water's OPA score of 122 (out of 304) compares poorly with Scottish Water's score of 177.4 (out of 340.6). However, with different variables being used in terms of parameters, and their weightings, this should not be taken as a true, like-for-like, comparison.
| NI Water | ||||
|---|---|---|---|---|
| OPA Measure | 07/08 | 08/09 | 09/10 | Max Possible |
| Low pressure | 4 |
4 |
20 |
38 |
| Unplanned interruptions to supply | 22 |
22 |
13 |
38 |
| Hosepipe restrictions | 13 |
13 |
13 |
13 |
| Drinking water quality | 5 |
5 |
13 |
50 |
| Sewage sludge disposal | 13 |
13 |
13 |
13 |
| Leakage | 13 |
9 |
10 |
13 |
| Sewage treatment works compliance | 5 |
5 |
5 |
50 |
| Water pollution incidents (high & medium) |
13 |
6 |
5 |
13 |
| Sewerage pollution incidents (high & medium) |
3 |
3 |
3 |
25 |
| Sewerage pollution incidents (low) | 3 |
5 |
4 |
13 |
| Customer contact score | 4 |
18 |
23 |
38 |
| Total | 98 |
103 |
122 |
304 |
Source: NI Water
| Scottish Water | ||||
|---|---|---|---|---|
| OPA Measure | 02/03 | 03/04 | 04/05 | Max Possible |
| Low pressure | 5.1 |
10.9 |
5.2 |
37.5 |
| Unplanned interruptions to supply | 3.8 |
3.8 |
17.9 |
37.5 |
| Hosepipe restrictions | 25 |
25 |
25 |
25 |
| Drinking water quality | 6.6 |
21.1 |
33.8 |
50 |
| Sewage sludge disposal | 12.5 |
12.5 |
12.5 |
12.5 |
| Leakage | 10 |
10 |
7.5 |
25 |
| Sewage treatment works compliance | 5 |
5 |
5 |
50 |
| Sewer flooding incidents (capacity) | 19.9 |
24.9 |
25 |
25 |
| Sewer flooding incidents (other) | 22.5 |
26.6 |
23.3 |
37.5 |
| Properties at risk of sewer flooding | 11.2 |
10.8 |
6.9 |
12.5 |
| Response to billing contacts | 0.9 |
0.9 |
0.9 |
9.4 |
| Response to written contact | 5.7 |
9.1 |
8.6 |
9.4 |
| Ease of telephone contact | 4.4 |
1.6 |
5.8 |
9.4 |
| Total | 132.6 |
162.1 |
177.4 |
340.6 |
Source: WICS
One of the concepts underpinning NI Water's economic regulatory regime is 'comparative' or 'yardstick' competition in which NIAUR uses benchmarking between NI Water and other UK water companies to inform regulatory decisions, such as on efficiency targets.
In addition, NI Water is involved in a number of benchmarking exercises, examples of which are detailed below.
NI Water's Price Control 2010 Business Plan (Section B2) contains an analysis of NI Water's Opex efficiency relative to OFWAT's benchmark company in England and Wales.
The analysis was used to develop targets for catch-up efficiency and suggested that NI Water should be considered to be in the efficiency band Lower E (for Opex) with an unadjusted efficiency gap of approximately 40-45% from Yorkshire Water (OFWAT's "frontier" company). To close 60% of the efficiency gap to the frontier over the five years from 2007/08 (encompassing both the Strategic Business Plan and the PC10 periods) NI Water needs to improve its efficiency by 4% and 5% pa for water and sewerage Opex, respectively.
Assuming that NI Water is able to achieve Opex efficiency savings in line with its actual targets (for the period 2007/08 to 2012/13), at the end of the PC10 period NI Water will have moved to efficiency band Upper D closing a significant portion of the efficiency gap. This is illustrated in Figure 1 below.
Source: Analysis by Frontier Economics
Opex efficiency bandings relate to the reduction in Opex necessary to achieve the same Opex as the "benchmark" company in England and Wales, as summarised in Table 5.
| Reduction to benchmark Company | |
|---|---|
| Upper A | <= 0% |
| Lower A | 0 to 5% |
| Upper B | 5 to 10% |
| Lower B | 10 to 15% |
| Upper C | 15 to 20% |
| Lower C | 20 to 25% |
| Upper D | 25 to 30% |
| Lower D | 30 to 35% |
| Upper E | 35 to 40% |
| Lower E | 40 to 45% |
| Lower E | 45 to 50% |
| Lower E | 50 to 55% |
NIAUR undertook a similar operational expenditure benchmarking exercise in order to set Opex efficiency targets for the PC10 period.
| Total Connected Properties (T2: L1) | Population - Total (T7: L17) | Total Length of Mains (T11: L11) | Length of Mains per 1,000 Connected Properties | Length of Mains per 1,000 Population | |
|---|---|---|---|---|---|
| Anglian | 2,033.2 |
4,210.08 |
37,232.00 |
18.31 |
8.84 |
| NES | 1,945.0 |
4,343.29 |
25,518.73 |
13.12 |
5.88 |
| Severn Trent | 3,399.3 |
7,487.79 |
46,484.32 |
13.67 |
6.21 |
| South West | 766.4 |
1,628.67 |
15,041.06 |
19.63 |
9.24 |
| Southern | 1,046.0 |
2,301.15 |
13,587.61 |
12.99 |
5.90 |
| Thames | 3,561.7 |
8,544.02 |
31,411.17 |
8.82 |
3.68 |
| United Utilities | 3,176.7 |
6,805.15 |
42,239.84 |
13.30 |
6.21 |
| Welsh | 1,366.4 |
2,882.27 |
27,363.52 |
20.03 |
9.49 |
| Wessex | 570.2 |
1,246.70 |
11,423.22 |
20.03 |
9.16 |
| Yorkshire | 2,196.4 |
4,868.40 |
30,874.00 |
14.06 |
6.34 |
| E&W Average | 15.40 |
7.09 |
|||
| NI Water | 800.0 |
1,748.53 |
26,067.07 |
32.58 |
14.91 |
NI Water has a similar number of bursts per 1,000 kilometres of water main to the average for England and Wales. However, NI Water has 2.12 times more length of mains per 1,000 connected properties than the E&W average. And NI Water has 2.10 times more length of mains per 1,000 population than the E&W average. South West Water has the closest connected properties and population totals to NI Water but NI Water has 1.7 times the length of mains.
A greater length of mains per 1,000 connected properties means NI Water can expect to have more bursts and hence more unplanned interruptions than water companies in E&W.
NI Water is involved in another benchmarking exercise, which compares data on the number of employee days lost through accidents at UK Water Companies. As can be seen in Table 7 below the number of employee days lost through accidents at NI Water compares favourably to its UK counterparts.
| 2006/7 | 2007/8 | 2008/9 | 2009/10 | |
|---|---|---|---|---|
| Anglian Water | 7.68 |
5.86 |
8.21 |
6.85 |
| Northern Ireland Water | 10.01 |
9.41 |
7.88 |
8.68 |
| Northumbrian Water | 12.55 |
11.12 |
10.26 |
9.41 |
| Scottish Water | 20.62 |
20.96 |
16.25 |
18.46 |
| Severn Trent Water | 11.0 |
11.10 |
7.67 |
6.78 |
| South West Water | 12.38 |
9.23 |
20.98 |
* |
| Southern Water | 17.61 |
16.55 |
12.85 |
13.35 |
| Thames Water | 21 |
15.99 |
16.71 |
14.50 |
| United Utilities Water | 8.67 |
9.86 |
7.67 |
6.88 |
| Wessex Water | 15.90 |
18.71 |
11.39 |
14.45 |
| Yorkshire Water | 21.85 |
16.70 |
14.50 |
12.96 |
| * last Qtr not yet submitted |
1. Mr Paul Priestly, Accounting Officer, Department for Regional Development (DRD);
2. Mr John Mills, Director of Water Policy Division, Department for Regional Development (DRD);
3. Mr Laurence MacKenzie, Chief Executive, Northern Ireland Water;
4. Mr George Butler, Director of Engineering & Procurement, Northern Ireland Water;
5. Mr Iain Osborne, Chief Executive, Utility Regulator;
6. Mrs Jo Aston, Director of Water Regulation, Utility Regulator;
7. Mr Kieran Donnelly, Comptroller and Auditor General (C&AG); and
8. Ms Fiona Hamill, Treasury Officer of Accounts (TOA).
1. Independent Water Review Panel's Strand 1 Report[1]
2. Northern Ireland Water's Annual Report 2009/10[2]
[1] Copies Available Upon Request
[2] Copies Available Upon Request
_fmt1.jpeg){kind=logo}
1. This is a landmark report that exposes serious failings in procurement, inappropriate and ineffective governance arrangements over an important arm's-length body, and a failure to observe the high standards expected of senior public officials.
2. In January 2010, an independent review team was commissioned to investigate governance arrangements at Northern Ireland Water (NI Water) in light of procurement problems identified in a number of internal audit reports. Four NI Water non-executive directors were dismissed in March 2010.
3. At the evidence session on 1 July 2010, the Committee focused on the assessment of the nature and cause of procurement failures, the governance arrangements at Northern Ireland Water and the oversight role by the Department for Regional Development. Concerns also emerged over the quality of the evidence provided by witnesses; the proper conduct and actions of the Department's and NI Water's Accounting Officers; and also over the independence of those appointed to carry out the review.
4. Following the evidence session, the Committee received correspondence from a member of the review team criticising the Committee's "disgraceful line of questioning". It emerged that Mr Paul Priestly, the Permanent Secretary and the Committee's main witness, had a role in drafting this letter. Mr Priestly was subsequently suspended from his position by the Head of the Northern Ireland Civil Service (NICS), who has assured the Committee that progress is being made with an internal management process under NICS disciplinary policy.
5. The Committee obtained extensive additional documentation from a variety of sources, and it was on the basis of this information that this report was prepared.
6. Public officials are required to act, at all times, with selflessness, integrity, objectivity, accountability, openness, honesty and leadership. It is the responsibility of the Head of the Northern Ireland Civil Service and his Permanent Secretaries to set the example in applying these values.
7. The actions of a number of senior officials in this case has undoubtedly undermined confidence in the integrity of the public sector, but it is important to remember that there are good and honourable people at all levels in public bodies. For confidence to be regained, the highest standards in public life must be applied, but those at the top must lead by example.
8. The conduct of Mr Priestly, the DRD Permanent Secretary, towards this Committee was unacceptable. The role of the Committee in questioning witnesses is to hold them to account for their actions. In his role in drafting this letter, Mr Priestly sought to undermine the Committee; this intervention was utterly disgraceful.
9. There are concerns over the independence of the investigation of NI Water's procurement problems. There were three potential conflicts of interest, involving two of the three review team members. There were also clear indications that the Department inappropriately influenced a small number of key findings in what was supposed to be an independent review.
10. The review team's report failed to provide, as requested, a detailed and considered assignment of individual responsibility for the governance failures. The review team was unable to fulfil its terms of reference because of the undue haste with which Mr Priestly pressed for the report to be completed. The speed with which this review was handled was completely out of character for the Northern Ireland Civil Service. Mr Priestly may have acted with such haste as a result of Mr MacKenzie's threat of resignation, which he later withdrew, citing the positive support of DRD.
11. The Committee was not satisfied with the quality of the evidence provided by witnesses at the evidence session. This Committee should not have to seek to draw out relevant and important facts through cross examination.
12. The failure of NI Water to adhere to the basic principles of procurement is inexcusable. Between December 2005 and August 2010, there were 75 procurement failures totalling £45.9 million, of which 41 (£14.8 million) originated in the Water Service. These failures resulted from widespread abuse of single tender awards (STAs), unapproved contract extensions, and circumvention of financial controls.
13. There was a deeply embedded culture at all levels that made it acceptable to bypass rules to get the job done. In addition to weak financial controls and wholly deficient management information systems, there was no clear set of ground rules setting out who was responsible for authorising expenditure, something which any well run organisation should have. Even NI Water's central Procurement Unit, which should have been championing best practice, did not itself apply basic financial controls.
14. Many of the procurement problems arose in 2006-07, the final year of Water Service, when 273 staff (14% of the workforce) opted to remain in the NI Civil Service rather than move to NI Water. To address this, Water Service, and then NI Water, appointed significant numbers of consultants and temporary contract staff. While the Committee recognised that this was necessary to manage the short term staffing problems, it was, nevertheless, astonished to learn that in the three years up to 2009-2010, NI Water spent over £42 million on consultants and temporary staff. It seems to the Committee that it must have been difficult to tell who was an employee and who was a consultant.
15. While Internal Audit had serious concerns about the overall control environment within NI Water from the outset, it did not identify the procurement failures highlighted in this report. Indeed, in 2008-09 it was asked not to look at procurement, as new processes were being put in place. Even when it did identify weaknesses in the procurement process (in September 2009), it failed to recognise the significance of these problems.
16. Despite the procurement failings, the most recent CoPE accreditation exercise, which was carried out in 2009, found that all CoPEs, including NI Water, achieved the highest possible rating - that is "exemplar" status. The Committee therefore questions — not for the first time — the value of this accreditation process. It further questions the independence of this exercise, given that the review was carried out by PricewaterhouseCoopers (PwC), despite that company having received £27.1million in fees between March 2006 and August 2010 from Water Service and NI Water (including £2.2 million from contracts which were improperly authorised STAs).
17. The governance arrangements established by DRD for NI Water represented the worst of all worlds – NI Water was not a fully-fledged commercial organisation subject to the usual market disciplines nor was it a conventional public body operating under tried and tested public sector rules and procedures. The governance model was devised for a self-financing commercial company and was inadequate for a body whose income derived mainly from public funds. The current governance arrangements should now be revised to incorporate the level of oversight necessary for a public body delivering a service of fundamental importance to the people of Northern Ireland.
18. Departmental oversight of NI Water was clearly deficient:
19. DRD failed to ensure that NI Water complied with some of the most basic principles of good corporate governance. It did not ensure that NI Water had a full complement of non-executive board members until July 2008. In June 2008, the DRD Accounting Officer approved the appointment of the NI Water Chair as interim Chief Executive in direct contravention of established good practice. The separation of roles and responsibilities at the top of an organisation is fundamental to good governance. It is astonishing that the Accounting Officer failed to adhere to this key principle.
20. The Board of NI Water was badly let down by senior executives; management information was poor and the internal audit of procurement was deficient. However, these serious defects do not absolve the Board from its own responsibilities. The Board is required to hold management to account and should call for any information necessary. It also has a responsibility for directing and reviewing the work of internal audit. In failing to provide an appropriate level of audit coverage NI Water management and its Board had demonstrated a poor understanding of the significant risks the organisation faced.
21. The responsibilities of a non-executive director of a public body are demanding, but the role is crucial in ensuring such bodies properly manage public funds. What has happened in NI Water must not be allowed to deflect from the ability of public bodies to attract high calibre candidates to such important positions.
22. Throughout this report, the Committee makes a number of significant recommendations. These must be implemented with urgency and vigour if NI Water, and the wider public sector, is to prevent a recurrence of this unprecedented catalogue of serious failings.
1. The Committee recommends that the Head of the Civil Service completes his assessment of Mr Priestly's role in this matter as soon as possible and advises this Committee of the outcome. The Committee expects him to communicate, in the strongest terms, to all permanent secretaries and senior civil servants the need to adhere to the Nolan principles and to respect the role of this Committee and all other Committees of the Assembly.
2. The Committee recommends that when departments commission external review panels to investigate major irregularities, there should be very stringent guidelines around the independence of panel members. Any prospective panel member with potential or perceived conflicts of interest should be excluded from consideration. This is all the more crucial in circumstances where the remit of the panel includes apportionment of blame and where there is potential for reputational damage to those subject to investigation.
3. The Committee recommends that, as a point of principle, only the facts contained in independent reviews should be agreed. Ownership of conclusions and recommendations must firmly lie with those selected to carry out the independent review.
4. The IRT Report was deficient in terms of process, and was used as a basis of advice which led to the dismissal of Board members. Major investigations where blame may be apportioned should never be rushed. The Committee therefore recommends that reviews of this significance must always be given sufficient time to fully meet their terms of reference and come to a proper and complete conclusion on the facts.
5. NI Water made use of confidentiality clauses to keep embarrassing transactions secret. The Committee recommends that, as a point of principle, confidentiality agreements should not be used anywhere in the public sector. However, if in exceptional circumstances their use proves to be unavoidable, the Committee considers that these cases should be approved by the relevant departmental Accounting Officer and by DFP.
6. The Committee recommends that DFP reviews the use of confidentiality undertakings given to interviewees, sets out the circumstances where they should be used and issues appropriate guidance. The Committee expects this guidance to be principle based, requiring all public officials to follow and apply, at all times, the principles of honesty, openness, integrity and accountability.
7. The Committee strongly recommends that DFP issues clear guidance to all departments that any contracts, for the purpose of an inquiry or investigation, should provide the sponsor with ownership of the contractor's supporting documentation and the C&AG with full access to these papers.
8. The Committee recommends that all witnesses to this Committee must not only answer all questions put to them accurately, but also should not omit relevant and important facts. This Committee should not have to seek to draw out this information through cross examination. Only by receiving open, honest and full responses can this Committee make effective recommendations that help to improve the way the public sector serves the people of Northern Ireland.
9. To improve transparency and accountability in the use of STAs the Committee recommends that each departmental Accounting Officer should provide a statement of non-competitive contracts to both the relevant statutory Committee and to the C&AG on an annual basis. These statements should set out details of the subject or purpose of the contract, its value and the reasons for not having a competitive process.
10. The Committee recommends that there is a root and branch overhaul of the procurement function in the NI public sector to prevent the circumvention of financial controls and ensure transparency and value for money.
11. The Committee recommends that DFP considers the methodology employed by internal audit in the public sector, which should retain a risk-based approach but introduce an increased level of detailed testing.
12. The Committee recommended in its February 2009 report on the legal practitioner fraud[1] that internal audit, throughout the health sector, should give sufficient weight to the audit of contracts. Clearly this is a significant issue throughout the public sector. The Committee therefore recommends that contract audit is given greater prominence in the audit programmes of all government departments and NDPBs.
13. It is not good enough for the CoPE accreditation process just to consider whether proper procedures existed. There should be testing to ensure that the procedures are applied in practice. The Committee recommends that this issue is taken into account in the ongoing review of the CoPE assessment methodology.
14. The Committee recommends that, before appointing consultants to conduct reviews or investigations, CPD should check with departments and confirm that the preferred bidder does not have a potential conflict of interest.
15. The Committee recommends that DFP ensures that, in future, the external auditors of NI Water and any other arm's-length bodies constituted as companies not audited by the C&AG, should be required to provide an opinion on the regularity of income and expenditure.
16. The Committee recommends that a new governance agreement in the form of a Management Statement/Financial Memorandum should be put in place between DRD and NI Water for as long as NI Water continues to receive large amounts of public funding. This would provide the degree of oversight normally expected between a sponsoring department and an NDPB. The Committee is aware that such documents often take an inordinately long time to prepare; therefore DRD should work with DFP to fast track this process for NI Water.
17. The Committee recommends that DRD require NI Water to immediately implement, in full, all DFP guidance on the management of public money which is applicable to public bodies in Northern Ireland.
18. The Committee recommends that, as a priority, DRD conduct a fundamental review of governance arrangements in all its arm's-length bodies. This review should revisit and reinforce the recommendations of the Committee's report on Good Governance.
19. Given the ongoing dynamic environment in the public sector, there is a clear need for due diligence in the transfer of functions from one organisation to another. The Committee recommends that DFP considers the adequacy of guidance on due diligence and on human resource planning. Guidance should aim to minimise the risks associated with change management, particularly the risk of developing an over-reliance on the use of consultants.
20. The Committee recommends that departments, as well as board members and senior managers of public companies, should ensure that the degree of internal audit coverage corresponds with the level of risk as determined by a comprehensive risk assessment. This is particularly crucial in circumstances where the audited body is engaged in significant organisational change.
21. The recognised procedure for handling internal audit recommendations is to allocate responsibility for action to individual managers or directors and to set a challenging timetable for implementation. Progress is monitored by senior management and overseen by the Audit Committee. The Committee recommends that, for this process to work effectively, Accounting Officers must ensure that there are appropriate sanctions for those individuals who consistently fail to deliver.
22. The Committee recommends that all public bodies constituted as companies and subject to companies legislation must be required to adhere fully to the good governance requirements now set out in the UK Corporate Governance Code. It should fall to the departmental Accounting Officer to ensure that this happens.
23. The Committee recommends that departments ensure that non-executive directors are properly supported by all stakeholders in the governance model. Board members must receive accurate information from management, accurate independent assurance from auditors, and the support of the Department. However, Board members must recognise that they have a responsibility to challenge management, auditors and the information put before them.
1. The Public Accounts Committee met on 1 July 2010 to consider the "Northern Ireland Audit Office Memorandum on Governance of Northern Ireland Water". The main witnesses were:
2. Northern Ireland Water (NI Water) was established on 1 April 2007 as a Government owned company ("GoCo"), subject to companies' legislation, with the Department for Regional Development (DRD) as the sole shareholder. NI Water was appointed[2] as the provider of water and sewerage services in Northern Ireland, operating under licence issued by DRD and subject to regulation by the Northern Ireland Authority for Utility Regulation (the Regulator).
3. NI Water was formed as a GoCo on the basis that income would be generated from industrial, commercial and domestic water charges and that, eventually, NI Water would become self-financing. However, in April 2007, the NI Secretary of State postponed introduction of domestic water charging pending restoration of devolution. Since the restoration of devolution in May 2007, the Executive has deferred the introduction of the proposed domestic charges. NI Water continues to be funded by DRD, largely in the form of revenue subsidy (NI Water's main source of funding), some seventy-five per cent of its revenue income. In 2009-2010, DRD's subsidy to NI Water was £258 million.
4. NI Water is one of eight Centres of Procurement Expertise (CoPEs) in Northern Ireland's public sector. Procurement through a CoPE is intended to ensure that there is a professional influence on all procurement activity in order to maximise value for money[3] and ensure compliance with EU and UK legislation.
5. In January 2010, DRD and NI Water commissioned an independent review of governance arrangements in light of various procurement problems identified in a number of internal audit reports. The Comptroller and Auditor General (C&AG) prepared a memorandum[4] for the Committee on the review's findings, on which the Committee took evidence.
6. At the evidence session, the Committee focused on:
7. The Committee was not satisfied with the quality of the evidence provided by witnesses at the evidence session. Concerns were also raised about the independence of those carrying out the review of procurement.
8. Following the evidence session, the Committee received correspondence from a member of the review team criticising the Committee's line of questioning. This led to a chain of events culminating in the suspension on 17 August 2010 of the Permanent Secretary of DRD, the main witness at the evidence session.
9. In light of emerging concerns, the Committee obtained further documentation from DRD and NI Water and received a significant amount of additional information from a number of other sources. The Committee also asked the C&AG to independently evaluate the procurement failures identified and report back on his findings. The Committee has prepared this report on the basis of the NIAO Memorandum[5] and the other evidence it obtained.
10. A comprehensive timeline of events is included in the reference chapter.
11. It is essential that the general public and their elected representatives have full confidence in the way that Northern Ireland civil servants conduct public business. All public officials, from the top down, are required to behave, at all times:
12. The benchmark for ethical behaviour in the public sector was set by the Committee on Standards in Public Life at Westminster through its "Seven Principles of Public Life"[6]. Often referred to as "the Nolan Principles", these principles require public officials to act, at all times, with selflessness, integrity, objectivity, accountability, openness, honesty and leadership. The Committee has always championed the application of these principles in its work and plays an important role, on behalf of the Assembly, in holding public officials to account for their decisions.
13. The Committee expects all public officials from the top down to know these ethical principles so well that they should apply them instinctively in every decision they make. The Committee also expects that, as Accounting Officers, top officials must demonstrate that, in taking responsibility for public spending decisions, they have ensured regularity, value for money and propriety. Not only must they spend wisely and well, but their behaviour should be beyond reproach. This Committee acknowledges that the vast majority of civil servants strive to uphold these principles.
14. It is the responsibility of the Head of the Northern Ireland Civil Service (the Civil Service) and his Permanent Secretaries to set the tone at the top, ensuring that integrity and honesty are at the heart of all that they do and say. The Committee was therefore appalled to learn that the DRD Permanent Secretary, Paul Priestly, had a role in preparing a draft letter of complaint[7] to this Committee on behalf of Peter Dixon, a member of the Independent Review Team (IRT), which investigated procurement failings in NI Water. Mr Dixon is the Group Chief Executive of Phoenix Energy Holdings. In this letter Mr Dixon stated that there was a "disgraceful line of questioning" at the Committee's evidence session of 1 July 2010. The letter attacked the role of the Committee in questioning witnesses called to account for their actions in relation to the significant procurement problems at NI Water. The fact that Mr Priestly — the principal witness and the person required to set an example to the many public officials under his direction — had had a role in preparing this letter was utterly disgraceful. This letter clearly sought to undermine the role played by this Committee in holding public officials to account. The Committee is both shocked and angry at the duplicity of such a senior public servant.
15. Prior to the identification of the real author of the letter, the Chairman of Phoenix Energy Holdings Sir Gerry Loughran, a former Head of the Civil Service, distanced his company from Mr Dixon's comments. In doing so, he accepted that this Committee was pursuing perfectly legitimate questions which were both reasonable and evidence-based. Interestingly, Sir Gerry noted that Mr Dixon had "very little knowledge of the Assembly's accountability processes and in particular the work of the PAC [Public Accounts Committee]". The irony is that it was an Accounting Officer, supposedly expert in the accountability process, who had been involved in scripting the comments.
16. The Head of the Civil Service acted appropriately by suspending Mr Priestly when new information revealed his role in drafting the letter. Sir Jon Shortridge KCB, former Permanent Secretary of the Welsh Assembly Government, was appointed to investigate the actions of Mr Priestly in this matter. The Committee understands that this investigation has been completed. An announcement on Mr Priestly's future has not yet been made and he remains suspended on full pay. The Head of the Civil Service told the Committee that "the matter is being taken forward as an internal management process conducted in accordance with Northern Ireland Civil Service (NICS) disciplinary policy". He has given his personal assurance to the Committee that progress is being made in relation to the matter. The Committee will monitor the outcome.
17. While this case has undoubtedly undermined public confidence in the integrity of the Civil Service, it is important to remember that there are good and honourable people at all levels of the Civil Service. For confidence to be regained, not only must the Civil Service rigorously apply the highest standards in public life, but those at the top must lead by example. The Committee's report on the Hospitality Association of Northern Ireland[8] called on senior public officials to exercise moral leadership in maintaining public standards. The need for this to happen has never been greater. Holders of public office are accountable for their decisions and actions to the public and must submit themselves to whatever scrutiny is appropriate to their office.
18. The Committee recommends that the Head of the Civil Service completes his assessment of Mr Priestly's role in this matter as soon as possible and advises this Committee of the outcome. The Committee expects him to communicate, in the strongest terms, to all permanent secretaries and senior civil servants the need to adhere to the Nolan principles and to respect the role of this Committee and all other Committees of the Assembly.
19. In January 2010 Mr Priestly established an Independent Review Team (IRT) to examine procurement governance breaches in NI Water. The membership of the IRT was Peter Dixon, Group Chief Executive, Phoenix Holdings Ltd.; Jackie Henry, Public Sector Partner in Deloitte; and Glenn Thompson, business consultant and former senior civil servant and Accounting Officer[9]. In selecting Mr Dixon, Paul Priestly told the Committee that he was keen to have someone with commercial experience who could directly address whether NI Water was operating commercially. He had also wanted someone with accountancy skills and someone who had Accounting Officer experience. Mr Dixon did not charge for his contribution; Deloitte was paid some £36,000[10] and Mr Thompson, £21,000[11].
20. The Department told the Committee that in selecting the IRT members it had to take account of the fact that all but one of the big four accountancy firms were conflicted: Ernst and Young were NI Water's internal auditors; KPMG were its external auditors; PricewaterhouseCoopers (PwC) had significantly benefited from NI Water consultancy contracts, a number of which were not properly procured; therefore only Deloitte was not involved in the matter. However, the Committee's subsequent enquiries revealed that Deloitte had potential conflicts of interest.
21. Indeed, the Committee discovered that there were three potential conflicts of interest involving IRT members, none of which were properly handled. The first involved business relationships between Ms Henry and those who appointed her. Deloitte had been awarded consultancy work of £2.7 million by DRD and £804,000 by NI Water in the three years prior to Ms Henry's appointment to the IRT. In correspondence, the Department informed the Committee that Deloitte had been instrumental in establishing the NI Water governance framework on its formation and a partner from that firm was therefore considered to be an appropriate team member.
22. The NIAO Memorandum of 9 December 2010 disclosed that 11 days before Ms Henry's appointment to the IRT, her firm, Deloitte, was appointed to provide expert witnesses and forensic accountants to the Steria contractual dispute at a cost of £389,000. Ms Henry and Lian Patterson, the senior DRD Finance Director who had, with the Accounting Officer, selected the IRT members, were former colleagues at Deloitte. The relationships between Deloitte, DRD and NI Water were so extensive that those appointing Ms Henry should have been aware of the risk of a perception of conflict of interest.
23. It was entirely wrong to appoint someone whose own firm had carried out such a large amount of work for NI Water, including assisting with setting up the very governance structure which was now being reviewed for failing to prevent and detect the significant procurement breaches.
24. The second potential conflict concerns the relationship between the NI Water Chief Executive and Peter Dixon of the IRT. Mr MacKenzie told the Committee that Mr Dixon was a business acquaintance — "no more than that" — and he had made this relationship known to Mr Priestly, who did not consider that the relationship constituted a conflict of interest. Information emerging since the Committee's evidence session suggested a closer connection. The Committee has obtained an email between Mr MacKenzie and Mr Dixon where he sought to meet Mr Dixon as he needed help from friends.
25. The third potential conflict concerned the relationship between Mr Dixon and Don Price, a Board member and Chair of the Audit Committee. The IRT interview notes revealed that Mr Dixon had declared at the IRT's interview with Mr Price, the only non-executive not dismissed, that he knew Mr Price but he had no conversations with him in relation to the review. This declaration had no value when it was contained in interview notes never made publicly available. The connection should have been recorded in the report for all to see.
26. The Board of NI Water was clearly not convinced that the IRT members were independent and raised these concerns with the Department at an early stage of the review. These concerns were understandable, given that press reports as early as 8 February 2010 suggested that "heads could roll"[12] as a result of the review. However, Mr Priestly maintained that there was no basis on which to question the independence of the review.
27. DRD should not have appointed individuals to the IRT who could be perceived as having a conflict of interest. Indeed, it is abundantly clear that from the start of the IRT review, that certain members were clearly perceived as partial by those being investigated. The Department failed to appreciate that those tasked with apportioning blame for the procurement failures would have to be beyond reproach in terms of their independence.
28. The Committee recommends that when departments commission external review panels to investigate major irregularities, there should be very stringent guidelines around the independence of panel members. Any prospective panel member with potential or perceived conflicts of interest should be excluded from consideration. This is all the more crucial in circumstances where the remit of the panel includes apportionment of blame and where there is potential for reputational damage to those subject to investigation.
29. Two significant changes were made by the Review Team as a result of representations from the Department. The first draft referred to a serious "disconnect" between the NI Water Board and its Chief Executive, Mr MacKenzie. Mr Priestly suggested that the IRT change "disconnect" to "breakdown", which was accepted. Mr Priestly also suggested that the IRT should include that it considered the breakdown in the relationship to be "irreconcilable". The IRT did not go as far as Mr Priestly wanted. It stated that it was the view of the Chairman of the Board, Mr Mellor, that "the position is now irreconcilable". This Committee believes that this change, recommended by Mr Priestly and agreed to by the IRT, overstated the facts, in that there was ample evidence, from Board members, that the relationships were not irreconcilable. This is particularly important given that the Department's own assessment that the breakdown was irreconcilable was a factor in the dismissal of the board members.
30. The second key change made was in relation to the IRT findings on the assessment of DRD failures. Mr Priestly suggested that the IRT's finding, that DRD procrastination contributed to the creation of a weak governance environment, should be caveated with "This is no excuse for the failures in procurement which have been identified within NI Water." The IRT accepted this change to their findings. It was wrong for DRD to suggest and unwise of IRT to accept an amendment which was made simply to dilute the responsibility of the Department and should not have been made.
31. As part of its fact finding approach, the IRT interviewed 27 key officials including the NI Water Board. All interviews were minuted and all but one interviewee agreed those minutes. The interviewee who did not agree the minutes taken by the IRT was Declan Gormley. Mr Gormley questioned, among other things, what he perceived to be the negative bias of the IRT questioning and the partial minuting of his meeting. The Committee is shocked to learn that, not only did IRT decide not to include Mr Gormley's assessment in the report, but it failed to disclose that his comments had not been included.
32. The lack of agreement between Mr Gormley and the IRT is significant because he was the only Board member whose behaviour towards the IRT was taken into account when considering his dismissal. The Department considered that he had "communicated aggressively with the IRT". Mr Gormley was the only interviewee who failed to accept the IRT notes of his meeting. DRD concluded that his actions demonstrated a lack of judgement and determined that NI Water had lost confidence in him.
33. There are clear indications that the Department inappropriately influenced a small number of key findings in what was supposed to be an independent review. It is right that facts must be agreed: this is a necessary and valuable process to validate conclusions which must be evidence-based. But independent reporters should rarely amend their conclusions on the suggestion of those being reported upon.
34. Given the difficulties in the relationships between the Board and the Chief Executive, the Committee is disappointed that Mr Priestly did not do enough, at this time, to bring the parties together to resolve this. Indeed by his lack of action, he may have exacerbated already stressed relationships.
35. The Committee recommends that, as a point of principle, only the facts contained in independent reviews should be agreed. Ownership of conclusions and recommendations must firmly lie with those selected to carry out the independent review.
36. The IRT's overall conclusion on the culpability of the Board members and, in particular, the non-executives was far too general and was deficient in that it did not contain a detailed, considered and independent assignment of individual responsibility for the governance failures.
37. The IRT's overall conclusion was that procurement failings in NI Water represented a serious "breakdown in the application of the governance and control framework" of NI Water, and that this was "a serious matter for those responsible and accountable, primarily the Board of NI Water and the executives responsible for ensuring compliance". This view is particularly important in that it was given significant weight by DRD in the decision to dismiss board members.
38. The IRT terms of reference included the requirement to make recommendations in relation to the position of NI Water Board members (executive and non executive) and other senior managers involved in allowing the procurement breaches.
39. However, IRT failed to meet its terms of reference stating that "we have found it impossible, within our timeframe, to establish which executives within NI Water should be held responsible for the failures noted to date." The IRT recommended that the Chief Executive should initiate a detailed mapping of executive responsibility for procurement failures and this should lead, where necessary, to disciplinary action[13].
40. The report should have more closely considered the respective roles, responsibilities and actions of the Chairman of the Board, the Chairman of the Audit Committee, other non-executives, the executive directors and relevant senior managers in not preventing, detecting and correcting significant procurement breaches. The role of the Chairman of NI Water, for example, in providing effective strategic leadership[14] on matters including the encouragement of high standards of propriety and promoting value for money should have been considered by the review.
41. The Department undertook in March 2010 to consider the position of the two executive members of the Board following a review by NI Water of executive responsibilities. This review has yet to be completed. The Committee awaits the outcome of this process. The Committee understands that disciplinary proceedings were taken against five NI Water employees. This process has been completed in four cases; one case remains ongoing, and DRD told the Committee that it is being progressed as quickly as possible.
42. The Committee considers that, leaving aside the concerns above about the composition of the IRT, Mr Priestly should have provided more time to complete the review. The IRT investigation was completed with undue haste, particularly given that the purpose of the investigation was of such significance. The first draft of the IRT Review was completed three weeks from commencement. It was cleared ten days later following the production of two further drafts. However, not all internal audit reports were completed on procurement, even in draft, prior to finalisation of the IRT Review. Furthermore, the IRT found it impossible to allocate responsibility for the procurement problems to executives within the timeframe set.
43. It seems to the Committee that the speed with which this was handled was completely out of character for the NI Civil Service. Mr Priestly may have acted with such undue haste as a result of Mr MacKenzie's threat of resignation, which he later withdrew, citing the positive support from DRD.
44. The IRT Report was deficient in terms of process, and was used as a basis of advice which led to the dismissal of Board members. Major investigations where blame may be apportioned should never be rushed. The Committee therefore recommends that reviews of this significance must always be given sufficient time to fully meet their terms of reference and come to a proper and complete conclusion on the facts.
45. In accordance with the Nolan Principles, public officials should be as open as possible about all the decisions and actions they take and are accountable to the public for them. There was an unacceptable and widespread use of confidentiality clauses in NI Water that restricted openness and accountability. Such clauses were clearly intended to keep embarrassing payments out of the public view.
46. The Department would not disclose to the Committee details of the NI Water settlement with Steria[15]. The C&AG subsequently used his statutory powers to obtain this information. The NIAO Memorandum of 9 December 2010 disclosed that NI Water paid Steria £10.6 million including VAT and paid a Steria sub-contractor £2.1 million. In addition NI Water agreed to pay Steria's reasonable legal costs.
47. Other examples of confidentiality agreements at NI Water included:
| Year | Confidentiality agreement | £ | Reference |
|---|---|---|---|
| 2008-09 | Compensation for loss of office to Katharine Bryan, former Chief Executive | 162,000 | Para 46 below |
| 2009-10 | Settlement with Contracting Out LLP | 243,550* | Para 47 below |
| 2009-10 | Settlement to Loughs Agency for river pollution | 500,000 | Para 22 of Volume 1 |
* The £243,500 payment was made up of a settlement figure of £200,000, interest of £13,550 and VAT of £30,000.
48. Senior Executives leaving NI Water have received settlements which have also been subject to confidentiality agreements, including Ms Katharine Bryan, the first Chief Executive of NI Water. While the 2008-09 NI Water accounts disclose a compensation for loss of office settlement of £162,000, the reason for her early departure is subject to a confidentiality clause which was approved by the Department.
49. Contracting Out LLP was paid £527,000 for work on the termination of the Steria Contract. This included a settlement payment of £200,000 in respect of a six per cent bonus clause. Contracting Out told this Committee that the confidentiality clause was required by NI Water, but NI Water subsequently breached the clause in e-mails sent to a newspaper.
50. NI Water made use of confidentiality clauses to keep embarrassing transactions secret. The Committee recommends that, as a point of principle, confidentiality agreements should not be used anywhere in the public sector. However, if in exceptional circumstances their use proves to be unavoidable, the Committee considers that these cases should be approved by the relevant departmental Accounting Officer and by DFP.
51. In order to ensure public accountability, the Committee requires full access to persons and papers relevant to its enquiries. The Committee requested from DRD copies of the IRT interview notes. The Department said that it was unable to release the papers following legal advice that this material was both sensitive and personal. Each interviewee had been advised by the IRT that the record of their interview would remain confidential. Consequently, DRD and DFP considered that any disclosure of the information within the papers "may facilitate an unwarranted invasion of privacy". Both the Department and DFP were concerned that disclosure of such information might harm the conduct of future investigations through discouraging open and candid provision of information.
52. The C&AG sought access to the papers from DRD using his statutory powers, but DRD could not provide them as they were held by Deloitte who initially refused to release them. The contract had given Deloitte ownership and retention rights over all supporting documentation. Only after court action to retrieve the papers was threatened were they finally released and examined by NIAO as part of their procurement review.
53. The Committee is appalled that DRD agreed to the transfer of ownership of supporting papers to a publicly funded report to a private sector consultancy firm. This flies in the face of transparency. The presumption must be that public officials will give open and honest disclosure to departmental enquiries and investigations without the cover of a promise of confidentiality. The Committee also considers that public bodies must retain ownership and access to all evidence supporting investigations they have commissioned.
54. The Committee recommends that DFP reviews the use of confidentiality undertakings given to interviewees, sets out the circumstances where they should be used and issues appropriate guidance. The Committee expects this guidance to be principle based, requiring all public officials to follow and apply, at all times, the principles of honesty, openness, integrity and accountability.
55. The Committee strongly recommends that DFP issues clear guidance to all departments that any contracts, for the purpose of an inquiry or investigation, should provide the sponsor with ownership of the contractor's supporting documentation and the C&AG with full access to these papers.
56. Accounting Officers are well aware from guidance issued to them on their appointment that, except for situations in which a ministerial direction is sought and obtained, they and they alone are accountable for the actions of their departments to this Committee. The Committee should not have to remind any permanent secretary of this principle. When the Committee questioned Mr Priestly's decision to approve the appointment of the Chair as acting Chief Executive, he said that this step had been approved by the Minister. It was only when pressed on the point that he acknowledged that this had been his recommendation. This indicated a clear abdication by the Accounting Officer of his personal responsibility.
57. Managing Public Money Northern Ireland[16] requires witnesses at this Committee to give clear, accurate and complete evidence. Mr MacKenzie made great play of the fact that the contract with Contracting Out LLP was on the basis of a six per cent bonus which could have resulted in a payment of £1.4 million. He failed to mention, however, that NI Water had already[17] reached a settlement with Contracting Out LLP for £200,000 (plus VAT and interest) which bought out any potential bonus. Mr MacKenzie's answers on this matter failed to meet the standard required by the Committee.
58. In assessing the independence of the members of the IRT, the Committee questioned Mr MacKenzie about the nature of his relationship with Mr Dixon. Mr MacKenzie initially told the Committee that he was a business acquaintance, "no more than that". When an email from Mr MacKenzie to Mr Dixon was produced, which stated "I need help from my friends at the minute", Mr MacKenzie revised the description of this relationship, stating "he is a good friend, in the sense that he is a business acquaintance". The Committee was not convinced of the veracity of Mr MacKenzie's answers in this regard.
59. The previous Public Accounts Committee's 2002 report on the Northern Ireland Tourist Board[18] was quite clear on the quality of evidence it required from witnesses. It said that, "the blunt message that we have for any Accounting Officer who is tempted not to answer our questions fully is that we will insist on further investigation by the C&AG and exercise our full powers to call for papers and additional witnesses until we are satisfied that all the relevant facts have been revealed." This Committee remains of this view and considers that it is entirely appropriate to repeat the message.
60. The Committee recommends that all witnesses to this Committee must not only answer all questions put to them accurately, but also should not omit relevant and important facts. This Committee should not have to seek to draw out this information through cross examination. Only by receiving open, honest and full responses can this Committee make effective recommendations that help to improve the way the public sector serves the people of Northern Ireland.
61. Between September 2009 and June 2010, NI Water Internal Audit produced three reports on procurement irregularities. These reports identified extensive non-compliance with procurement rules and regulations in the procurement of goods and services[19]. The Committee subsequently requested, and the C&AG agreed, that NIAO carry out an examination of the procurement failures on goods and services in NI Water which had been highlighted in the Internal Audit reports. One of the key issues which the Committee was keen to determine was the extent to which the procurement failures pre-dated the inception of NI Water. From its review, NIAO identified £45.9 million in 75 procurement failures over the period 1 December 2005 to 31 August 2010, 41 (£14.8 million) of which originated in Water Service.
62. The C&AG's review has confirmed that there were serious failings in procurement procedures in NI Water. These include:
63. EU Utilities Procurement Regulations permit non-competitive contracts (Single Tender Action contracts) when the contractor is the sole supplier of certain goods and services. There was scant evidence that STAs were awarded to sole suppliers. NI Water's own internal rules state that all STAs over £250,000 require approval by the Department and any STAs under £250,000 require Chief Executive approval. Again, there was no evidence that appropriate approvals had been sought for those STAs identified by Internal Audit.
64. The failure of NI Water to adhere to these basic rules is inexcusable; they are there for good reason, namely:
65. As a direct result of STA abuse, suppliers have been prevented from bidding for NI Water contracts. If NI Water is to retrieve this situation and restore the confidence of potential suppliers, it will have to clearly demonstrate that there are no favoured suppliers and that all firms operate on a level playing field.
66. Inappropriate use of STAs is a problem which reaches beyond NI Water and into the wider public sector. The Committee welcomes the new substantive guidance on STAs[20] issued by DFP in June 2010. It is a concern that this guidance on the interpretation of procurement regulations was issued four years after the regulations were introduced[21]. It should not have taken a Committee hearing on this matter to prompt the circulation of relevant guidance.
67. To improve transparency and accountability in the use of STAs the Committee recommends that each departmental Accounting Officer should provide a statement of non-competitive contracts to both the relevant statutory Committee and to the C&AG on an annual basis. These statements should set out details of the subject or purpose of the contract, its value and the reasons for not having a competitive process.
68. One of the most worrying audit findings was that a contractor was asked to keep his invoices below £20,000 so that these invoices would not be brought to senior management for approval. Internal Audit investigated this case as a potential fraud. While no fraud was found, Internal Audit concluded that there was a deliberate attempt to circumvent financial delegations. Given this conclusion, the Committee was astonished to learn that no disciplinary action was taken. The C&AG has concerns over how this potential fraud was investigated and has therefore decided to report further on this.
69. The Committee recommends that there is a root and branch overhaul of the procurement function in the NI public sector to prevent the circumvention of financial controls and ensure transparency and value for money.
70. It is clear that there was a combination of factors which led to the procurement failures, including:
71. One of the reasons advanced for the failure to obtain proper approvals for contracts was that this would have caused significant delays. There are indications that managers at all levels broke the rules, in what they regarded to be the best interests of NI Water, to speed up the process when appropriate authorisation would have caused significant delays.
72. The Committee wants to be very clear on this matter. It is never acceptable to breach the rules to get things done, simply because forward planning was inadequate. Also, there are already well established procedures to deal with emergency situations. The Committee does not and will not condone breaking the rules to get the job done quickly.
73. Any well run organisation, whether it is in the private, public or voluntary sector, will have a clear set of ground rules setting out who is responsible for authorising expenditure. Such basic controls were not in place when the company was created. NI Water had simply rolled forward the inadequate delegated limits which were in place in Water Service to the new company. These controls, which were not reviewed or revised for a further 12 months, were recorded on NI Water's intranet, and were not sufficiently communicated to staff. It was all the more important that these ground rules should have been properly communicated, given the high turnover of staff and the widespread use of consultants and temporary contract staff.
74. NI Water's central Procurement Unit, which should have been championing best practice, did not itself apply basic financial controls. For example, it was:
75. Board members made the point that the procurement problems could have been addressed sooner had an electronic procurement system for goods and services been introduced when originally planned. The Committee considers that, while the electronic system may have addressed many of the problems in the procurement of goods and supplies earlier (as it would not have permitted transactions to proceed without the proper authorisation in place), this was no excuse for not having alternative procedures and systems for controlling and authorising contracts.
99. Many of the procurement problems arose in 2006-07, the final year of Water Service, as the body was preparing to move to GoCo status. 273 staff had opted to remain in the NI Civil Service rather than move to NI Water. This represented almost 14% of the workforce. To address both the need for expertise in the development and implementation of business transformation programme and the staff shortfall, Water Service appointed consultants and used temporary contract staff. This same practice was carried forward into NI Water.
76. The Committee recognises that the use of consultants and temporary contract staff was necessary to manage the short-term staffing problems. However, in the three years up to 2009-2010, NI Water spent over £42 million on consultants and temporary staff. This level of expenditure over such a prolonged period is astonishing.
77. The procurement failings within NI Water have raised concerns over the extensive and inappropriate use of consultants. For example, Water Service entered into an agreement with a specialist recruitment company for a consultant to lead a transition project. Following the establishment of NI Water, this same consultant recommended and employed at least three temporary staff from his own firm. In one of these cases there was the almost farcical situation where the consultant signed the contract schedule with his own company, acting as the NI Water Client Representative. It seems to the Committee that it must have been difficult to tell who was an employee and who was a consultant.
78. Consultancy appointments should have been time-bound. Instead, we have seen instances where, not only were consultants retained for up to four years, but also, in some cases, were themselves signing irregular contract extensions. Furthermore, there should have been a planned transfer of knowledge and expertise from consultants to NI Water staff. The Committee raised a similar issue in a previous report[22].
79. The use of consultants is also an expensive option which should not be seen as a long-term solution for any public sector organisation. The Department told the Committee that NI Water could have saved over £4 million between 2007-08 and 2009-2010 by employing full-time staff rather than using temporary contract staff.
80. Between April 2007 and September 2009, various internal and external reviews were carried out on procurement in NI Water. All of these failed to identify the extent of the procurement problems.
81. From the formation of NI Water, it is evident that Internal Audit had serious concerns about the overall control environment within NI Water. However, Internal Audit was asked not to carry out any procurement audit in 2008-09, as new processes were being put in place. This was approved by the Board. As a result, expenditure of goods and services, by its nature high risk, was excluded from scrutiny for over 12 months in an organisation going through a process of transition. This Committee believes that this was a serious error in judgement by all involved.
82. Furthermore, given the widespread use of consultants and temporary staff, particularly since the last year of Water Service in 2006-07, those charged with governance, and in particular the company's audit committee, failed to adequately identify and address this area of risk. As a direct result, this risk was not given the necessary weight in the consideration of the internal audit programmes.
83. Ironically, when Internal Audit did eventually carry out a review of procurement, it did identify weaknesses in the procurement process but failed to recognise the significance of these problems. Internal Audit identified 29 unapproved contract extensions, but failed to realise that these were potential breaches of procurement regulations.
84. At the evidence session, the Committee was told that the internal audit approach involved a minimal level of testing and that more in-depth substantive work would only take place if Internal Audit was aware of a particular issue. This approach is flawed as the low level of testing increases the risk that Internal Audit may not identify significant failings in the systems under review.
85. The Committee recommends that DFP considers the methodology employed by internal audit in the public sector, which should retain a risk-based approach but introduce an increased level of detailed testing.
86. The Committee recommended in its February 2009 report on the legal practitioner fraud[23] that internal audit, throughout the health sector, should give sufficient weight to the audit of contracts. Clearly this is a significant issue throughout the public sector. The Committee therefore recommends that contract audit is given greater prominence in the audit programmes of all government departments and NDPBs.
87. NI Water is one of eight accredited CoPEs in Northern Ireland's public sector[24]. Such accreditation[25] is intended to ensure that there is a professional influence on all procurement activity in order to maximise value for money and confirm compliance with EU and UK legislation. The most recent accreditation exercise was carried out by PwC in 2009. In this review, all CoPEs, including NI Water, achieved the highest possible rating - that is "exemplar" status.
88. The Committee questions the value of an accreditation process which fails to detect such fundamental procurement problems. The Committee is therefore greatly concerned, not just with the assessment of NI Water, but the wider assessments of CoPEs across the public sector.
89. This is not the first time that this Committee has expressed concerns over CoPE status[26]. Two years ago the Committee recommended that, "CoPEs which demonstrate persistent poor practice should have their status removed, if the concept of a "Centre of Procurement Expertise" is to mean anything." The Committee remains unconvinced that NI Water should have ever received CoPE status on the basis of the evidence provided to this Committee.
90. The Committee learned that, subsequent to our evidence session, a "gateway-type" review was carried out to determine whether NI Water should retain CoPE status[27]. Although the review found no evidence to justify removal of the CoPE status, it considered that the current process for the accreditation of CoPEs was no longer sufficiently robust. The Procurement Board has asked Central Procurement Directorate to review the CoPE assessment methodology. This decision is long overdue.
91. It is not good enough for the CoPE accreditation process just to consider whether proper procedures existed. There should be testing to ensure that the procedures are applied in practice. The Committee recommends that this issue is taken into account in the ongoing review of the CoPE assessment methodology.
92. The external review of CoPE status, including NI Water, was carried out by PricewaterhouseCoopers (PWC). This appointment was made despite PwC having received £27.1 million in fees between March 2006 and August 2010 from Water Service and NI Water (including £2.2 million from contracts which were improperly authorised STAs). PwC had also carried out a Strategic Review of NI Water Procurement in 2007. In light of these clear conflicts of interest, the Committee was surprised that PwC, in applying its own ethical standards, bid for this assignment.
93. The Treasury Officer of Accounts was unable to explain why Central Procurement Directorate (CPD) would award work to PwC in these circumstances. It is no excuse that CPD was not aware of the conflict; CPD should have completed its own checks. Such an exercise would have excluded PwC from the bidding.
94. The Committee recommends that, before appointing consultants to conduct reviews or investigations, CPD should check with departments and confirm that the preferred bidder does not have a potential conflict of interest.
95. Under the Water Licence (Condition F1) NI Water must ensure effective and fair competitive tendering and comply with relevant procurement legislation. NI Water must submit a Procurement Plan to the Regulator setting out how it intends to fulfil these obligations. Each year, it must also submit a report on its procurement activities setting out the extent of compliance with the plan. This report is reviewed by an appointed Reporter who, in turn, submits his findings to the Northern Ireland Authority for Utility Regulation (the Regulator). However, neither the compliance report nor the Reporter's review raised any issues of note in the procurement of goods and services in NI Water.
96. The Regulator told the Committee that, in such reports, a balance must be struck between providing his Office with sufficient assurance while also ensuring that the NI Water management and DRD take responsibility for putting in place robust operational processes for procurement activity across NI Water. He considered that ensuring compliance with procurement processes was primarily the responsibility of management and would expect any areas of past non-compliance to be highlighted and addressed as a consequence of the company's normal audit processes.
97. The procurement failures have not affected the clean audit opinion provided to NI Water by its external auditors. As a limited company, the external auditors of NI Water are not, and were not, required to provide an opinion on whether its spending is in line with the relevant rules and regulations (the regularity[28] opinion). This is a serious omission, as bodies largely funded from the public purse need to be audited to a higher standard than those set for private companies.
98. The Committee is extremely disappointed to learn that, despite ongoing internal and external audits, the development of procurement plans and the production of annual reports on procurement compliance, none of these reviews identified the fundamental procurement failings within NI Water.
99. The Committee recommends that DFP ensures that, in future, the external auditors of NI Water and any other arm's-length bodies constituted as companies not audited by the C&AG, should be required to provide an opinion on the regularity of income and expenditure.
100. NI Water's governance arrangements were designed in 2007 on the basis that the organisation would be a sustainable self-financing commercial company[29] operating under company law[30]. DRD's Accounting Officer holds ultimate responsibility for the Department's 100 per cent shareholding in NI Water. Within DRD a Shareholder Unit was established as the prime mechanism by which the Department was to manage its shareholding interest in NI Water. NI Water's Board, appointed by the Minister and composed of executive and non-executive members, was delegated the responsibility for the company's operations, delivery of the approved Strategic Business Plan and compliance with relevant legislation and regulatory requirements.
101. DRD put in place a standard governance model for a GoCo. However, the circumstances in which NI Water operated had significantly changed since the framework was designed. The governance model assumed that NI Water would be financed through the payment of domestic water charges. In April 2007 the Secretary of State postponed the introduction of water charges pending restoration of devolution. Since the restoration of devolution in May 2007, the Executive has deferred the introduction of the proposed domestic charges for water. NI Water's main source of income therefore continues to be the DRD subsidy which amounts to seventy-five per cent of its revenue income.
102. In January 2009, following the Executive's decision to further defer domestic water charges, NI Water was reclassified by the Office of National Statistics[31] as a Non Departmental Public Body (NDPB) for public expenditure purposes with effect from the 2008-09 financial year. Reclassification was on the basis that an insufficient amount of NI Water's income was derived from charges for it to be considered self-financing and therefore a Public Corporation. The advice DRD received from DFP was that this would have no impact on the governance arrangements for NI Water.
103. The Committee considers that the governance arrangements established by DRD for NI Water represented the worst of all possible worlds – NI Water was not a fully-fledged commercial organisation subject to the usual market disciplines, nor was it a conventional public body operating under tried and tested public sector rules and procedures.
104. In addition to the requirements of companies' legislation, the governance framework for NI Water is set out in two key documents:
105. The March 2007 Governance Letter describes a much looser degree of oversight than would have been the case had NI Water been regarded as an NDPB for accountability purposes. For example, the sponsoring department of an NDPB is required[32] to "periodically carry out a risk assessment of the NDPB's activities to inform the sponsor Department's oversight". NDPB status would also have provided for greater departmental oversight of the internal audit function.
106. The Governance Letter explicitly states that the company need not comply with the key principles for handling public resources set out in the Government Accounting Northern Ireland[33] manual. The Governance Letter provides, for example, for only limited audit information to be provided by NI Water to DRD as of right and is also completely silent on the access rights of the C&AG. Moreover, the Governance Letter does not set out the rights of the Department and the circumstances in which it could intervene in the affairs of NI Water.
107. The Governance Letter does, however, allow for the governance arrangements to be revisited in the event of a material change to the business. The Committee's view is that that the decision to defer the introduction of water charges was a material change which ought to have been reflected in revised governance arrangements. It is astonishing that this did not happen. The Committee considers that the Governance Letter was completely deficient in setting out proper oversight arrangements for NI Water.
108. The Accounting Officer told the Committee that he decided to stiffen governance arrangements in May 2008. These new governance arrangements required NI Water to provide the Department with more audit information including, for the first time, access to internal audit reports although these were not made available until August 2008. These steps to tighten departmental oversight appear to have been too little too late.
109. The Department told the Committee that, as a result of reclassification, there was a need to carry out closer monitoring of NI Water. DRD therefore introduced what it considered to be stricter governance arrangements, including the appointment of the new Chief Executive as Accounting Officer (in September 2009, nine months after re-classification). DRD accepted that this appointment appeared to take a long time, but told the Committee that there was a great deal of uncertainty around NDPB status and that a number of complex issues had to be worked through. A key point for the Committee is that DRD should not have put the Accounting Officer appointment on hold until the issue of NDPB status was worked through.
110. The NI Water Board had concerns about the appropriateness of the appointment of its Chief Executive (who was also a Board member) as an Accounting Officer in September 2009. These concerns centred around the Board's view that there was a conflict between the responsibilities[34] of an Accounting Officer, and the requirement under the Licence that the directors act independently of the shareholder and exclusively in the interests of the company[35]. However valid the Board's concerns may have been, this contradiction is yet a further example of the confusion and ambiguity in the governance arrangements established for NI Water by DRD.
111. The Board accepted[36] the Chief Executive's appointment as an Accounting Officer on the understanding that his duties as a Board member take precedence in legal terms. However, while acknowledging the Board's concerns, the Department's response[37] failed to settle the matter definitively, merely stating that to avoid potential conflict there was a need for ongoing co-operation between the Chief Executive, the Board and the Department. This fudge on the part of the Permanent Secretary had serious consequences for NI Water, as the Board subsequently came to consider that the understanding which gave precedence to the Board member role had been breached. The Committee notes that DFP guidance[38] requires that a subsidiary Accounting Officer notifies the sponsoring Department of any significant problem in a timely fashion.
112. It is entirely appropriate that the Chief Executive was appointed as NI Water's Accounting Officer given that DFP guidance[39] requires that an Accounting Officer is appointed to all significant arm's-length bodies. However, it was entirely unsatisfactory that the Board's concerns about this appointment, although acknowledged, were never properly resolved.
113. The letter appointing the Chief Executive as Accounting Officer[40] requires him to adhere to the principles outlined in Managing Public Money, Northern Ireland (MPMNI). The Committee has already established that the NI Water Governance Letter expressly exempted NI Water from the requirement to implement MPMNI's predecessor GANI. This contradiction highlights the confusing nature of the governance arrangements that DRD and DFP had drawn up.
114. The governance arrangements established for NI Water were inadequate for a body whose funding derived mainly from public resources. The circumstances in which NI Water operated were clearly substantially different from those envisaged when its governance arrangements were devised. This should have resulted in a fundamental rethink and redesign of the governance framework rather than tinkering at the margins.
115. In its January 2008 report[41] on "Management, Governance and Delivery" the Independent Water Review Panel stated that the governance system needed "positive leadership" and highlighted that "it must be clear to all concerned who is accountable to whom and for what". The Committee is of the view that this remains a fundamental problem for DRD, one which it needs to address.
116. DRD announced a review of overall governance arrangements in NI Water on 30 June 2010. The Committee considers that it is now well past time for the governance arrangements to be revised to deliver the level of oversight expected of a public body delivering a service of fundamental importance to the people of Northern Ireland.
117. The Committee recommends that a new governance agreement in the form of a Management Statement/Financial Memorandum should be put in place between DRD and NI Water for as long as NI Water continues to receive large amounts of public funding. This would provide the degree of oversight normally expected between a sponsoring department and an NDPB. The Committee is aware that such documents often take an inordinately long time to prepare; therefore DRD should work with DFP to fast track this process for NI Water.
118. The Committee recommends that DRD require NI Water to immediately implement, in full, all DFP guidance on the management of public money which is applicable to public bodies in Northern Ireland.
119. Although it had drawn up inadequate governance arrangements, the Department was still closely involved in oversight of NI Water. Despite this, the Committee considers that the outworking of departmental oversight was clearly insufficient.
120. Concerns have been expressed regarding the role and skills of the Shareholder Unit within DRD. In his meeting with the IRT, the Regulator advised that DRD did not understand the company properly, that the Shareholder role in particular was not sufficiently rigorous and that staff in the Shareholder Unit did not have appropriate skills. The C&AG has informed the Committee[42] that the IRT was told by an NI Water Executive that DRD would have benefited from setting up the Shareholder Unit on a shadow basis (the shadow year of the Company was 2006-07).
121. The Accounting Officer told the Committee that DRD had been denied access to the company's internal audit reports; nor did it receive assurance statements on a timely basis. It was not until May 2008 that the Accounting Officer wrote to the Chair of NI Water requiring access to all Internal Audit reports, Audit Committee minutes, the external auditor's management letter and details of the Internal Audit programme, as well as other key documentation relating to risk management in NI Water. The Accounting Officer told the Committee that he had met with resistance from the Board in accessing this information. For example, internal audit reports were not made available to the Shareholder Unit until August 2008 and then only on signing a confidentiality agreement which effectively prevented the C&AG from accessing these reports. This is despite the fact that two months earlier, Mr Priestly arranged with the former C&AG, John Dowdall, to meet with the Board to reinforce the arguments he was making, that is that public money was involved and that expenditure of public funds was subject to review by the Audit Office.
122. DRD assured the Committee that "at no time was a "red flag" raised to the Department" on procurement issues. However, significant weaknesses in internal control in other areas of the organisation were being identified by internal audit. As DRD did not access internal audit reports until August 2008 it was not in a position to challenge the extensive number of internal audit reports which received a "red" rating - the most severe level of control weakness. Even when access was gained, the Department failed to take sufficient action.
123. The Department did have access, although not on a timely basis, to the annual internal audit opinion which is the main source of advice to the NI Water Board and Executives on the control environment. This has remained at Category 4 "requires immediate improvement" from 2007-08 to 2009-2010. Category 4 is the lowest level of assurance possible, short of the extremely rare disclaimer opinion, and indicates that action needs to taken in a short time frame to address material risks and issues. However, the Board and Executive Team were slow to address the significant number of high priority actions, and DRD did not ensure that these were addressed.
124. The Committee is appalled that the Department had put itself in the position of being unable to access key audit information on its own arm's-length body. Had NI Water been treated as an NDPB for accountability purposes, the Department could have secured access to such information as well as access to carry out its own independent reviews of internal audit and the right to be consulted on the competence and qualifications of the Head of Internal Audit.
125. The Committee notes that the former Chief Executive, who resigned in May 2008, had been appointed as an Accounting Officer. The Department failed to appoint her successor, the Interim Chief Executive (Chris Mellor), as an Accounting Officer. Mr MacKenzie was appointed Accounting Officer in September 2009. An Accounting Officer should certainly have been appointed immediately upon reclassification as an NDPB in January 2009. Indeed, the Committee considers that the appointment should have been made prior to reclassification given that NI Water was receiving significant public funds from the outset.
126. In June 2009, as part of its audit of the DRD Resource Account, NIAO requested sight of NI Water internal audit reports. The NI Water Board decided[43] that it would not authorise the release of these reports to NIAO. DRD told NIAO that it was unable to grant it access to the reports it held as the Acting Director of the Shareholder Unit had signed a confidentiality agreement with NI Water's internal auditors, Ernst and Young. The Department told the Committee that these arrangements were based on the presumption that NI Water would be a GoCo and it had not been anticipated that Internal Audit reports would have been required by NIAO. This action was wrong regardless of the status of NI Water. In order to access these reports NIAO was asked to sign an agreement which it considered contained unacceptably restrictive clauses. NIAO did not obtain unrestricted access to Internal Audit Reports until April 2010, following the intervention of the DRD Accounting Officer.
127. The Committee is appalled that the Department could only gain access to Internal Audit reports by signing a restrictive agreement. The Committee finds it totally unacceptable for DRD to have signed this agreement as it effectively limited the C&AG's access rights and so, yet again, put key documentation outside the reach of NIAO (see paragraph 51).
128. The Committee's April 2008 Report[44] on Good Governance, recommended that "Departments should always be represented at Audit Committees of Arm's-Length Bodies". This recommendation was accepted by DFP in July 2008. Despite this, DRD was not represented on NI Water's Audit Committee until March 2010. The Committee is astonished that the Department chose to ignore this recommendation on the basis that it was not appropriate under the GoCo arrangements set out in the Governance Letter.
129. In November 2007 at an evidence session on the Use of Consultants[45] the Committee was told that DFP guidance on the use of consultants did not apply to NI Water. In its report, the Committee recommended that DFP guidance should apply in full on the grounds that "DRD completely owns the company and the Northern Ireland taxpayers pick up the bill for any failure to ensure value for money in NI Water."
130. The Department did not accept the Committee's recommendation. Instead, it undertook through its monitoring of governance arrangements and through the quarterly Shareholder Meetings, to "put in place a specific mechanism to monitor NI Water's use of external management consultants..". It is disgraceful that, having ignored the Committee's recommendation, the Department has clearly failed to implement effective alternative arrangements.
131. The Committee also recommended in its report on the Use of Consultants that any decisions to procure without competitive tendering, above a minimal threshold, must be reported to the Audit Committee. If this had happened in NI Water the procurement breaches might have been identified much earlier. The Committee was also of the view that non-competitive tendering should be authorised by Accounting Officers who would be aware that they might be required to explain such decisions to this Committee. This reinforces the point that a public body of the scale of NI Water should not have been permitted to function without its Chief Executive fulfilling the role of Accounting Officer.
132. In August 2010 DFP issued the closing report[46] of the Arm's-Length Review Team. The Team had been established in September 2008 in response to the recommendations of this Committee's report on Good Governance, particularly as a result of governance failings in the Northern Ireland Events Company. The Team worked with a number of Departments to review their sponsorship arrangements with their arm's-length bodies. The Committee notes that DRD is not listed as having completed such a review.
133. The Committee recommends that, as a priority, DRD conducts a fundamental review of governance arrangements in all its arm's-length bodies. This review should revisit and reinforce the recommendations of the Committee's report on Good Governance.
134. The increased use of consultants and temporary contract staff was as a result, at least in part, of the 273 Water Service employees choosing to remain civil servants rather than transfer to NI Water on its establishment. Better human resource planning and change management in the transition between Water Service and NI Water could well have avoided the increased use of consultants and dependence on temporary contract staff which has proved to be so costly to NI Water.
135. Given that many of procurement problems originated within Water Service, the Committee considers that the failure to identify this as an issue for NI Water points to a failure in due diligence[47] leading up to the establishment of the company.
136. Given the ongoing dynamic environment in the public sector, there is a clear need for due diligence in the transfer of functions from one organisation to another. The Committee recommends that DFP considers the adequacy of guidance on due diligence and on human resource planning. Guidance should aim to minimise the risks associated with change management, particularly the risk of developing an over-reliance on the use of consultants.
137. The internal audit of Water Service had been undertaken by DRD's own Internal Audit Unit. Initially, the internal audit function in NI Water was contracted out to a private sector company. Ernst & Young were appointed under a three year contract in April 2007. During the contracted-out period NI Water built an in-house internal audit capability, appointing a Head of Internal Audit designate from January 2010, the post being made substantive from April 2010.
138. Best practice guidance on public sector internal audit emphasises that audit planning should be based on a documented assessment of risk. In addition, audit coverage should cover both the extent to which management controls address the risks identified and how well they operate in practice. The guidance emphasises that a key consideration in assessing risk is the extent of change taking place in an organisation, as changing processes can be inherently more risky than established and known processes.
139. The internal contract with Ernst & Young provided for 350 man days per year[48]. This was based on the number of audit days provided by DRD Internal Audit to Water Service. However, the risks within NI Water during the period of transformation were considerably higher and justified greater audit coverage. Indeed, the Committee notes that the Ernst & Young partner responsible for NI Water internal audit told the IRT that this level of coverage was "low/insufficient" given the transitional changes and the scale of transformation to be undertaken. This strongly suggests that NI Water management and its Board had demonstrated a poor understanding of the significant risks the organisation faced in failing to provide for an appropriate level of audit coverage. This is also demonstrated by management's decision, agreed by the Board, not to conduct procurement audits in 2008-09. DRD, who told the Committee it had influence over the audit plan, should have ensured adequate audit coverage was in place.
140. The Committee recommends that departments, as well as board members and senior managers of public companies, should ensure that the degree of internal audit coverage corresponds with the level of risk as determined by a comprehensive risk assessment. This is particularly crucial in circumstances where the audited body is engaged in significant organisational change.
141. From the outset, internal audit identified significant audit concerns; an extensive number of internal audit reports, particularly in the first year of NI Water's operation, received a "red" rating - the most severe level of control weakness. The annual internal audit opinion has remained at Category 4 "requires immediate improvement" from 2007-08 to 2009-2010 based, in the main, on concerns about data quality and management information. A Category 4 rating indicates that action needs to be taken in a short timeframe to address material risks and issues. It is a matter of grave concern that NI Water has, so far, failed to improve this unacceptably poor assurance rating.
142. The recognised procedure for handling internal audit recommendations is to allocate responsibility for action to individual managers or directors and to set a challenging timetable for implementation. Progress is monitored by senior management and overseen by the Audit Committee. The Committee recommends that, for this process to work effectively, Accounting Officers must ensure that there are appropriate sanctions for those individuals who consistently fail to deliver.
143. It is a matter of concern that, from the outset, the Department failed to ensure that non-executives were properly represented on the Board, in line with best practice. When the shadow board was appointed in 2006 and its members were appointed to the Board in 2007, only four non-executives (including the Chair) were in post, despite DRD having identified the optimum number of non-executives as five. When one of the remaining non-executives resigned in July 2007, she was not replaced. Indeed the Board was so short of non-executive members that the Chair, on three occasions[49] when attending the Audit Committee in his capacity as interim Chief Executive, was included in the non-executive count in forming a quorum.
144. It was not until July 2008, when two new members were appointed, that the Board had a full complement of non-executives. The Accounting Officer explained that this delay was due to a decision to await the outcome of the Hillyard Report[50] of January 2008, and to the time required to go through the appointment process. While the Committee accepts this was a valid consideration, the Department should have taken steps to address the pressures on non-executive members for example, by appointing interim board members. DRD should have realised that overloading non-executive board members in this way put at risk the successful operation of the Board.
145. In addition, the failure to appoint new non-executive board members meant that in the period July 2007 to July 2008 NI Water was not compliant with the Combined Code on Corporate Governance[51] which requires that non-executives should form at least half the board. The failure of a publicly owned company to adhere to the most basic principles of good corporate governance as set out in the Combined Code is totally unacceptable and must never be permitted by any Accounting Officer.
146. In the PAC evidence session of 29 May 2008[52] Mr Priestly had said that "I have taken steps to reinforce my role as the departmental accounting officer and to seek further assurances from the company that it is spending public money wisely and that it has in place proper systems of internal control and risk management". Despite this assurance, only one day later, the Accounting Officer approved the appointment of the NI Water Chair as interim Chief Executive. The dual role continued until Mr MacKenzie took up the position on 27 July 2009.
147. The 2006 Combined Code, which sets out standards of good governance for Boards, clearly states: "The roles of chairman and chief executive should not be exercised by the same individual". The Accounting Officer told the Committee "that is not best practice, but it is not unusual for a short period in such circumstances." NIAO raised concerns about this appointment, but DRD dismissed these concerns stating that this was a short-term measure and that the appointment process would take six to nine months; in the end it took 14 months. In appointing the Chair as interim Chief Executive, the Board had, in effect, "lost" a further non-executive director, reducing the number available to two in June 2008 and to four between July 2008 and July 2009.
148. The separation of roles and responsibilities at the top of the organisation is fundamental to good governance. It is astonishing that the DRD Accounting Officer considered adherence to this basic principle to be optional.
149. The Committee recommends that all public bodies constituted as companies and subject to companies legislation must be required to adhere fully to the good governance requirements now set out in the UK Corporate Governance Code. It should fall to the departmental Accounting Officer to ensure that this happens.
150. The Board is responsible[53] for ensuring that there are effective management/internal controls and internal approval processes within NI Water and, crucially, that these are operating in practice (a summary of the responsibilities of Board Members is at Appendix 3). There is no doubt that this is far from an easy task in an organisation as large and complex as NI Water and this is reflected in the relatively high level of remuneration[54] provided.
151. In fulfilling their responsibilities, Board members can generally rely on receiving clear and accurate management information and on assurances provided by internal audit. The Committee considers that management information within NI Water was poor and that the internal audit of procurement was deficient. In this regard, the Board was badly let down by the management of NI Water.
152. However, these serious defects do not absolve the Board from its own responsibilities. The Board is required to hold management to account, and should call for any management information it considers appropriate on the basis of a thorough knowledge of the business. The Board, through the Audit Committee, also has a responsibility for directing and reviewing the work of internal audit.
153. There are a number of other important factors which increased the risks surrounding the procurement of goods and services in NI Water of which the Board should have been aware. These include:
154. Set against this, it was not unreasonable for the Board to take some assurance from the fact that neither auditors nor external assessors had raised concerns in relation to procurement.
155. The responsibilities of a Non-Executive Director of a public body are demanding, but the role is crucial in ensuring that such bodies properly manage public funds. What has happened in NI Water must not be allowed to deflect from the ability of public bodies to attract high calibre candidates to these positions.
156. The three-way relationship between a sponsoring department, the board of an arm's-length public body and its chief executive are complex and need to be handled with sensitivity by all involved. The role of the permanent secretary is central in ensuring that these relationships work.
157. The Committee recommends that departments ensure that non-executive directors are properly supported by all stakeholders in the governance model. Board members must receive accurate information from management, accurate independent assurance from auditors, and the support of the Department. However, Board members must recognise that they have a responsibility to challenge management, auditors and the information put before them.
| Date | Event | Source |
|---|---|---|
| 3 April 2006 | Shadow Board was appointed comprising as Non Executive Director (NEDs) – Chris Mellor (Chair), Ruth Thompson, John Ballard and Rose Hynes and as Executive Directors – Katharine Bryan (CEO), Ronan Larkin (Finance & Regulation) and Phil Barker (Operations). DRD's submission to PAC gives 8 February as the date of Mr Mellor's appointment as Shadow Chair. | DRD submission of 2 August, Annex K and IRT report of 25 February 2010. DRD Submission of 2 August, Annex E |
| 20 March 2007 | All Shadow Board members appointed to Board of NIW. The direct rule Minister signs the 'governance letter' (addressed to the Chair) setting out how the relationship between the Board and the Shareholder will be conducted. The Board is delegated responsibility for the company's operations and for compliance with relevant legislation and regulatory requirements. The Board is responsible for complying with best practice standards of regularity and propriety in the use of public funds. It is also responsible for ensuring effective internal controls and internal approval processes are in place and operating effectively. | DRD submission of 2 August, Annex K DRD submission of 2 August, Flag K1 |
| April 2007 | Ernst and Young (E&Y) appointed internal auditors of NIW under a three year contract. Paul Priestly in evidence to the Committee stated that E&Y's contract was for two years. KPMG is the external auditor of NIW. | IRT Report of 25 February 2010. Official Report (Hansard) of 1 July Evidence Session |
| 1 April 2007 | The Water Service, an agency of DRD became Northern Ireland Water Limited a Government owned company (GoCo) subject to company's legislation, appointed under the Water and Sewerage Services (NI) Order 2006 as the provider of water and sewerage services in Northern Ireland (NI). NI Secretary of State postpones introduction of domestic water charging pending restoration of devolution | IRT Report of 25 February 2010 IRT Report of 25 February 2010 |
| 10 April 2007 | Consultancy services agreement (the Master Agreement) signed by Katharine Bryan (former Chief Executive of NIW) and Sue Holmes, of Contracting Out LLP for supply of consultancy services relating to major contracts. Ms Holmes had until 1 April 2007 been a member of Water Services' management board, with the title of PPP Director. Ms Holmes had been on secondment to Water Service from the Strategic Investment Board (SIB). | DRD submission to the Public Accounts Committee (PAC), 2 August 2010 |
| 8 May 2007 | Devolution restored – NI Executive defers domestic water charges and agrees TOR for Independent Water Review. | IRT Report of 25 February 2010 |
| June 2007 | Independent Water Review Panel established (IWRP). | IWRP Phase 1 report of 12 October 2007 |
| 19 July 2007 | Rose Hynes, NED and Audit Committee Chair resigns. John Ballard becomes Chair of Audit Committee. | IRT Report of 25 February 2010. Official Report (Hansard) of 1 July Evidence Session |
| September 2007 | NIW is due to provide mid-year Assurance Statement to DRD; this is not provided until April 2008. | Official Report (Hansard) of 1 July Evidence Session |
| 12 October 2007 | Independent Water Review Panel (IWRP *) Phase I report (also known as the Hillyard report) published. | IWRP website |
| 3 December 2007 | Paul Priestly is appointed Permanent Secretary of the Department for Regional Development. | Official Report (Hansard) of 1 July Evidence Session |
| 16 January 2008 | IWRP Phase 2 report (addressing governance of NIW) advises that NI Water should be retained until 2013 and recommends a greater oversight role for the Minister of Regional Development, increased local knowledge and experience at board level both within NI Water and the Utility Regulator, and enhanced powers and duties for the Consumer Council. | IWRP website |
| February 2008 | Minister launches Public Appointments process for new non-executive directors. It emerged that errors had been made in NIW's apportionment of costs between commercial and domestic users resulting in a shortfall in funding. Acting Director in Shareholder Unit signs 'hold harmless' agreement which prevents NIAO from accessing the NIW internal Audit reports produced by E&Y. | IRT report of 25 February 2010 DRD submission, 2 August, Annex J |
| March 2008 | Approval of Business Improvement Plan, the key transformation programme (also known as One Programme). | IRT Report of 25 February 2010 |
| 1 April 2008 | David Gilmour appointed Commercial director (2 year fixed term contract) | CEO's submission of 21 October 2010 |
| April 2008 | Investigation of the Cost Re-Apportionment Issue by the NI Authority for Utility Regulation (the Regulator) assisted by Grant Thornton. Mid-year assurance statement, which would normally have been expected by September or October 2007, came through. | IRT Report of 25 February 2010 |
| 8 May 2008 | Paul Priestly chairs his first quarterly shareholder meeting. | Official Report (Hansard) of 1 July Evidence Session |
| 22 May 2008 | Paul Priestly writes to NIW Chair (Chris Mellor) on the need for enhanced assurances from NIW while the company continues to receive the major part of its income from Departmental subsidy. This required:
|
DRD submission of 2 August, Flag K4 |
| 28 May 2008 | Katharine Bryan, the Chief Executive of NIW, resigns. NIW Accounts for 2008-09 disclose that she received compensation for loss of office of £162,000. | IRT Report of 25 February 2010 |
| 29 May 2009 | In evidence to the Committee Paul Priestly states "I have taken steps to reinforce my role as the departmental accounting officer and to seek....assurances from the company that it is spending public money wisely and that it has in place proper systems of internal control and risk management". | Official Report (Hansard) of 1 July Evidence Session |
| May 2008 | NIW expenditure on Contracting Out contract exceeds £250,000 threshold requiring DRD approval. | Official Report (Hansard) of 1 July Evidence Session |
| 1 June 2008 | Chris Mellor doubles up as Chair and Interim Chief Executive (to July 2009). The UK Corporate Governance Code (formerly the Combined Code) states this should not happen. The terms of the Water Licence (Condition F, paragraph 6A.5A (g)) calls on the company to have regard to the Combined Code. | IRT Report of 25 February 2010 NI Water Licence |
| 17 June 2008 | NIW Chair responds to Paul Priestly's letter of 22 May undertaking to deliver Assurance Statements on a timely basis. Other information requested was to be discussed by the Board at its next meeting. The Chair points out the need to take into consideration the terms of the Licence (Condition F, paragraphs 5A and 6A) to the effect that Board members should be able "to act independently of the parent company or controlling Shareholder and exclusively in the interests of the Appointee". | DRD submission of 2 August, Flag K4 |
| 24 June 2008 | John Dowdall (then C&AG) addresses NIW Board at request of Paul Priestly on public sector accountability. | DRD submission of 2 August, Flag K4 |
| 7 July 2008 | Two further Non-Executive Directors appointed: Don Price and Declan Gormley. The Commission for Public Appointments' audit of this appointment process raised concerns as to how DRD handled probity and conflicts of interest (concerns about the probity of one candidate, who passed the assessment but was not appointed, were expressed orally to the Minister, but were not properly recorded). | IRT Report of 25 February 2010. Official Report (Hansard) of 1 July Evidence Session |
| 11 July 2008 | DFP accepts the Committee's recommendation in the April 2008 report "Good Governance – Effective Relationships between Departments and their Arm's length Bodies" that departments should be represented on the audit committee of each of its arm's length bodies. DRD decides to implement this recommendation in the NI Transport Holding Company but not NIW. | Official Report (Hansard) of 1 July Evidence Session |
| 30 July 2008 | NIW Chair writes to Paul Priestly undertaking to ensure audit information requested his letter of 22 May 2008 would be provided in its final form or when approved by the Audit Committee. The Board's concern is said to be to ensure the Executive Team and the Board has the opportunity to fully understand such issues and take steps to manage and mitigate them. The Chair assured Mr Priestly that "significant or material audit issues will be brought to the Shareholders attention as soon as practical". | DRD submission of 2 August, Flag K7 |
| July 2008 | NIW appointed a Governance and Internal Audit Manager (Nicola Brennan, formerly of Ernst and Young) with the intention being to develop the in-house Internal Audit function within NIW. Ms Brennan become designate Head of Internal Audit in January 2010 and took up the substantive post on 1 April 2010. NIAO raises concerns about appointment of Chair as acting Chief Executive on the basis that the combination of roles "undermines the Board's independent oversight role". | IRT Report of 25 February 2010 NIAO Memorandum on Procurement and Governance in NIW, June 2010, Annex A |
| August 2008 | DRD first receives copies of NIW's internal audit reports despite requesting these on 22 May 2008. | IRT Report of 25 February 2010. Official Report (Hansard) of 1 July Evidence Session |
| September 2008 | Lian Patterson is appointed Senior Finance Director of DRD. | DRD submission of 2 August, Flag K4 |
| 27 October 2008 | The Office for National Statistics reclassifies NI Water as a Non Departmental Government Body. DFP Guidance was that this was for public expenditure purposes only and did not apply to governance. | DRD submission of 2 August, Flag I1 |
| 17 November 2008 | David Gilmour's post as Commercial Director made permanent | Chief Executive's submission of 21 October 2010 |
| 25 November 2008 | George Butler (Asset Management) appointed as an Executive Director. | IRT Report of 25 February 2010 |
| 28 November 2008 | Don Price becomes Chair of the NIW Audit Committee | IRT Report of 25 February 2010 |
| November 2008 | The Regulator outlined potential enforcement action against NIW in respect of cost re-apportionment issue. | IRT Report of 25 February 2010 |
| December 2008 | Phil Barker (Operations Director and Board member) resigns. | IRT Report of 25 February 2010 |
| January 2009 | Company formally notified of re-classification of NIW as an NDPB for public expenditure purposes with effect from 1 April 2008. | IRT Report of 25 February 2010 |
| February 2009 | Laurence MacKenzie interviewed for Chief Executive post. The panel consists of Paul Priestly, Chris Mellor and Ruth Thompson The Regulator accepts Legally Binding Undertakings from NIW to improve its Systems of Planning and Internal Control. | Chief Executive's submission of 21 October 2010. IRT Report of 25 February 2010 |
| 6 February 2009 | David Gilmour (NIW Director of Procurement) and Sue Holmes (Contracting Out LLP) sign Schedule 7 under the Master Agreement between the two parties. The agreement was to provide assistance in the termination of the Steria (formerly Xansa) billing contract. The fee agreed was a fixed price of £250,000 plus a bonus of 6% of cost recoveries made (over £3 million) as identified by Contracting Out. | NIAO Memorandum of 9 December 2010 |
| 1 April 2009 | Chris Mellor, Ruth Thompson & John Ballard re-appointed as NIW Board members. | IRT Report of 25 February 2010 |
| June 2009 | Submission of PC10 Business Plan to the Utility Regulator to secure funding for 2010-2013. DRD, in finalising its Resource Accounts, become aware of the full impact of the re-classification of NIW as an NDPB. NIAO requests sight of NIW Internal Audit Reports as part of audit of the DRD Resource Account. DRD was unable to grant access as it had signed a confidentiality agreement with E&Y. NIAO refused to sign a confidentiality agreement to obtain access to these reports from NIW and did not receive them until Paul Priestly intervened in April 2010. | IRT Report of 25 February 2010. IRT Report of 25 February 2010 NIAO Memorandum, June 2010 |
| 2 June 2009 | David Gilmour emails acting Chief Executive/Chair clarifying contract arrangements with Contracting Out and stating "there is no issue with procurement regulations". On this basis the Mr Mellor confirms on 5 June that he is content with the arrangements. | NIW Internal Audit Report of November 2009 |
| Early July 2009 | Termination of Customer Billing / Contact Centre Contract (Steria contract). | IRT Report of 25 February 2010 |
| 28 July 2009 | Laurence MacKenzie is appointed as NIW Chief Executive. [Chief Executive's submission to PAC of 21 October 2010 gives his start date as 27 July 2009] | Official Report (Hansard) of 1 July Evidence Session |
| 4 August 2009 | Executive Team Minutes record that Members will be asked to confirm that there were 'no similar cases [which required Board approval] of which the Board should be made aware. Members would be asked to confirm they were in compliance". (Minutes of 18 August meeting confirm assurance statements in writing will be required). | Executive Team Meeting Minutes, McGlone/Purvis submission to PAC |
| 10 August 2009 | Laurence MacKenzie receives an e-mail from David Gilmour (Director of Procurement) asking for approval a further 130 days' work for Contractor A at £775 a day. Mr MacKenzie considered that this did not represent good value for money. | Official Report (Hansard) of 1 July Evidence Session |
| 18 August 2009 | David Gilmour now described in Executive Team meeting minutes as Commercial Director. | Executive Team Meeting Minutes, Mr McGlone/Ms Purvis submission (FOI) |
| 28 August 2009 | NIW Board discusses the potential for conflict of roles between the Chief Executive as a Board member and as an Accounting Officer. The Chair notes that, based on current relationship with stakeholder, it is likely that any potential conflicts could be identified at an early stage and a way forward be agreed between the Company and the Shareholder. Going forward the Board agreed any conflicts should be dealt with on a case by case basis. | NIW Board minutes |
| September 2009 | Publication of the Regulator's draft PC10 determination for consultation. | IRT Report of 25 February 2010 |
| September 2009 | Internal Audit report on 'Contracts Compliance' highlights process issues with an overall rating of "Requires Moderate Improvement". Procurement Breaches are not identified although there is reference to 29 contracts running on ad-hoc extensions. This is considered a value for money issue. | D Gormley/C Mellor submission to PAC of 1 September 2010 |
| September 2009 | PwC's report on CoPE status awards NIW 'exemplar' status. | CoPE status report (DFP website) |
| September 2009 | Laurence MacKenzie raises concerns with Board over Contracting Out LLP contract. Board approves wider review of Contract Approvals. | D Gormley/C Mellor submission to PAC |
| 15 September 2009 | Laurence MacKenzie designated as NIW Accounting Officer by Mr Priestly. | DRD submission of 2 August, Annex K |
| 29 September 2009 | Laurence MacKenzie tells Board that he has received signed assurances from each member of the Executive Team that they were unaware of any material issues which had not been brought to the Board's attention or that required Shareholder approval. The Board noted NIAO's request for sight of all NIW internal audit reports. The release of internal audit reports to NIAO was not authorised. | IRT Report of 25 February 2010 and NIW Board minutes NIW Board minutes |
| October 2009 | First draft of Internal Audit review of Contracting Out LLP contract to Laurence MacKenzie. Contracting Out contract terminated following Internal Audit report. Contracting Out in its submission to the Committee gives the date of termination as 2 November 2010. Director of Procurement/Commercial Director suspended and in January 2010 made redundant. He was reportedly paid £30,000 to leave NIW. The Chair, when interim Chief Executive, had been informed by Mr Gilmour that appropriate procurement procedures had been followed regarding Contractor A. This was incorrect and Mr MacKenzie had undertaken to follow up which led to the departure of Mr Gilmour. | NIW Internal Audit Report of November 2009 IRT Report of 25 February 2010 D Gormley/C Mellor submission. Ruth Thompson's interview with IRT, 2 February 2010 |
| 23 October 2009 | Paul Priestly approves settlement of £200,000 payment to Contracting Out in lieu of 6% bonus, approval is conditional upon a thorough investigation of these services. | NIAO Memorandum, 9 December 2010 |
| 27 October 2009 | Laurence MacKenzie brings to the Board the findings of Internal Audit's investigation into the procurement of Contractor A which breached the Company's Financial Authority Framework. The Board instruct him to conduct an Internal Audit Review. Chair of the Audit Committee advised that "the company's internal audit rating as at 30 September (2009) was the same as the previous year, however there was room for improvement". The Audit Committee minutes of 26th October 2009 noted that the key for improvement was for management to deliver on the action plans. | IRT Report of 25 February 2010 |
| 10 November 2009 | Initial Meeting with David Gilmour (Commercial Director) outlining proposed restructuring | Chief Executive's submission of 21 October 2010 |
| 12 November 2009 | Further meeting with David Gilmour to discuss options including potential redundancy | Chief Executive's submission of 21 October 2010 |
| 20 November 2009 | Agreement reached with David Gilmour for redundancy. A compromise agreement including a confidentiality clause was entered into. Payment made was 'in-line with the post-holder's contractual entitlement'. | Chief Executive's submission of 21 October 2010 |
| November 2009 | Final draft of Internal Audit report on Contracting Out LLP. The report finds that the absence of a contract period or value limit to the Master Agreement represents a potential breach of EU procurement legislation and Condition F1 of the licence. It was also a STA with a potential value over £250,000 which had not, as required under the financial delegations, been approved by the Shareholder. | NIW Internal Audit Report of November 2009 |
| 24 November 2009 | Board meeting considers PC10 draft determination. Laurence MacKenzie confirms his opinion that savings outlined to the Board were deliverable. | D Gormley/C Mellor submission and NIW Board minutes. |
| 1 December 2009 | At the request of the Director of Asset Management the Chair retrospectively approves a business case for a £20,000 contract awarded in February 2009 to Grontmij UK Ltd. The Chair is a non-executive director of Grontmij; his interest was declared in the Register of Interests. | DRD submission to PAC, 2 August 2010 |
| 4 December 2009 | Mark Ellesmere, NIW Company Secretary writes to Paul Priestly bringing to his attention the Board's concern that there was "the potential for conflict of interest between the two roles" of Accounting Officer and Board member. The Board had agreed that Laurence MacKenzie should accept the Accounting Officer appointment on the basis that: the appointment is not permanent; the proposed arrangement is not intended to undermine Laurence's role as Chief Executive or the role of the Board; that "compliance with Laurence's duties as a Director of the Company...will take precedence in legal terms over his obligations as Accounting Officer"; and that the appointment will have no material impact upon current governance arrangements. | DRD submission of 2 August, Flag K8 |
| 18 December 2009 | Paul Priestly replies to Mark Ellesmere acknowledging the Board's concerns about the potential for conflict of interest between the Accounting Officer role and the Laurence MacKenzie's role as director of the company. To avoid potential conflict "there will be a need for ongoing co-operation between Laurence, the Board and the Department as the need arises". Mr Priestly neither accepts nor rejects the conditions attached by the Board to Mr MacKenzie's appointment as AO. | DRD submission of 2 August, Flag K8 |
| 21 December 2009 | Letter from Contracting Out to NIW confirming £200,000 settlement is agreed, but the settlement does not proceed. | NIAO Memorandum, 9 December 2010 |
| 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 that remain outstanding. | IRT Report of 25 February 2010 |
| 30 December 2009 | Deloitte appointed via a mini competition (7 tenders received) for forensic accounting and expert witness services in relation to the Steria legal action. | NIAO Memorandum, 9 December 2010 |
| 1 January 2010 | David Gilmour leaves NI Water | CEO's submission of 21 October 2010 |
| 12 January 2010 | Working draft of the Contracts Approval Internal Audit made available to Laurence MacKenzie. | IRT Report of 25 February 2010 |
| 15 January 2010 | Laurence MacKenzie meets Peter Dixon (Group Chief Executive of Phoenix Energy Holdings) for coffee at 08.30 hours. Mr MacKenzie states they discussed mainly NI Water's price control process The draft Contracts Approval Internal Audit report is issued to the NIW Executive Committee and considered by them at a meeting with Laurence MacKenzie at 3pm. | DRD submission of 2 August, Annexes M4 and M6 and Chief Executive's submission of 21 October 2010. CEO's evidence to PAC and D Gormley/C Mellor submission |
| 18 January 2010 | Laurence MacKenzie emails a summary of the Contracts Approval Internal Audit to the Chair and the non-executive directors (at 09.29 hours). Mr MacKenzie advises Mr Priestly of the detail of the draft Contracts Approval Internal Audit report findings (at 09.31 providing the same summary as provided to non-executive directors). At 9.40am Mr MacKenzie tenders his resignation to the Chair with effect from 18 February 2010. Three reasons are given: ambiguity surrounding the price control process; differing views between him and the Board on future efficiencies; and the significant governance issues he had faced. In a subsequent email at 12.05 hours Laurence MacKenzie informs the Chair that the biggest issue for him is the corporate governance one, but he does not attribute his decision to lack of support from the Chair - "far from it". Laurence MacKenzie provides a copy of the draft internal audit report to the Chair at 12.50 hours. Declan Gormley emails Mr MacKenzie at 12.30 hours. He questions the quality of information being provided to the Board by the Executive Team. Mr Gormley states that it won't be long before people question the role of non-executive directors "when there is continued failure to demonstrate the highest levels of Corporate Governance". He considers that it is unacceptable for the Executive Team to be unaware of these breaches but accepts that they occurred before Mr MacKenzie's appointment. Mr Gormley asks Mr MacKenzie to confirm he gave an amnesty to the Executive Team in relation to any other breaches of the code resulting in an assurance that none existed. Mr MacKenzie responds at 12.43 hours that this was correct "all signed a declaration". Laurence MacKenzie issues a copy of the draft report to DRD at 15.50 hours DRD staff researching grounds for removal of Board members in Articles and in legislation. At 9.05pm Mr Priestly emails Lian Patterson and Gary Fair asking "are there grounds set out in legislation or elsewhere on which we may dismiss Board members?" | D Gormley/C Mellor submission, CEO's evidence to PAC, DRD submission of 2 August, Annex H D Gormley/C Mellor submission (their reference Appendix 1A); Official Report (Hansard) of 1 July Evidence Session; CEO's submission of 21 October 2010 DRD Freedom of Information response to Mr McGlone of 3 September 2010 Chief Executive's submission of 21 October 2010. D Gormley/C Mellor submission (their reference Appendix 1D) |
| 19 January 2010 | Paul Priestly emails Lian Patterson at 7.18am setting out 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 responds "Think you have a very good plan here...I can put to Laurence today". At 09.00 Mr Priestly advises Bruce Robinson, Head of the NI Civil Service (HoCS) of his intention to commission an independent review to report on actions to be taken "to address the governance failures". DRD have no record of HoCS response. At 13.50 Mr Priestly informs Ms Patterson and Gary Fair (DRD Shareholder Unit) that the terms of reference of the review should the requirement to provide an analysis of "how these failures of governance happened" and any action required "to address the procurement governance". He also indicates that the review should be completed within a short timescale with a target of 10 working days. Mr Priestly having obtained Ministerial approval emails HoCS at 2.12pm stating that he had met with Laurence MacKenzie who "has agreed that, on the basis of our jointly initiating such a review as DRD and NIW Accounting Officers, he will think again about his resignation. But he made clear that all depends on the outcome of the review in terms of addressing the issues". Mr Priestly asked Mr MacKenzie to withdraw his resignation. Mr MacKenzie was reassured by the support he received from DRD. Mr MacKenzie emails Mr Dixon at 5.51pm. The subject line reads "Done Deal". The email reads: "Expect a call! L". The reply reads "Bet PP's eyes were bulging!!!............Look forward to it. P" Mr MacKenzie subsequently told the Committee that "I do not have a record on either my office or home computer system of such an email". Mr Priestley advises the Chair he is setting up an Independent Review Team (IRT) and informs him who will be on panel. | DGormley/C Mellor submission (their reference Appendix 1F) DRD submission, 2 August, Flag H1 DRD submission of 2 August, Flag H2 D Gormley/C Mellor submission (their reference Appendix 1G) Official Report (Hansard) of 1 July Evidence Session. D Gormley/C Mellor submission (their reference Appendix 1H) Letter to PAC Chairperson, 21 October 2010 D Gormley/ C Mellor submission |
| 20 January 2010 | Laurence MacKenzie confirms his resignation to Chair and this is shared with the Board. Chair told Mr MacKenzie that his actions had been in direct contravention of his duties under the Companies Act (where the first duty * of a Director is to the Company). Chair expresses concerns Paul Priestly at the direction of the draft Terms of Reference for the IRT. Mr Priestly writes to Chair providing final Terms of Reference and informing him that, on the advice of the IRT, the Chief Executive should "exclude himself from all Board discussions on the review and the matters which have led to it". IRT is appointed. The members are Jackie Henry (Deloitte), Glenn Thompson (consultant and former Accounting Officer) and Peter Dixon (Group Chief Executive of Phoenix Energy Holdings). The IRT attend a commissioning meeting with Paul Priestly and Laurence MacKenzie. At the meeting the IRT advised that Mr MacKenzie should exclude himself from all Board discussions on the review. The meeting was not minuted. The Chair of the Committee for Regional Development (CRD) and NIAO are informed by Mr Priestly that a review had been commissioned because internal audit had highlighted "a number of systemic and serious governance failures in relation to procurement activity within NIW". Mr Priestly informs Bruce Robinson (Head of the NI Civil Service) of IRT Terms of Reference, copying letter to CRD. DRD has no record of any response. Mr MacKenzie withdraws his resignation that evening in voice mail message to Chair. | D Gormley/C Mellor submission D Gormley/C Mellor submission DRD submission of 2 August, Flag H6 DRD submission to PAC, 2 August, Flag G9 and H5. Malcolm McKibbin's letter of 22 October 2010 DRD submission of 2 August, Flag H3 DRD submission of 22 October 2010. D Gormley/C Mellor submission |
| 21 January 2010 | Chair circulates IRT terms of reference to the Board and informs them that Laurence MacKenzie has withdrawn his resignation given 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 irregularities, and that's the view of the Review team as well". Chair writes to Paul Priestly advising non-executive directors would cooperate with IRT and giving their view that the Laurence MacKenzie had not acted as a Board member and had bypassed the established procedures to deal with such matters. Second draft of Contract Approvals Internal Audit report provided to non-executive directors. | DRD's FoI response to Mr McGlone of 3 September 2010 D Gormley/C Mellor submission D Gormley/C Mellor submission |
| 22 January 2010 | Third draft of the Internal Audit Report completed. Paul Priestly emails DRD staff at 18.02 hours, informing them that he had briefed the C&AG on NIW procurement governance issues. He records that the C&AG made the point that the Chief Executive was right to bring this to DRD's attention, that an independent review was sensible and that providing for the Chief Executive to exclude himself from Board discussions of the review was entirely sensible. [This note was not agreed with the C&AG.] Chair emails Paul Priestly at 19.25 hours and states that the Board had considered Laurence MacKenzie's request to withdraw his resignation and "were unanimous in their view that far from accepting his request they were very happy to accept his resignation". Mr Priestly responds to Chair at 21.00 hours expressing view that non-executive directors "don't seem to recognise the seriousness of the issues and the situation now facing us all. This is public money and the rules and standards are exceptionally high. NIW has fallen far below them on this issue." Expresses the view that as Accounting Officer he would have felt compelled to launch an independent review, with or without the Chief Executive's or Board's agreement. Mr Priestly sends Chair a copy of his note [unagreed] of his discussion with C&AG. His note indicates the C&AG supported his approach. | IRT Report of 25 February 2010 DRD submission of 2 August, Flag H DRD submission of 2 August (Flag C1) DRD submission of 2 August (Flag C1) DRD submission of 2 August (Flag C2) |
| 23 January 2010 | Laurence MacKenzie emails Chair confirmation that his resignation has been withdrawn. | D Gormley/C Mellor submission |
| 25 January 2010 | Independent Review commences for three weeks. Non-executive Directors (excepting Ms Thompson) meet in Belfast. | DRD submission of 2 August, Flag G9 D Gormley/C Mellor submission |
| 26 January 2010 | Paul Priestly and Lian Patterson meet with C&AG and Stephen McCormick (NIAO Director) to provide an update. Mr Priestly's note of the meeting records the C&AG's acceptance of his approach and an acknowledgement of "the difficulties facing the department in having to consider interim appointments to the Board of NIW and/or as CEO [Chief Executive], without appearing to pre-judge the outcome of the review. He [the C&AG] accepted that this work would need to be done, even if only on a contingent basis". [The note of the meeting with the Department was not agreed with the C&AG.] | DRD submission of 2 August, Annex H9 |
| 27 January 2010 | Final version of the Contract Approvals Internal Audit Report issued. Chair writes to Laurence MacKenzie to inform him that the probationary period for his employment has been extended. | IRT report of 25 February 2010 NIW's 3 September 2010 response to an FoI from Mr McGlone |
| 28 January 2010 | Chair writes to Jackie Henry asking for a written assurance that all members of the Review team are fully independent and no member has a conflict of interest or a potential conflict of interest in relation to the matters under review. He also asks for assurance that no member of the IRT is a personal friend of any party subject to the review; has had unofficial access to confidential or sensitive information concerning NIW; or has offered advice, coaching or counselling to the Chief Executive or other parties in the last three months. At the Chair's request a copy of the letter is forwarded to the Minister. | DRD submission of 2 August, Annex M1 |
| 30 January 2010 | Jackie Henry replies to the Chair assuring him that the IRT is approaching its review objectively, without pre-conceptions and in accordance with the terms of reference. She states IRT would reach its conclusions and recommendations on thorough consideration of the evidence before it. | DRD submission of 2 August, Annex M2 |
| January 2010 | Nicola Brennan, the NIW Governance and Internal Audit Manager became the designate Head of Audit taking-up the substantive post on 1 April 2010. The in-house Internal Audit function reporting lines were changed to have it report to the Director of Finance, Regulation and Commercial. Prior to this, Internal Audit reported to the Head of Corporate Governance. | IRT Report of 25 February 2010 |
| 4 February 2010 | Chief Executive emails the Regulator – the subject line reads "Licence Compliance in Procurement" and states that while he is concerned at any potential breach of Condition F1 of the Licence "I have no reason to believe there are further issues which would lead to a deep concern about compliance generally". Ruth Thompson writes to Paul Priestly rejecting his assertion that non-executive directors did not recognise the seriousness of the issues. She adds that she did not receive the draft Internal Audit report until 21 January and that she had not discussed her role as a non-executive director or her views on the issue to hand with him. | D Gormley/C Mellor submission DRD submission, 2 August 2010, Flag C4 |
| 5 February 2010 | Chief Executive writes to Chair questioning the basis on which his probationary period had been extended given that the period had expired and no issues had been raised about his performance by the Chair in his 18 January response to the Chief Executive's resignation. Paul Priestly responds to Ruth Thompson stating that his comments regarding his concern that the non-executive directors did not recognise the seriousness of the issues should be seen in the context that he had been informed by Chris Mellor that the non-executive directors were unanimous in their view that, rather than allow Laurence MacKenzie to withdraw his resignation, they were happy to accept it. Chair calls Paul Priestly in relation to his and the Board's concerns about the relationship between Peter Dixon, Laurence MacKenzie and Paul Priestly. Mr Priestly replied stating he did not believe there was any basis on which to question the independence of the review, which would be evidence based and focused on the terms of reference. Mr Priestly stated that Mr Dixon was one of his many contacts in the business community. | NIW's 3 September 2010 response to an FoI from Mr McGlone DRD submission of 2 August (Flag C5) DRD submission of 2 August, Annex M and M4 |
| 8 February 2010 | Belfast Telegraph quotes a 'Stormont source' that 'heads could roll' in contracts probe in NI Water. | Belfast Telegraph |
| 10 February 2010 | Addendum to the Contract Approvals Internal Audit Report completed. Declan Gormley writes to Paul Priestly to register concern regarding his statement that non-executive directors "are not taking seriously" the governance issues at NIW given that Mr Priestly had not sought to establish his views. IRT's request to NIW's Head of Internal Audit for an interim report on the findings of the 'deep dive' audits is refused by the Chair. Chair writes to Paul Priestly advising him of "inappropriate conversations" which the Chief Executive had told Board members about. The Chief Executive had reportedly received confidential information about NIW from Peter Dixon who had received it from Paul Priestly. The Chair comments on the timing of the meeting between Mr Dixon and Mr MacKenzie on Friday 15 January, the same day Mr MacKenzie met his Executive Team to discuss the Contract Approvals Internal Audit Report. The Chair also refers to Mr Dixon asking questions during IRT interviews which suggested he had access to information about NIW known to very few people. The Chair states that these matters together with press leaks had not reinforced his confidence in the review. | IRT Report of 25 February 2010. D Gormley/C Mellor submission (their reference Appendix 1I) IRT submission to PAC, 2 August 2010 DRD submission of 2 August, Annex M5 |
| 11 February 2010 | Paul Priestly responds to Declan Gormley in an email (at 17.24 hours) which reads "Declan You should have a copy of my letter to Ruth Thompson of 5 February which addresses these issues. Regards Paul." Laurence MacKenzie informed Paul Priestly (18.22 hours) that he had met Peter Dixon on 4 occasions since becoming Chief Executive, that Mr Dixon was a business acquaintance and they had discussed themes of a common interest. He had met with him on 4 December and later shared the discussion with his Executive Team and Board members - all issues discussed were in the public domain. Peter Dixon confirms Laurence MacKenzie's earlier comments to Paul Priestly (at 18.51). He adds that he had also met Paul Priestly from time to time, in the same way that, as Chief Executive of Phoenix Holdings, he had met politicians, senior civil servants, ministerial advisors and ministers who wished to learn his views on certain matters. Laurence MacKenzie informs Paul Priestly by email (at 23.06 hours) that the Chair wants the board to review issues emerging from the 'deep dive' review before these are shared with the IRT. | DRD submission of 2 August (Flag C7) DRD submission of 2 August (Flag M6) DRD submission of 2 August (Flag G3) |
| 12 February 2010 | In email correspondence between Laurence MacKenzie, Chris Mellor and Paul Priestly, Mr Priestly expresses his view of the precedence of the responsibilities of an Accounting Officer and concern if there were any attempt to hinder the work of internal audit. Chair raises concerns at possible errors in Internal Audit's work and the apparent haste in completing this work. Email exchanges are shared with Stephen McCormick, NIAO Director, who notes the independent line being taken by the Head of Internal Audit and the fact the Chair had acted in the past as Chief Executive and that there would be, at least, a perception issue in regard to his independence. | DRD submission of 2 August (Flag G3) DRD submission of 2 August (Flag G3) |
| 15 February 2010 | Belfast Telegraph reports that Laurence MacKenzie had recently tendered his resignation. IRT submits the first draft of its report to Paul Priestly, Laurence MacKenzie and the Board for validation. | Belfast Telegraph website DRD submission, 2 August, Flag G1 |
| 16 February 2010 | Gary Fair emails Mr Priestly and others in DRD at 10.43am stating that if the Board and Chief Executive could work together, although he considers it probably not conceivable, that a protocol be established whereby the Chief Executive would allow the board 24 hours to consider an issue before he notifies the DRD Accounting Officer. Mr Fair goes on to write his view of the draft IRT report "A lot depends on how strong the final recommendations are. The text so far wouldn't necessarily seem to support strong recommendations". Paul Priestly responds at 10.51am stating the "need to think about the following: 1. A report which says 'serious failure of governance'. 2. More failings to come from the ingoing IA work. 3. Breakdown in CEO/Board relationship. I think this points in a particular direction." Gary Fair replies at 11.15am agreeing but adds "I don't think this is the current emphasis in the report....there is an unjust emphasis on DRD failures that weren't failures." Paul Priestly speaks to Jackie Henry of IRT and expresses his view that the draft report "does not give us quite enough to advise the Minister on a clear course of action." Paul Priestly emails Jackie Henry at 4.58pm attaching a summary of issues emerging from the 'deep dive' audits and asking for these to be considered by IRT in reaching its final conclusions. Laurence MacKenzie responds to draft IRT report. | D Gormley/C Mellor submission (their reference Appendix 1J) As above As above D Gormley/C Mellor submission (their ref. Appendix 1K) DRD submission of 2 August, Flag G2 IRT submission to PAC, 2 August 2010 |
| 17 February 2010 | Paul Priestly emails IRT at 8.25am stating that the first draft did not "offer a clear way forward" and urging them not to feel constrained by their Terms of Reference. In a second email to the IRT at 11.49am "Subject: re: Meeting this afternoon" he asks them to reconsider the balance of their report "an impartial commentator on reading the report may even conclude....that 'the DRD shareholder is at fault for the governance failures in NIW!' Such a conclusion would be perverse and a travesty". Paul Priestly also writes to the IRT expressing concerns that the draft IRT report does not address the ToR given its emphasis on the failures in the Shareholder role. He considers this gives NIW Board a 'get-out clause' and adds "you may wish to consider revising the Report and shifting the balance back onto the core issues and where responsibility for the procurement governance failures lies." An Annex sets out additional supporting evidence and 15 suggested text revisions. Text revisions suggests requested by Paul Priestly and accepted by IRT include:
|
D Gormley/C Mellor submission (their ref. Appendix 1K) D Gormley/C Mellor submission (their ref. Appendix 1L) D Gormley/C Mellor submission (their ref. Appendix 1K) IRT submission, 2 August 2010 |
| 18 February 2010 | Chair submits response to draft IRT report. The IRT responds to Paul Priestly's letter of 17 February. IRT does not agree that its report fails to address the key issue. Mr Priestly had not seen their recommendations. IRT notes that the emerging findings of the 'deep dive' exercise are a significant development. IRT assures Paul Priestly that it has not been constrained by its terms of reference. IRT receive a copy of NIW's interim report on deep dive audits following the intervention of Paul Priestly. IRT issues second draft report (Sections 1-4) for validation to Paul Priestly, Chris Mellor and Laurence MacKenzie. Lian Patterson emails Shareholder Unit staff (cc'd to Paul Priestly) at 12.43 hours, asking them to set out steps to be taken should one or more Board members (both executive and non-executive) vacate their position or be removed from the Board. This was to be regarded as contingency planning and was totally dependent on IRT recommendations. | IRT submission, 2 August 2010 DRD submission of 2 August 2010, Flag G7 IRT submission, 2 August 2010 IRT submission, 2 August 2010 Dr McKibbin's letter to PAC Chairperson, 19 November 2010 |
| 19 February 2010 | Paul Priestly and Laurence MacKenzie respond to the second draft report of the IRT. Paul Priestly requests one substantive change reflecting that NIW's spending in relation to Business Improvement/Transformation programme started in 2007-08. The change in incorporated in the final report but is attributed to DRD i.e. "the Department advised IRT that..." | IRT submission, 2 August 2010. DRD submission of 22 October 2010 |
| 21 February 2010 | Email from Don Price to Chris Mellor notes that procurement issues reflect non-adherence to procedures rather than lack of control/governance framework and that issues were not picked-up by Halcrow [consultants reporting to the Regulator on procurement] or by Internal Audit. He states "the Panel [IRT] from the outset has seemed determined to find Governance failures by the Board rather than working with the Board to ensure the necessary corrective actions". | D Gormley/C Mellor submission (their reference Appendix 1b) |
| 22 February 2010 | IRT received, via Paul Priestly, an updated report on the emerging findings of the 'deep dive' audit. Chair responds to the second draft of the IRT report. | IRT submission, 2 August 2010 IRT submission, 2 August 2010 |
| 23 February 2010 | IRT agree final report | IRT submission, 2 August 2010 |
| 25 February 2010 | Final IRT report submitted to Paul Priestly. Minister meets with IRT. DRD reports that they told him that their review was evidence based and that they had reached their findings and recommendations independently. [Ministerial Briefing of 2 March 2010 prepared by Lian Patterson refers, at Annex B, to the Minister meeting with the IRT taking place on Tuesday 23 February.] | IRT submission, 2 August 2010 DRD submission of 2 August, Annex M DRD submission to PAC, 22 October 2010 |
| 26 February 2010 | Jackie Henry forwards to Paul Priestly email correspondence between IRT and Declan Gormley. The correspondence sets out the failure to agree a note of their interview with Mr Gormley on 9 February. Jackie Henry indicates the IRT found the responses, accusations and level of aggression within the email chain unacceptable. Mr Gormley had complained that the draft note prepared by IRT had accentuated negatives, displayed bias towards a particular outcome and had failed to meet his request to include a definition of good governance given by Peter Dixon. Mr Gormley stated that Mr Dixon had said "that any failing – at any level –must be considered as a failure on behalf of the body corporate". IRT subsequently excluded Mr Gormley's unagreed evidence from consideration in its review. | DRD submission to PAC of 22 October 2010 |
| 28 February 2010 | Paul Priestly received a letter from Sue Holmes of Contracting Out LLP regarding the "dispute and pending court action" between Steria Ltd and NIW. The letter is send as an attachment to an email (sent at 14.41 hours) which states "To be opened by the Addressee only – strictly private and confidential". It continues "Please see the attached letter for your attention only". The letter is also marked "Strictly Private and Confidential". Ms Holmes' letter refers to the breaking up of the NIW team conducting Reviews of the Steria contract including the redundancy of the Commercial Director and another Director. Ms Holmes claims NIW required her to fabricate timesheets to support a £200,000 settlement of her contract with the company. Mark Ellesmere had informed Ms Holmes in an email of 21 December 2009 that he would "only be able to agree payment upon receipt of daily timesheets to back up the 260 additional man days". Ms Holmes told PAC (21 July 2010) that NIW knew that the contract was based on deliverables and was not rates based and therefore detailed time sheets had neither been required or kept. At 17.31 hours Paul Priestly forwards the email from Sue Holmes to Lian Patterson, Gary Fair and Barbara Faloona of DRD and Laurence MacKenzie (NIW) for their advice. | Correspondence from Declan Gormley, 12 October 2010 Contracting Out submission of 21 July 2010 and Declan Gormley's submission of 12 October 2010 Declan Gormley's submission of 12 October 2010 |
| March 2010 | The Director of the Shareholder Unit begins to attend NIW Audit Committee meetings | DRD submission of 2 August, Annex P |
| 2 March 2010 | Lian Patterson's submission to the Minister recommends that he writes to Chris Mellor, Ruth Thompson, John Ballard and Declan Gormley asking them, on the basis of the recommendations made in the IRT Report, to consider their position. The Minister was advised that IRT was aware of a serious breakdown in the relationships between the NIW Board and the Chief Executive, that the Chair had advised the IRT that this position was "irreconcilable" and that "the review team also independently formed that view". | D Gormley/C Mellor submission (their reference Appendix 1P) and DRD's submission of 22 October 2010 |
| 3 March 2010 | Non-executive directors meet with Laurence MacKenzie and all agree that the relationship could work and was reconcilable [John Ballard records this meeting as taking place on 4 March]. Minister writes to four non-executive directors, including the Chair, asking them to consider their position; they are given until 8 March 2010 to respond. With each letter is a copy of the final IRT report of 25 February 2010. The letters refer to IRT findings that the Internal Audit findings represent "a serious breakdown in the governance and control framework of NIW". Reference is also made to the IRT's awareness "of a serious breakdown between the NIW Board and its CEO [Chief Executive]". The letter to Declan Gormley contains an additional paragraph: "I have also had my attention drawn to your response to the work of the IRT and this has caused me to have serious concerns as to your appreciation of the gravity of the situation leading to the appointment of the IRT and your appetite for implementing its recommendations." Board member Don Price is invited to remain on the Board subject to providing written confirmation that: he would work positively with DRD and NIW to put matters right; that there is no irreconcilable difference between him and the Chief Executive; and that he would positively support the Chief Executive in taking forward the agreed action plan. Mr Price responded to the Minister's letter, providing the assurances requested. The Minister also writes to the two Executive Board members, George Butler and Ronan Larkin, stating that he would consider the extent of their responsibility following the completion of an exercise to map responsibility for individual failures. | D Gormley/C Mellor submission DRD submission, 2 August, Annex D1 DRD submission, 2 August, Annex D3 DRD submission, 2 August, Annex D4 DRD submission, 2 August, Annex D5 |
| 4 March 2010 | Minister meets with Ruth Thompson, Declan Gormley and John Ballard. | DRD's submission of 2 August, Annex D2 |
| 5 March 2010 | Ruth Thompson responds to Minister's letter of 3 March stating that the position between the Board (especially the non-executive directors) and the Chief Executive "is not irreconcilable". This was the Chair's view which had been represented to the IRT view as that of the Board. The Chair had also represented to Paul Priestly that Ms Thompson had been prepared to accept the Chief Executive's resignation after he had asked for it to be withdrawn, when she had not expressed this view. Ruth Thompson stated that the serious issues raised by Internal Audit represented "repeated failures by the executive" to implement procedures laid down by the Board and DRD. Ms Thompson expressed the desire to continue on the Board, in the company's best interests, so that her work and experiences to date were not lost. | DRD's submission of 2 August, Annex D2 |
| 7 March 2010 | John Ballard responds to the Minister's letter of 3 March outlining his contribution to NIW in difficult circumstances over 4 years. He expressed surprise at Internal Audit's findings in light of Executive assurances as recently as September 2009 that the necessary systems were in place and in view of previous audit findings. Mr Ballard states he takes the issues identified by IRT seriously and accepts its recommendations. Although there had been a disconnect between the Chief Executive and the Board, in his view "this breakdown is not irreconcilable". Mr Ballard expressed his wish to remain on the board. | DRD's submission of 2 August, Annex D2 |
| 8 March 2010 | Belfast Telegraph reports on the findings of the IRT review and states that its earlier prediction that "heads could roll" now looked more likely. Chair responds to Minister's letter of 3 March. He asks to be judged to his entire record and achievements in NIW including improvements in the controls over procurement. Chair acknowledges "the failures to comply with the procedures are serious and should not have happened". He comments that the IRT report omits any examination of the systems now in place, without which it is not possible to conclude whether non-compliance identified is systemic. Nor does IRT comment on why Internal Audit, and Halcrow (in its report to the Regulator) and DFP's Central Procurement Directorate (CPD) failed to identify the discrepancies earlier. He comments "with hindsight the approach of Internal Audit was clearly flawed in that it used a risk based approach rather than substantive testing of compliance". The Chair clarifies that he was the only board member who expressed the view that the differences between the Board and the Chief Executive were irreconcilable. His view now was that although trust and confidence had been eroded it was not irreconcilable. He expressed his wish to continue and his view that NIW "will continue to need the senior level experience of people who have actually run a water company". Declan Gormley responds to the Minister's letter of 3 March 2010. He expresses the view that the differences between the board and the Chief Executive are not irreconcilable and that it is his understanding that this view is shared by all non-executive directors and the Chief Executive. With the exception of this issue, Mr Gormley states he finds himself "substantively in agreement with the IRT's findings". He notes that the governance failings identified preceded his and Don Price's appointment in July 2008. Mr Gormley does not accept that he had failed to appreciate the seriousness of the matters highlighted by the IRT review. He recognised that the "tone and manner" with which he expressed his views "could perhaps have been couched in more temperate or considered language". Mr Gormley expressed his commitment to fulfilling his duties as a board member, to addressing the problems identified and supporting the Chief Executive in remedying deficiencies highlighted by the IRT report. | Belfast Telegraph DRD's submission of 2 August, Annex D2 DRD's submission of 2 August, Annex D2 |
| 11 March 2010 | Four of five non-executive Directors are dismissed by email. Don Price, chair of the Board's Audit Committee, is retained after agreeing to provide assurances including implementation of the IRT report. Chair writes to the Chief Executive confirming the extension to his probationary period has been withdrawn. | D Gormley/C Mellor submission |
| 12 March 2010 | Dismissal of Board members is reported in the press. | D Gormley/C Mellor submission |
| 15 March 2010 | Minister for Regional Development makes a statement to the Assembly stating that he will consider the position of two members of the Executive Management group – George Butler (Asset Management) and Ronan Larkin (Finance & Regulation). NIW IA submits first draft of "Control Environment – Phase I – Operating Expenditure" report (resulting from 'deep dive' audit) | Official Report (Hansard), 15 March 2010 DRD website |
| 19 March 2010 | Paul Priestly responds to Sue Holmes letter received on 28 February. He writes that he has "discussed the circumstances" of her claim with Laurence MacKenzie, he states that it would be helpful, in support of her invoice for £200,000 which she had indicated related to 260 days work, if she could provide NIW "with some further detail in relation to the work generated, dates involved etc. to enable the company to give proper consideration to her claim". | Contracting Out submission of 21 July 2010 |
| 22 March 2010 | Sue Holmes replies to Paul Priestly stating that he had been misinformed in regard to the £200,000 offer and it status but that in recognition of his "most helpful intervention" she sets out a revised "reasonable settlement offer". | Contracting Out submission of 21 July 2010 |
| 23 March 2010 | NIW IA submits first draft of "Control Environment – Phase II – Capital Expenditure" report (resulting from 'deep dive' audit) | DRD website |
| 30 March 2010 | Final settlement reached between Contracting Out and NIW. NIW paid £200,000 plus VAT and interest of £7,277 (calculated at 8%), the total paid was £243,550.99. The settlement was made without admission of liability. A confidentiality agreement was signed. | NIAO Memorandum of 9 December 2010. |
| 23 April 2010 | NIW IA completes final "Control Environment – Phase I – Operating Expenditure" report (resulting from 'deep dive' audit) | DRD website |
| 26 April 2010 | NIW IA submits final "Control Environment – Phase II – Capital Expenditure" report and first draft of "Control Environment – Phase III – Other Financial Delegations and Staff Expenses" report (resulting from 'deep dive' audit). | DRD website |
| 1 April 2010 | NIW Internal Audit completes the 'invoice slicing' report which finds no evidence of fraud but reports deliberate circumvention of financial delegations which it regards as a "serious breach of duty" on the part of two NIW staff. Both employees were subject to a disciplinary process but no disciplinary action was taken forward. | Lian Patterson's correspondence with PAC Chairperson of 7 September 2010 |
| 10 June 2010 | Email from Lian Patterson to Paul Priestly and others "Subject; Phonecall with K Donnelly". Lian Patterson reports that the C&AG had informed her that the NIAO Memorandum to PAC on 'NIW Procurement /Governance' would be with the Department for clearance within days. She refers to the issues NIAO would be raising in the Memorandum including COPE status. Lian Patterson as an aside notes "We understand from Laurence that David Gordon [Belfast Telegraph] is going to run further pieces in the run up to the hearing and this feature [COPE status] will be part of this". | D Gormley/C Mellor submission |
| 16 June 2010 | NIW IA submits final "Control Environment – Phase III – Other Financial Delegations and Staff Expenses" report (resulting from 'deep dive' audit) | DRD website |
| 17 June 2010 | NI Procurement Board meets and agrees to conduct reviews of (i) the CoPE assessment process and (ii) NIW's status as a CoPE. The reviews to be considered at the Board's November 2010 meeting. | Official Report (Hansard) of 1 July Evidence Session |
| 30 June 2010 | Minister appoints an interim set of four non-executive directors by an emergency process. Minister also announces an examination of the overall governance arrangements in NIW. | Official Report (Hansard) of 1 July Evidence Session |
| 1 July 2010 | PAC takes evidence from Accounting Officers, Paul Priestly and Laurence MacKenzie. Also appearing as witnesses are Lian Patterson (Senior Finance Director, DRD) and Nicola Brennan (Head of Internal Audit, NI Water). DRD Resource Account receives a qualified opinion from C&AG on the basis of irregular expenditure incurred by NIW. | Official Report (Hansard) of 1 July Evidence Session Official Report (Hansard) of 1 July Evidence Session |
| 2 July 2010 | Paul Priestly emails Peter Dixon with draft letter of complaint to PAC. | Press reports of 20 August 2010 |
| 5 July 2010 | Paul Priestly sends 'CAPS lock' email to C&AG stating Jackie Henry of IRT wanted to hear how the NIAO intends to deal with matters raised at Evidence Session in "ASSISTING THE PAC IN COMING UP WITH THEIR FINAL REPORT. I THINK IT WOULD BE HELPFUL FOR YOU TO MEET THEM IF THE REQUEST IS MADE." Peter Dixon, a member of the IRT and Group Chief Executive of Phoenix Energy Holdings, writes to the Chairperson of PAC complaining about the manner in which the Committee conducted its interrogation. | Media reports Mr Dixon's letter of 5 July 2010 |
| 19 July 2010 | Following a letter from John Dallat MLA to the Chairman of Phoenix Energy Holdings (Sir Gerry Loughran) in response to Peter Dixon's letter of complaint, Mr Dixon withdrew his letter. | Letter from Sir Gerry Loughran to Mr Dallat |
| 21 July 2010 | Sue Holmes of Contracting Out LLP writes to PAC detailing what she considers to be omissions in the evidence provided by Paul Priestly and Laurence MacKenzie on 1 July 2010 in relation to the terms of that company's contract with NIW. Her points included:
|
Contracting Out submission of 21 July 2010 |
| 2 August 2010 | In a submission to PAC, the IRT states that its approach was 'evidence based' and validated by issuing draft findings to Paul Priestly, Chris Mellor and Laurence MacKenzie for their comments – before the IRT determined its conclusions and recommendations. IRT stated that the most significant factor in the changes between the first and second drafts of its report was the emerging findings of the 'deep dive' audit which "increased substantially the finding of significance and seriousness in the failure of those responsible for applying the governance and control framework of the Company". IRT stated that it analysed in detail all comments received and incorporated those where additional evidence was provided or existing evidence was clarified. Additional evidence was tested and corroborated as appropriate. IRT concluded that it had presented its analysis and findings "without fear or favour". | IRT submission, 2 August 2010 |
| 6 August 2010 | Padraic White appointed as NIW Interim Chair | DRD Press Release |
| 16 August 2010 | UTV Live Tonight alleges that the first draft IRT report was materially changed at the request of Paul Priestly so as to strengthen the case for the dismissal of Board members. | UTV Live Tonight |
| 17 August 2010 | Paul Priestly is suspended pending an investigation centring on claims that he drafted Peter Dixon's letter of complaint to the Public Accounts Committee. The investigation is to report to the Head of the Civil Service regarding the conduct of Mr Priestly and any other civil servant in relation to the letter of 5 July 2010. | Terms of Reference of Sir Jon Shortridge's Independent investigation |
| 2 September 2010 | PAC requests, and the C&AG agrees, that NIAO will conduct of a review of NIW Internal Audit findings in relation to procurement failings. | NIAO Memorandum, 9 December 2010 |
| 17 September 2010 | PAC informed that NIW/Steria contract dispute had been resolved and that the agreement reached was confidential. NIW made a substantial payment to Steria. | Correspondence from Dr Malcolm McKibbin to PAC Chairperson |
| 24 November 2010 | Media reports that Sir Jon Shortridge has completed his investigation into the conduct of Paul Priestly. No official announcement has been made. | media reports |
| 9 December 2010 | NIAO find total procurement breaches in Water Service and NIW between December 2005 and August 2010 amounted to £45.9 million (75 cases) of which £14.8 million (41 cases) originated in Water Service. The Memorandum also addresses the concerns raised with PAC by Contracting Out. NIAO disclosed that NIW's settlement with Steria amounted to a payment to Steria of £10.6 million including VAT and a payment to a sub-contractor of £2.1 million. | NIAO Memorandum, 9 December 2010 |
| 5 January 2011 | The Minister for Regional Development announces an external review of the "Freeze-Thaw" incident which is to be conducted by the Regulator. On 7 January the first Minister and deputy First Minister appoint Philip Holder and Heather Moorehead to consider the broader governance issues in relation to the matter. | Departmental Press Releases |
| 6 January 2011 | Laurence MacKenzie resigns as NIW Chief Executive as a result of NIW's handling of the water crisis which left 40,000 homes without water over the Christmas period. | Laurence MacKenzie's press release |
Holders of public office should act solely in terms of the public interest. They should not do so in order to gain financial or other material benefits for themselves, their family, or their friends.
Holders of public office should not place themselves under any financial or other obligation to outside individuals or organisations that might seek to influence them in the performance of their official duties.
In carrying out public business, including making public appointments, awarding contracts, or recommending individuals for rewards and benefits, holders of public office should make choices on merit.
Holders of public office are accountable for their decisions and actions to the public and must submit themselves to whatever scrutiny is appropriate to their office.
Holders of public office should be as open as possible about all the decisions and actions that they take. They should give reasons for their decisions and restrict information only when the wider public interest clearly demands.
Holders of public office have a duty to declare any private interests relating to their public duties and to take steps to resolve any conflicts arising in a way that protects the public interest.
Holders of public office should promote and support these principles by leadership and example.
1. The general duties of company directors are set out in the Companies Act 2006. These are to:
2. The 2006 Combined Code[55], which sets out standards of good governance for Boards, states that the role of the Board is to provide entrepreneurial leadership of the company within a framework of prudent and effective controls which enables risk to be assessed and managed. The board should set the company's values and standards and ensure that its obligations to shareholders and others are understood and met. Non-executive directors should scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance. They should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible.
3. The Chair is responsible for leadership of the Board and for ensuring that the directors receive accurate, timely and clear information. Management has an obligation to provide such information but directors should seek clarification or amplification where necessary. The Chair should ensure effective communication with shareholders and should facilitate the effective involvement of non-executive directors in particular and ensure constructive relations between executive and non-executive directors. There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.
4. The NI Water Governance Letter states "The governance arrangements detailed in this paper are intended to work alongside and be congruent with the responsibilities and duties of the NI Water Board, as defined in the Companies Order 1986 (as amended) and consistent with accepted governance practice for commercial businesses wholly owned by Government. As such, it is assumed that the board will, in carrying out its business, take due consideration of relevant communication from the Shareholder on shareholding matters, for example Government objectives, business strategy, performance reporting, Board remuneration and appointments."
5. The Letter also states: "NI Water's Board is accountable for delivering Value for Money ("VFM") and complying with best practice standards of regularity and propriety in regard to the use of Public Funds. NI Water's Board is therefore responsible for ensuring effective systems and processes, management and internal controls, and internal approval processes are in place and operating effectively, and that evidence based assurances are provided to the Shareholder to that effect as required."
6. "The Appointee [NI Water] shall, at all times, conduct the Appointed Business as if it were substantially the Appointee's sole business and the Appointee were a separate listed public limited company. The Appointee should have particular regard to the following in the application of this Condition:
(a) the composition of the board of directors of the Appointee should be such that the directors, acting as such, are able to act independently of the parent company or controlling shareholder and exclusively in the interests of the Appointee."
[1] PAC Report 'Brangham, Bagnall and Co. Legal Practitioner fraud Perpetrated against the Health and Personal Social Services, 26/08/09R, 5 February 2009
[2] Under the Water and Sewerage Services (Northern Ireland) Order 2006
[3] Value for money is to be achieved through compliance with the 12 Principles of Public Sector Procurement. The Principles are accountability, competitive supply, consistency, effectiveness, efficiency, fair dealing, integration, integrity, informed decision making, legality, responsiveness and transparency.
[4] 'NIAO Memorandum on Procurement and Governance in NI Water', laid at the NI Assembly on 18 June, 2010
[5] NIAO Memorandum on 'Examination of Procurement Breaches in Northern Ireland Water', laid at the NI Assembly on 9 December 2010
[6] The Seven Principles of Public Life - Standards in Public Life: First Report of the Committee on Standards in Public Life (1995) Cm2850. See reference chapter
[7] See appendix 1.
[8] 15th Report of Committee of Public Accounts 2007-08 Report on' Hospitality Association of Northern Ireland: A Case Study in financial management and the public appointments process' (36/07/08R)
[9] Mr Thompson was a former Accounting Officer of the Northern Ireland Court Service.
[10] Deloitte's costs of £36,443 included 20 days of Ms Henry's time, £22,000, 7 days of secretarial time £2,450, a review of NI Water's internal audit methodology £6,525 (fixed fee) and VAT.
[11] Mr Thompson's costs included £17,840 for 22.3 days time incurred, £66 for expenses and VAT of £3,122.
[12] Article in Belfast Telegraph.
[13] This process did not include non-executive directors
[14] Guidance on Codes of Practice for Board members of Public Bodies (Cabinet Office' October 2004)
[15] Steria was contracted by NI Water to provide a customer billing system but the contract was terminated early.
[16] Chapter 3, paragraph 3.5.3 and paragraph 3.5.2 of Managing Public Money Northern Ireland (DFP, June 2008)
[17] The settlement was approved by DRD on 23 October 2009, and paid 30 March 2010
[18] First Report of the Public Accounts Committee, 'Report on the Northern Ireland Tourist Board', Session 2002/2003 (01/02R)
[19] These issues did not relate to capital expenditure, except in one case which was the extension of a contract initially awarded for consultancy services.
[20] Central Procurement Directorate Procurement Guidance Note 02/10, Award of Contracts without a Competition (Also known as Single Tender Action): Issue date: 17th June 2010.
[21] The Public Contracts Regulations 2006 and The Utilities Contracts Regulations 2006
[22] Transforming Land Registers: The LandWeb Project, 3 August 2010, (Session 2009-2010).
[23] PAC Report 'Brangham, Bagnall and Co. Legal Practitioner fraud Perpetrated against the Health and Personal Social Services, 26/08/09R, 5 February 2009
[24] The eight COPEs in the NI public sector are, Construction & Advisory Division; CPD – Supplies & Service Division; Roads Service; Health Estates; Procurement and Logistics Service; Education and Library Boards; Northern Ireland Housing Executive and NI Water.
[25] Central Procurement Directorate's "Public Procurement Policy Management Information Guide"
[26] PAC First Report (Session 2009/2010) - Report on the Investigation of Suspected Contract Fraud
[27] Peer Review – NI Water Procurement Processes Action Plan, carried out 18-22 October 2010
[28] Regularity is defined as the requirement for all items of expenditure and receipts to be dealt with in accordance with the legislation authorising them, any applicable delegated authority and the rules of government accounting, DAO(DPF) 06/05 http://www.aasdni.gov.uk/pubs/DAOs/dao0605v2.doc
[29] Governance Letter issued by the then NIO Minister David Cairns on 20 March 2007 to the Chair Chris Mellor.
[30] The Companies Act 2006
[31] The Office of National Statistics is the executive office of the UK Statistics Authority, a non-ministerial department which reports directly to Parliament. One of its functions is to decide on the classification of all entities and transactions for the purpose of producing national accounts
[32] A Model MS/FM is provided at Annex 7.4 of the DFP manual "Managing Public Money Northern Ireland"
[33] "NI Water and NI Water's Board do not need to comply with the requirements of GANI (Government Accounting Northern Ireland)". GANI was replaced in June 2008 by Managing Public Money Northern Ireland (MPMNI).
[34] MPMNI, Chapter 3, Box 3.1 - to ensure the organisation makes all decisions in line with the strategy, aims and objectives set by ministers and/or in legislation
[35] NI Water Licence, Condition F Accounts and Accounting Information, paragraph 6A.5A
[36] NI Water General Counsel's letter to DRD Accounting Officer of 4 December 2009
[37] Dated 18 December 2009
[38] MPMNI Annex 7, A.7.4, paragraph 3.6
[39] MPMNI, Chapter 3, paragraph 3.1.1
[40] 15 September 2009
[41] IWRP Strand Two Report "Management, Governance and Delivery", January 2008, also referred to as the Hillyard Report. The report was produced prior to the reclassification of NI Water as a Non Departmental Public Body (NDPB).
[42] Letter of 15 December 2010 from the C&AG to PAC Chairperson
[43] In 2009-10 Internal Audit's key areas of concern were: poor data quality/management information; weaknesses in IT Strategy and governance; and in the governance of Alpha and Omega PPP Contracts.
[44] "Report on Good Governance – Effective Relationships between Departments and their Arm's Length Bodies" 24 April 2008, 28/07/08r
[45] Report on the Use of Consultants, Report: 16/07/08R, 10 January 2008
[46] DFP 17 August 2010, DF1/10/318812
[47] Most commonly, a due diligence check is an investigation into an organisation's financial and organisational health and capacity prior to a decision to invest in, fund or purchase that organisation.
[48] Correspondence from C&AG to PAC Chairperson, 15 December 2010
[49] Letter from Paul Priestly to Paul Maskey, Chairperson PAC dated 2 August 2010
[50] Independent Water Review Panel's Strand 2 Report on Management, Governance and Delivery of January 2008
[51] The UK Corporate Governance Code (formerly the Combined Code) sets out standards of good practice in relation to board leadership and effectiveness, remuneration, accountability and relations with shareholders.
[52] Evidence Session 29 May 2008 - Managing Sickness Absence in The Northern Ireland Civil Service
[53] NI Water Governance Letter, March 2007
[54] Non-executive board members to be appointed in 2011 will receive £18,000 per annum based on attendance on 2 days per month. The Chair will receive £40,000 per annum based on attendance for 4 days per month.
[55] The UK Corporate Governance Code (formerly the Combined Code) sets out standards of good practice in relation to board leadership and effectiveness, remuneration, accountability and relations with shareholders.
* http://www.iwrp-ni.org.uk/index/publications.htm
* The Companies Act 2006 lists 7 'general duties' of a Director; no duty is given precedence over the others. These are: to act within powers; to promote the success of the company; to exercise independent judgement; to exercise reasonable care, skill and diligence; to avoid conflicts of interest; not to accept benefits from third parties; to declare interest in proposed transaction or arrangement.
Present: Mr Paul Maskey (Chairperson)
Mr Roy Beggs (Deputy Chairperson)
The Lord Browne
Mr John Dallat
Mr David Hilditch
Mr Patsy McGlone
Mr Mitchel McLaughlin
Mr Stephen Moutray
Ms Dawn Purvis
In Attendance: Miss Aoibhinn Treanor (Assembly Clerk)
Mr Phil Pateman (Assistant Assembly Clerk)
Miss Danielle Best (Clerical Supervisor)
Mr Darren Weir (Clerical Officer)
Apologies: Mr Trevor Lunn
Mr Jim Shannon MP
2:04 pm the meeting opened in public session.
The Committee noted correspondence from the Committee for Finance and Personnel providing correspondence from DFP regarding the status of NI Water as a Centre of Procurement Expertise (COPE).
Agreed: Members agreed to forward the correspondence to the Northern Ireland Audit Office as requested.
[EXTRACT]
Present: Mr Paul Maskey (Chairperson)
Mr Roy Beggs (Deputy Chairperson)
The Lord Browne
Mr Trevor Lunn
Mr Mitchel McLaughlin
Mr Patsy McGlone
Mr Stephen Moutray
Ms Dawn Purvis
Mr Jim Shannon
In Attendance: Miss Aoibhinn Treanor (Assembly Clerk)
Mr Phil Pateman (Assistant Assembly Clerk)
Miss Danielle Best (Clerical Supervisor)
Mr Darren Weir (Clerical Officer)
Also in Attendance: Mr Damien Martin (Clerk Assistant)
Apologies: Mr John Dallat
Mr David Hilditch
2:08 pm the meeting opened in public session.
2:15 pm Mr Beggs entered the meeting.
2:34 pm Mr McGlone entered the meeting.
2:46 pm Ms Purvis left the meeting.
2:50 pm Mr Shannon entered the meeting.
2:51 pm Mr Beggs left the meeting.
2:46 pm Mr Lunn, Mr McGlone and Mr Moutray left the meeting.
3:00 pm The meeting went into closed session after initial remarks on both reports by the C&AG.
Ms Felicity Huston briefed members before leaving the meeting.
Mr Kieran Donnelly, C&AG; Mr Eddie Bradley, Assistant Auditor General; Mr Paul Craig, Audit Manager; and Mrs Dorothy Smith Senior Auditor; briefed the Committee on the report.
The C&AG continued to brief members in private session.
2:46 pm Mr Lunn entered the meeting.
3:40 pm Mr Shannon left the meeting.
3:45 pm Mr Beggs and Ms Purvis entered the meeting.
Mr Kieran Donnelly, C&AG; Mr Stephen McCormick, Director; Miss Jacqueline O'Brien, Audit Manager; and Mr Joe Campbell, Audit Manager; briefed the Committee on the report.
The C&AG continued to brief members in private session.
[EXTRACT]
Present: Mr Paul Maskey (Chairperson)
Mr Roy Beggs (Deputy Chairperson)
The Lord Browne
Mr John Dallat
Mr David Hilditch
Mr Trevor Lunn
Mr Mitchel McLaughlin
Mr Patsy McGlone
Ms Dawn Purvis
Mr Jim Shannon MP
In Attendance: Miss Aoibhinn Treanor (Assembly Clerk)
Mr Phil Pateman (Assistant Assembly Clerk)
Miss Danielle Best (Clerical Supervisor)
Mr Darren Weir (Clerical Officer)
Apologies: Mr Stephen Moutray
2:03 pm The meeting opened in public session.
2:04 pm Mr Hilditch entered the meeting.
The Committee took oral evidence on the above report from:
2:19 pm Mr Shannon entered the meeting.
2:20 pm Mr Shannon left the meeting.
2:23 pm Mr Dallat left the meeting.
2:30 pm Mr Dallat entered the meeting.
2:34 pm Mr Dallat left the meeting.
2:42 pm Mr Dallat entered the meeting.
2:51 pm Mr McGlone left the meeting.
2:59 pm Mr McGlone entered the meeting.
3:05 pm Mr Shannon entered the meeting.
3:10 pm Ms Purvis left the meeting.
3:17 pm Mr Dallat entered the meeting.
3:20 pm Ms Purvis entered the meeting.
3:40 pm Mr Hilditch left the meeting.
3:55 pm Mr McGlone left the meeting.
4:05 pm Mr McGlone entered the meeting.
4:18 pm Mr Dallat left the meeting.
4:24 pm Mr Dallat entered the meeting.
4:40 pm Mr Shannon left the meeting.
4:47 pm Mr McGlone left the meeting.
4:55 pm Mr Lunn left the meeting.
5:03 pm Mr McLaughlin left the meeting.
The witnesses answered a number of questions put by the Committee.
Agreed: The Committee agreed to request further information from the witnesses.
5:07 pm The meeting went into closed session.
Members noted correspondence from a former Chairman of Northern Ireland Water offering to attend and support the Committee's forthcoming evidence session on 'The Governance of NI Water'.
Agreed: Members agreed that this would not be necessary and agreed to invite the letterwriter to submit written information to the Committee.
[EXTRACT]
Present: Mr Paul Maskey (Chairperson)
Mr Roy Beggs (Deputy Chairperson)
The Lord Browne
Mr John Dallat
Mr David Hilditch
Mr Patsy McGlone
Mr Mitchel McLaughlin
Ms Dawn Purvis
Mr Jim Shannon
In Attendance: Miss Aoibhinn Treanor (Assembly Clerk)
Mr Phil Pateman (Assistant Assembly Clerk)
Miss Danielle Best (Clerical Supervisor)
Mr Darren Weir (Clerical Officer)
Apologies: Mr Trevor Lunn
Mr Stephen Moutray
2:03 pm the meeting opened in closed session.
The Committee considered an issues paper from the oral evidence session on the NIAO report on 'Measuring the Performance of NI Water'.
Agreed: The Committee agreed the issues contained in the paper as discussed.
2:09 pm the meeting went into open session.
Members noted correspondence from the Committee for Regional Development providing an update on the main findings of the "deep-dive" reports relating to NI Water.
Members noted the "deep-dive" audit reports recently published by the Department for Regional Development.
The Committee took oral evidence on the above report from:
The witnesses answered a number of questions put by the Committee.
3:25 pm Mr Dallat left the meeting.
3:28 pm Mr Dallat entered the meeting.
3:30 pm Mr McGlone left the meeting.
3:34 pm Mr McGlone entered the meeting.
3:45 pm Mr Beggs entered the meeting.
3:45 pm Mr Dallat left the meeting.
3:47 pm Mr Hilditch left the meeting.
4:01 pm Mr Dallat entered the meeting.
4:09 pm Mr Shannon left the meeting.
4:24 pm Mr Shannon entered the meeting.
4:30 pm Mr Hilditch entered the meeting.
5:03 pm The Chairperson adjourned the meeting.
5:10 pm The meeting opened in open session.
5:11 pm Mr Hilditch entered the meeting.
Agreed: The Committee agreed to request further information from the witnesses.
[EXTRACT]
Present: Mr Paul Maskey (Chairperson)
Mr Roy Beggs (Deputy Chairperson)
The Lord Browne
Mr John Dallat
Mr Trevor Lunn
Mr Mitchel McLaughlin
Ms Dawn Purvis
In Attendance: Miss Aoibhinn Treanor (Assembly Clerk)
Mr Damien Martin (Clerk Assistant)
Ms Roisin Kelly (Assembly Clerk)
Mr Alyn Hicks (Assistant Assembly Clerk)
Miss Danielle Best (Clerical Supervisor)
Mr Darren Weir (Clerical Officer)
Apologies: Mr David Hilditch
Mr Patsy McGlone
Mr Stephen Moutray
1.08 pm The meeting opened in closed session.
The Committee agreed to conduct the entire meeting in closed session to discuss matters relating to the development of its draft report into the NI Water inquiry.
Members agreed that the Clerk to the Committee for Regional Development should be present.
The Committee considered correspondence dated 21 July 2010 from Ms Sue Holmes of Contracting Out LLP (enclosing copy correspondence between Contracting Out LLP and NI Water and Contracting Out LLP and the Department for Regional Development).
1.09 pm Mr McLaughlin entered the meeting.
1.35 pm Mr Dallat left the meeting.
1.42 pm Mr Dallat rejoined the meeting.
Agreed: The Committee would formally accept this correspondence as evidence.
Agreed: The Committee would seek legal advice regarding the extent to which the subject matter of this correspondence should be regarded as sub judice.
Agreed: The Committee would forward this correspondence to the Head of the Civil Service to inform his investigation into the matters which led to the precautionary suspension of the Permanent Secretary of the Department for Regional Development and advise the Head of the Civil Service that this correspondence had been discussed by the Committee in closed session.
Agreed: The Committee would request the terms of reference of the Head of the Civil Service's investigation and the anticipated timescale for the completion of his investigation.
The Committee considered correspondence from the Committee for Regional Development.
Agreed: The Committee agreed that PAC would consider the request from the Committee for Regional Development to share papers pertaining to the inquiry at its next meeting, by which time further information on the matters under investigation by the Head of the Civil Service should be known and the Committee will have had an opportunity to clarify plans for taking forward its own inquiries.
Agreed: The Chairpersons of both Committees would continue to liaise regarding the respective roles of each Committee in relation to the issues arising.
Agreed: The Clerk to the Committee for Regional Development should relay to that Committee the decisions taken at today's meeting.
Agreed: The Northern Ireland Audit Office would prepare an Issues Paper for the Committee's next meeting.
Agreed: The Clerk would prepare an Options Paper for the Committee's next meeting.
[EXTRACT]
Present: Mr Paul Maskey (Chairperson)
Mr Roy Beggs (Deputy Chairperson)
Mr Trevor Lunn
Mr Patsy McGlone
Mr Mitchel McLaughlin
Ms Dawn Purvis
In Attendance: Miss Aoibhinn Treanor (Assembly Clerk)
Mr Damien Martin (Clerk Assistant)
Ms Roisin Kelly (Assembly Clerk)
Mr Phil Pateman (Assistant Assembly Clerk)
Miss Danielle Best (Clerical Supervisor)
Miss Michelle McDowell (Clerical Officer)
Apologies: The Lord Browne
Mr John Dallat
Mr David Hilditch
Mr Stephen Moutray
12:04 pm The meeting opened in closed session.
12:06 pm Ms Purvis entered the meeting.
The Committee agreed to conduct the entire meeting in closed session to discuss matters relating to the development of its draft report into the NI Water inquiry.
Members agreed that the Clerk to the Committee for Regional Development should be present.
The Committee noted correspondence received from Mr Bruce Robinson, Head of the Northern Ireland Civil Service detailing the current position of the investigation being undertaken in respect of Mr Paul Priestly's suspension.
Agreed: The Committee agreed the terms of a response to Mr Robinsons's letter and to request to be updated on the outcome of the investigation upon its conclusion.
Members noted correspondence from Dr Malcolm McKibbin, Accounting Officer, Department for Regional Development providing the further information requested by the Committee following its evidence session on 1 July 2010. Members also noted a tabled letter from the Department giving a further update on outstanding issues.
Agreed: The Committee agreed the terms of a reply to Dr McKibbin.
Agreed: The Committee agreed to return the offer of a briefing by Mr MacKenzie in due course.
Agreed: The Committee agreed to schedule a further meeting on Tuesday, 7 September 2010 on the NI Water inquiry.
Agreed: The Committee agreed to consider this item at its next meeting.
Agreed: The Committee also agreed that FOI information received by members would be circulated to the Committee.
Members noted correspondence from the Committee for Regional Development providing an update on its recent evidence session on NI Water with the Minister for Regional Development.
Agreed: The Committee agreed to the request made by the Committee for Regional Development to share certain inquiry papers received pertaining to NI Water inquiry.
Members considered and amended a draft issues paper on this evidence session.
Members considered an options paper provided by the Clerk to the Committee.
Agreed: The Committee asked the Comptroller and Auditor General to undertake an examination of procurement contract exceptions in NI Water.
[EXTRACT]
Present: Mr Paul Maskey (Chairperson)
Mr Roy Beggs (Deputy Chairperson)
Mr John Dallat
Mr Trevor Lunn
Mr Patsy McGlone
Mr Mitchel McLaughlin
Mr Stephen Moutray
Ms Dawn Purvis
In Attendance: Miss Aoibhinn Treanor (Assembly Clerk)
Mr Damien Martin (Clerk Assistant)
Ms Roisin Kelly (Assembly Clerk)
Mr Jonathan McMillan (Legal Services)
Mr Phil Pateman (Assistant Assembly Clerk)
Miss Danielle Best (Clerical Supervisor)
Mr Darren Weir (Clerical Officer)
Apologies: The Lord Browne
Mr David Hilditch
12:07 pm The meeting opened in closed session.
The Committee agreed to conduct the meeting in closed session to discuss matters relating to the development of its draft report into the NI Water inquiry.
Members agreed that the Clerk to the Committee for Regional Development and Mr Jonathan McMillen from Legal Services should be present.
12:10 pm Mr Beggs entered the meeting.
Members noted correspondence received from Chris Mellor and Mr Declan Gormley.
Agreed: The Committee agreed to consider as its inquiry develops Mr Gormley's request to provide oral evidence to the Committee and the need for further oral evidence to be heard.
12:39 pm Mr Moutray left the meeting.
12:50 pm Mr McGlone left the meeting.
12:54 pm Mr McGlone entered the meeting.
Members noted correspondence from a member of the public relating to the appointment of Non-Executive Directors at NI Water.
Members noted correspondence from Mr Kieran Donnelly, Comptroller and Auditor General outlining the aims of his examination of NI Water.
Members noted the legal advice and accompanying brief from the Clerk to the Committee.
Members noted that due to the amount of information received as a result of FOI requests by members and supplied to members an electronic copy has been provided.
Members considered an issues paper on this evidence session.
Members considered an options paper provided by the Clerk to the Committee.
Agreed: The Committee agreed to receive a progress paper from the Clerk to the Committee summarising lines of inquiry in the week commencing 20 September 2010.
[EXTRACT]
Present: Mr Paul Maskey (Chairperson)
Mr Roy Beggs (Deputy Chairperson)
Mr John Dallat
Mr Trevor Lunn
Mr Patsy McGlone
Mr Mitchel McLaughlin
Mr Stephen Moutray
In Attendance: Miss Aoibhinn Treanor (Assembly Clerk)
Mr Phil Pateman (Assistant Assembly Clerk)
Miss Danielle Best (Clerical Supervisor)
Mr Darren Weir (Clerical Officer)
Apologies: The Lord Browne
Mr David Hilditch
Ms Dawn Purvis
2:01 pm The meeting opened in closed session.
The Committee noted correspondence from Felicity Huston, Commissioner of Public Appointments for Northern Ireland highlighting a correction to the evidence heard at its session on 1 July 2010 on the Governance of NI Water.
Agreed: The Committee agreed to include the correspondence alongside the Hansard transcript in its final report.
[EXTRACT]
Present: Mr Paul Maskey (Chairperson)
Mr Roy Beggs (Deputy Chairperson)
Mr Gregory Campbell MP
Mr John Dallat
Mr Trevor Lunn
Mr Patsy McGlone
Mr Mitchel McLaughlin
Mr Adrian McQuillan
Ms Dawn Purvis
In Attendance: Miss Aoibhinn Treanor (Assembly Clerk)
Mr Phil Pateman (Assistant Assembly Clerk)
Miss Danielle Best (Clerical Supervisor)
Mr Darren Weir (Clerical Officer)
Apologies: Mr William Irwin
Mr Stephen Moutray
1:03 pm The meeting opened in closed session.
1:03 pm Mr McLaughlin entered the meeting.
The Committee agreed to conduct the meeting in closed session to discuss matters relating to the development of its draft report into the NI Water inquiry.
Members noted correspondence received from Dr Malcolm McKibbin, Accounting Officer, Department for Regional Development providing the further information requested by the Committee relating to staff substitutions.
1:06 pm Mr Campbell and Mr McGlone entered the meeting.
1:08 pm Ms Purvis entered the meeting.
Members noted correspondence from Mr Bruce Robinson, Head of the Northern Ireland Civil Service relating to the investigation being undertaken in respect of Mr Paul Priestly's suspension.
Agreed: The Committee agreed to consider a draft letter to Mr Robinson at its next meeting to clarify some points raised.
Members noted correspondence from Mr Tony McGovern, Managing Director, Rodgers Contracts relating to procurement practices at NI Water.
Agreed: The Committee agreed to acknowledge Mr McGovern's letter and to forward it to the Northern Ireland Audit Office for investigation and if relevant to address implications for the current enquiry from the letter.
Members noted correspondence from R Conway and J J Flood relating to their ongoing dispute with NI Water regarding the installation of a water meter at their business premises.
Agreed: The Committee agreed to forward this item of correspondence to the Committee for Regional Development for its consideration.
The Chairperson updated the Committee that some Members have information obtained by Freedom of Information and this will be distributed once it has been received in its entirety.
Members noted a memorandum from the Clerk to the Committee for Regional Development requesting certain papers pertaining to the NI Water enquiry.
[EXTRACT]
Present: Mr Paul Maskey (Chairperson)
Mr Roy Beggs (Deputy Chairperson)
Mr Gregory Campbell MP
Mr John Dallat
Mr William Irwin
Mr Trevor Lunn
Mr Patsy McGlone
Mr Mitchel McLaughlin
Mr Stephen Moutray
Ms Dawn Purvis
In Attendance: Miss Aoibhinn Treanor (Assembly Clerk)
Mr Phil Pateman (Assistant Assembly Clerk)
Miss Danielle Best (Clerical Supervisor)
Mr Christopher McNickle (Clerical Officer)
Apologies: Mr Adrian McQuillan
1:05 pm The meeting opened in closed session.
1:06 pm Mr Dallat and Mr McGlone entered the meeting.
The Committee agreed to conduct the meeting in closed session to discuss matters relating to the development of its draft report into the NI Water inquiry.
Members noted correspondence from Mr Kieran Donnelly, Comptroller and Auditor General, Northern Ireland Audit Office to Mr Tony McGovern, Rodgers Contracts relating to the Committee's request that the Audit Office follow up on the issues raised.
1:08 pm Mr Beggs entered the meeting.
1:18 pm Mr Moutray left the meeting.
1:25 pm Mr McLaughlin left the meeting.
1:31 pm Mr Irwin left the meeting.
Members noted correspondence from Mr Bruce Robinson, Head of the Northern Ireland Civil Service relating to the investigation being undertaken in respect of Mr Paul Priestly's suspension.
Agreed: The Committee agreed to write to Mr Robinson to clarify some points raised.
Members noted correspondence from Sir Jon Shortridge KCB requesting a meeting with the Chairperson re events after the Committee's evidence session on 1 July 2010.
Agreed: The Committee agreed that the Chairperson should meet Sir Shortridge on behalf of the Committee.
Members noted correspondence from Mr Declan Gormley detailing questions sent by him to the Department for Regional Development.
Agreed: The Committee agreed to write to the Department to follow up on some of the points raised.
1:44 pm Mr Campbell left the meeting.
1:45 pm Mr Beggs left the meeting.
The Chairperson updated the Committee on information obtained by Freedom of Information and submitted as evidence. The Committee was briefed by the Clerk to the Committee on the developing register of this material and agreed for further updates as the register develops.
[EXTRACT]
Present: Mr Paul Maskey (Chairperson)
Mr Roy Beggs (Deputy Chairperson)
Mr Gregory Campbell MP
Mr Patsy McGlone
Mr Mitchel McLaughlin
Mr Stephen Moutray
Ms Dawn Purvis
In Attendance: Miss Aoibhinn Treanor (Assembly Clerk)
Mr Phil Pateman (Assistant Assembly Clerk)
Miss Danielle Best (Clerical Supervisor)
Mr Christopher McNickle (Clerical Officer)
Apologies: Mr John Dallat
Mr William Irwin
Mr Trevor Lunn
Mr Adrian McQuillan
2:06 pm The meeting opened in public session.
2:39 pm Ms Purvis left the meeting.
2:43 pm Ms Purvis entered the meeting.
2:59 pm Mr Moutray left the meeting.
3:04 pm Mr McLaughlin left the meeting.
3.18 pm The Committee went into closed session.
Agreed: The Committee agreed to defer consideration of the report until the week commencing 1 November 2010.
Members noted two items of correspondence forwarded by Mr Gormley to the Committee relating to the Committee's ongoing inquiry into NI Water.
3:22 pm Mr McGlone left the meeting.
[EXTRACT]
Present: Mr Paul Maskey (Chairperson)
Mr Gregory Campbell MP
Mr John Dallat
Mr Patsy McGlone
Mr Mitchel McLaughlin
Mr Adrian McQuillan
Mr Stephen Moutray
Ms Dawn Purvis
In Attendance: Miss Aoibhinn Treanor (Assembly Clerk)
Mr Phil Pateman (Assistant Assembly Clerk)
Miss Danielle Best (Clerical Supervisor)
Mr Darren Weir (Clerical Officer)
Apologies: Mr Roy Beggs (Deputy Chairperson)
Mr William Irwin
Mr Trevor Lunn
2:08 pm The meeting opened in public session.
2:10 pm Mr McGlone entered the meeting.
2:22 pm The Committee went into closed session.
2:30 pm Mr McQuillan left the meeting.
2:35 pm Mr McQuillan entered the meeting.
Agreed: The Committee agreed to defer this item of correspondence until its meeting week commencing 8 November.
2:47pm Mr McGlone left the meeting.
Agreed: The Committee agreed to defer this item of correspondence until its meeting week commencing 8 November.
Agreed: The Committee agreed to defer this item of correspondence until its meeting week commencing 8 November.
Agreed: The Committee agreed that due to the sensitivity of some of the information in the response this part should be retained in the Committee Office.
Agreed: The Committee agreed to defer this item of correspondence until its meeting week commencing 8 November.
2:49 pm Mr McGlone entered the meeting.
Paragraphs 1 – 6 read and agreed.
Agreed: The Committee agreed to reconsider a redraft of paragraphs 7 – 11 at its next meeting.
Paragraphs 12 - 14 read and agreed.
Paragraph 15 read, amended and agreed.
Paragraphs 16 – 28 read and agreed.
Paragraph 29 read, amended and agreed.
Paragraphs 30 – 47 read and agreed.
3:05 pm Mr McGlone left the meeting.
3:06 pm Ms Purvis left the meeting.
3:07 pm Ms Purvis entered the meeting.
3:21 pm Mr Campbell left the meeting.
3:29 pm Mr McGlone entered the meeting.
Paragraph 48 read and agreed.
Paragraphs 1 – 9 read and agreed.
Agreed: Members agreed the correspondence for inclusion in the report.
[EXTRACT]
Present: Mr Paul Maskey (Chairperson)
Mr Roy Beggs (Deputy Chairperson)
Mr Gregory Campbell MP
Mr John Dallat
Mr William Irwin
Mr Trevor Lunn
Mr Patsy McGlone
Mr Mitchel McLaughlin
Mr Stephen Moutray
Ms Dawn Purvis
In Attendance: Miss Aoibhinn Treanor (Assembly Clerk)
Mr Phil Pateman (Assistant Assembly Clerk)
Miss Danielle Best (Clerical Supervisor)
Mr Darren Weir (Clerical Officer)
Apologies: Mr Adrian McQuillan
2:03 pm The meeting opened in public session.
Members noted correspondence from Mr Iain Osborne, Chief Executive, Utility Regulator providing information requested by the Committee relating to its ongoing inquiry into NI Water.
2:23 pm Ms Purvis left the meeting.
2:24 pm Mr Campbell and Mr Moutray left the meeting.
2:27 pm Mr Lunn left the meeting.
2:29 pm Mr Lunn entered the meeting.
Members noted correspondence from Mr Laurence MacKenzie, Chief Executive, NI Water providing information requested by the Committee relating to its ongoing inquiry into NI Water.
Members noted correspondence from Dr Malcolm McKibbin, Accounting Officer, Department for Regional Development providing information requested by the Committee relating to its ongoing inquiry into NI Water.
Members noted correspondence from Mr Bruce Robinson, Head of the Northern Ireland Civil Service in relation to the investigation being undertaken in respect of Mr Paul Priestly's suspension.
Members noted a progress paper from the Clerk to the Committee relating to the Committee's ongoing inquiry into NI Water and agreed where to factor in to it the issues raised by the above correspondence.
3:06 pm Mr McGlone left the meeting.
3:09 pm Mr McGlone entered the meeting.
Agreed: The Committee agreed not to meet on Thursday 18 November 2010.
Paragraph 7 read, amended and agreed.
Paragraphs 8 – 10 read and agreed.
[EXTRACT]
Present: Mr Paul Maskey (Chairperson)
Mr Roy Beggs (Deputy Chairperson)
Mr Gregory Campbell MP
Mr John Dallat
Mr William Irwin
Mr Trevor Lunn
Mr Patsy McGlone
Mr Mitchel McLaughlin
Mr Adrian McQuillan
Mr Stephen Moutray
In Attendance: Miss Aoibhinn Treanor (Assembly Clerk)
Mr Phil Pateman (Assistant Assembly Clerk)
Miss Danielle Best (Clerical Supervisor)
Mr Darren Weir (Clerical Officer)
Apologies: Ms Dawn Purvis
2:02 pm The meeting opened in public session.
2:06 pm Mr Irwin and Mr McQuillan entered the meeting.
2:07 pm Mr Lunn declared an interest stating that the whistleblower was a former colleague in politics and business.
2:09 pm Mr Campbell entered the meeting.
2:12 pm Mr Moutray entered the meeting.
2:17 pm Mr McGlone left the meeting.
2:19 pm Mr McGlone entered the meeting.
2:35 pm Mr McLaughlin entered the meeting.
2:35 pm The meeting went into closed session.
Members noted correspondence from Mr Stephen Peover, Accounting Officer, Department of Finance and Personnel providing information requested by the Committee relating to its ongoing inquiry into NI Water.
Members noted correspondence from Mr Laurence MacKenzie, Chief Executive, NI Water responding to an anonymous letter relating to concerns raised regarding procurement processes which were copied to the Committee.
Members noted correspondence from Dr Malcolm McKibbin, Accounting Officer, Department for Regional Development providing the further information sought by the Committee in relation into its ongoing inquiry into NI Water.
3:27 pm Mr McQuillan left the meeting.
3:32 pm Mr McQuillan left the meeting.
Agreed: The Committee agreed to seek legal advice about the response.
Agreed: The Committee agreed not to meet on Thursday 2 December 2010.
3:32 pm Mr McQuillan entered the meeting.
[EXTRACT]
Present: Mr Paul Maskey (Chairperson)
Mr Roy Beggs (Deputy Chairperson)
Mr Trevor Lunn
Mr Mitchel McLaughlin
Mr Patsy McGlone
In Attendance: Ms Aoibhinn Treanor (Assembly Clerk)
Mr Phil Pateman (Assistant Assembly Clerk)
Miss Danielle Best (Clerical Supervisor)
Mr Darren Weir (Clerical Officer)
Apologies: Mr Gregory Campbell MP
Mr John Dallat
Mr William Irwin
Mr Adrian McQuillan
Mr Stephen Moutray
Ms Dawn Purvis
2:08 pm The meeting opened in public session.
2:25 pm Mr McGlone left the meeting.
2:34 pm Mr McGlone entered the meeting.
2:35 pm The meeting went into closed session after initial remarks by the C&AG.
Members noted correspondence from Dr Malcolm McKibbin, Accounting Officer, Department of Regional Development to the C&AG which was copied to the Committee relating to the NIAO memorandum on the 'Examination of Procurement Breaches in NI Water'.
Mr Kieran Donnelly, Comptroller and Auditor General; Stephen McCormick, Director; Jacqueline O'Brien, Richard Ross and Joe Campbell, Audit Managers; briefed the Committee on the findings on the recent examination of procurement breaches in NI Water.
The witnesses answered a number of questions put by members.
The C&AG agreed to report back to the Committee about concerns raised by Mr McGlone around clearance of the memorandum.
Agreed: The Committee agreed to note the memorandum and factor the findings into its draft report.
Agreed: The Committee agreed to defer consideration of this item of correspondence until its next meeting on 16 December 2010.
[EXTRACT]
Present: Mr Paul Maskey (Chairperson)
Mr Roy Beggs (Deputy Chairperson)
Mr John Dallat
Mr William Irwin
Mr Trevor Lunn
Mr Mitchel McLaughlin
Mr Adrian McQuillan
In Attendance: Miss Aoibhinn Treanor (Assembly Clerk)
Mr Phil Pateman (Assistant Assembly Clerk)
Miss Danielle Best (Clerical Supervisor)
Mr Darren Weir (Clerical Officer)
Apologies: Mr Gregory Campbell MP
Mr Patsy McGlone
Mr Stephen Moutray
Ms Dawn Purvis
1:33 pm The meeting opened in public session.
1:41 pm Mr McQuillan entered the meeting.
2:19 pm Mr Irwin left the meeting.
2:23 pm Mr Irwin entered the meeting.
3:11 pm Mr Dallat left the meeting.
3:12 pm Mr McQuillan left the meeting.
3:15 pm Mr Dallat entered the meeting.
3:18 pm Mr Beggs left the meeting.
3:24 pm Mr Irwin left the meeting.
3:27 pm Mr Irwin entered the meeting.
3:30 pm The meeting went into closed session.
Members noted correspondence from Dr Malcolm McKibbin, Accounting Officer, Department for Regional Development relating to a recent article published in the Institute of Internal Audit's magazine.
Agreed: The Committee agreed that the Chairperson and Deputy Chairperson should meet the Accounting Officer regarding official commentary in the media during PAC inquiries in the context of this article.
Members noted correspondence from Mr Kieran Donnelly, Comptroller and Auditor General, Northern Ireland Audit Office highlighting some findings from the papers he obtained from the Independent Review Team.
Members noted correspondence from Mr Kieran Donnelly, Comptroller and Auditor General, Northern Ireland Audit Office to Dr Malcolm McKibbin, Accounting Officer, Department for Regional Development which was copied to the Committee relating to the clearance times of the Audit Office's Memo on the 'Examination of Procurement Breaches in NI Water'.
[EXTRACT]
Present: Mr Paul Maskey (Chairperson)
Mr Roy Beggs (Deputy Chairperson)
Mr Gregory Campbell MP
Mr John Dallat
Mr Trevor Lunn
Mr Mitchel McLaughlin
Ms Dawn Purvis
Mr Stephen Moutray
In Attendance: Ms Aoibhinn Treanor (Assembly Clerk)
Mr Phil Pateman (Assistant Assembly Clerk)
Miss Danielle Best (Clerical Supervisor)
Mr Darren Weir (Clerical Officer)
Apologies: Mr William Irwin
Mr Patsy McGlone
Mr Adrian McQuillan
2:01 pm The meeting opened in public session.
2:06 pm Mr Dallat entered the meeting.
2:09 pm Ms Purvis entered the meeting.
2:26 pm Mr Dallat left the meeting.
2:28 pm Mr Lunn left the meeting.
2:29 pm Mr Lunn entered the meeting.
2:30 pm The meeting went into closed session.
2:37 pm Mr Dallat entered the meeting.
2:41 pm Mr Beggs left the meeting.
Members noted correspondence from the Northern Ireland Audit Office inviting the Chairperson to speak at the conference.
2:51 pm Mr Campbell left the meeting.
Agreed: The Committee agree that the Chairperson should speak at the event on its behalf.
Agreed: The Committee agreed to launch the NI Water report with a media pre-brief in advance of the conference.
The Chairperson reminded Members that the Committee will consider its report on 'Procurement Governance at NI Water' at its meeting on 20 January 2011.
Agreed: The Committee agreed to request an update from the Head of the Northern Ireland Civil Service and DRD/NI Water on investigations into conduct related to the inquiry.
[EXTRACT]
Present: Mr Paul Maskey(Chairperson)
Mr Roy Beggs (Deputy Chairperson)
Mr Gregory Campbell MP
Mr William Irwin
Mr Trevor Lunn
Mr Patsy McGlone
Mr Stephen Moutray
Mr Mitchel McLaughlin
Ms Dawn Purvis
In Attendance: Ms Aoibhinn Treanor (Assembly Clerk)
Mr Phil Pateman (Assistant Assembly Clerk)
Miss Danielle Best (Clerical Supervisor)
Mr Darren Weir (Clerical Officer)
Also in attendance: Mr Damien Martin (Clerk Assistant)
Apologies: Mr John Dallat
Mr Adrian McQuillan
1:44 pm The meeting opened in closed session.
The Chairperson thanked members for starting early to address the matter.
The Committee considered an options paper from the Clerk and was briefed by the Clerk Assistant, Damien Martin, on good practice in this situation from other legislatures.
Agreed: The Committee agreed to change the handling arrangements for Committee papers; to instigate an inquiry; and to issue a statement immediately.
Members considered a draft press statement.
Agreed: The Committee agreed the draft statement as amended for immediate issue.
2:35 pm The meeting went into public session.
2:30 pm Mr Irwin left the meeting.
2:40 pm Mr McGlone left the meeting.
2:44 pm The meeting went into closed session.
Paragraphs 1 - 4 read and agreed.
2:48 pm Mr Irwin entered the meeting.
2:50 pm Mr Campbell left the meeting.
Paragraph 5 read, amended and agreed.
3:01 pm Mr Moutray left the meeting.
Paragraphs 6- 10 read and agreed.
The Committee discussed the order of the sections.
3:26 pm Mr McGlone left the meeting.
3:32 pm Mr McGlone entered the meeting.
3:35 pm Mr Irwin left the meeting.
Paragraphs11 - 13 read and agreed.
Paragraphs 14 and 15 read, amended and agreed subject to further advice.
4:03 pm Mr Lunn left the meeting.
4:06 pm Mr Lunn entered the meeting.
Paragraph 16 read, amended and agreed subject to further information.
4:14 pm Mr Irwin entered the meeting.
Paragraph 20 read, amended and agreed.
Paragraphs 21 - 27 read and agreed.
Paragraph 28 read, amended and agreed.
Paragraph 29 read, amended and agreed.
Paragraph 30 read and agreed.
Paragraph 31 read, amended and agreed subject to further advice.
Paragraph 32 read and agreed.
Paragraph 33 read, amended and agreed subject to further advice.
Paragraphs 34-37 read and agreed.
Paragraph 38 read, amended, agreed and transposed.
Paragraphs 39-43 read and agreed.
Paragraphs 44-46 read, amended and agreed subject to further advice and information.
Paragraph 47 read, amended and agreed.
Paragraphs 48-54 read and agreed.
Paragraph 54 read, amended and agreed.
Paragraphs 56-58 read and agreed.
Paragraph 59 blank.
Paragraphs 60-67 read and agreed.
Paragraph 68 read, amended and agreed.
Paragraphs 69-72 read, amended and agreed.
Paragraphs 73-78 read and agreed.
Paragraph79 read, amended and agreed subject to further advice.
Paragraphs 80-84 read and agreed.
5:15 pm Mr McGlone left the meeting.
5:16 pm Mr Irwin entered the meeting.
Paragraph 85 read, amended and agreed.
5:18 pm Mr McGlone entered the meeting.
Paragraphs 86-92 read and agreed.
Paragraphs 93 read, amended and agreed subject to further advice.
Paragraph 94 read and agreed.
Paragraph 95 read, amended and agreed.
Paragraphs 96-97 read, agreed and transposed.
Paragraphs 98-118 read and agreed.
Paragraphs 119-120 read, amended and agreed subject to further advice.
Paragraphs 121-122 read and agreed.
Paragraph 123 blank.
Paragraphs 124-132 read and agreed.
Paragraph 133 read, amended and agreed.
Paragraphs 134-140 read and agreed.
5:46 pm Mr McGlone left the meeting.
Paragraph 141 read, amended and agreed.
5:50 pm Mr McGlone entered the meeting.
5:51 pm Mr McGlone left the meeting.
5:53 pm Mr McGlone entered the meeting
Paragraphs 142-156 read and agreed.
Agreed, that the report should be accompanied by a timeline.
The Committee discussed this draft and the drafting of the Executive Summary.
Agreed: The Committee agreed to seek legal advice on certain paragraphs of the draft report; the Committee agreed to seek further information from HOCS and DRD in relation to certain paragraphs of the draft report.
Members noted correspondence from Sue Holmes, Contracting Out.
Agreed: The Committee agreed to seek legal advice on a matter raised.
Agreed: The Committee agreed that C&AG should respond to the Committee regarding this letter.
This item was deferred until the next meeting.
[EXTRACT]
Present: Mr Paul Maskey (Chairperson)
Mr Roy Beggs (Deputy Chairperson)
Mr Gregory Campbell MP
Mr William Irwin
Mr Patsy McGlone
Mr Adrian McQuillan
Mr Stephen Moutray
Mr Mitchel McLaughlin
In Attendance: Ms Aoibhinn Treanor (Assembly Clerk)
Ms Hilary Bogle (Assistant Clerk)
Miss Danielle Best (Clerical Supervisor)
Mr Darren Weir (Clerical Officer)
Also in attendance: Mr Damien Martin (Clerk Assistant)
Ms Angela Kelly (Assembly Legal Services) (Agenda Item 3 (i)).
Apologies: Mr Trevor Lunn
Ms Dawn Purvis
Mr John Dallat
2.07pm The meeting commenced in open session.
The Chairperson welcomed Members to the meeting.
Agreed: The Committee agreed that the meeting should commence in open session and go into closed session at Agenda Item 3.
2.09pm The meeting moved into closed session.
The Committee noted the Clerk's brief, legal advice provided by Assembly Legal Services and the presentation of issues made by Ms Angela Kelly of Assembly Legal Services.
2.33pm Mr McGlone left the meeting.
Agreed: Following discussion the Committee agreed to give further consideration to the issue when Legal Advice has been received on other related matters in the Report.
The Chairperson thanked Ms Kelly for attending the meeting.
2.36pm
The Committee considered correspondence received from Dr McKibbin, Accounting Officer, Department of Regional Development in relation to departmental approval of confidentiality agreements.
Agreed: Following discussion the Committee agreed to note the response and to reflect its content in the draft report.
The Committee considered correspondence received from Dr McKibbin, Accounting Officer, Department of Regional Development re Executive mapping/disciplinary processes at NI Water.
Agreed: Following discussion the Committee agreed to note the correspondence received from Dr McKibbin, to reflect its contents in the revised draft report, and to seek further information on the matter.
The Committee considered correspondence received from the Head of the Northern Ireland Civil Service re the Committee's Inquiry into NI Water.
2.50pm Mr McLaughlin left the meeting.
2.51pm Mr McLaughlin returned to the meeting.
2.53pm Mr Moutray left the meeting.
Agreed: Following discussion the Committee agreed to write to the Head of the Civil Service seeking further information and to reflect the response in its draft report.
The Committee considered correspondence received from the C&AG in relation to correspondence received last week from Sue Holmes re Contracting Out.
The Chairperson asked C&AG to address the correspondence.
Agreed: Following discussion the Committee agreed to note the correspondence for its report.
Agreed: Members noted and agreed the draft handling arrangements in light of the leaking of the document, and agreed to adopt the proposed handling arrangements for the Committee's papers from now on. The Committee further agreed to review these handling arrangements in due course.
Agreed: Members noted that Assembly Legal Services have advised that they will examine the draft executive summary and relevant annexes to fully address the most recent request for legal advice made by the Committee. The Committee agreed to this course of action.
Agreed: The Committee agreed to address those paragraphs regarding which further information and advice had been sought.
Paragraph 39 read and agreed subject to further consideration.
Paragraph 43 read, amended and agreed.
Paragraph 55 read, amended and agreed.
3.36pm Mr Irwin left the meeting.
Paragraph 57 read, amended and agreed.
Paragraph 64 read and agreed subject to further consideration.
Paragraph 67 read, amended and agreed.
Paragraph 69 read and agreed.
Paragraph 71 read and agreed.
Paragraph 73 read, amended and agreed.
Paragraph 92 read, amended and agreed.
Paragraph 102 read and agreed.
Paragraph 117 read, amended and agreed.
Paragraph 118 read and agreed.
Paragraph 121 read, amended and agreed.
Paragraph 145 read and agreed.
Paragraph 146 read and agreed.
Agreed: The Committee agreed the Executive Summary subject to legal advice.
Agreed: The Committee agreed to note the Utility Regulator's 'Cost and Performance Report' on NI Water for 2007-2010.
Paragraph 22, read and agreed.
Paragraph 29, read and agreed.
Paragraph 42, read, amended and agreed.
Paragraphs 9, 10 and 12 of the Executive Summary, read, amended and agreed.
Agreed: The Committee agreed the correspondence for inclusion in the Report.
The Committee ordered the Committee's Report on 'Measuring the Performance of NI Water' to be printed.
The Clerk Assistant presented a proposed terms of reference for the inquiry requested by the Committee into the leaking of the draft report on procurement and governance in NI Water.
Agreed: The Committee agreed the terms of reference for the inquiry.
[EXTRACT]
Present: Mr Paul Maskey (Chairperson)
Mr Roy Beggs (Deputy Chairperson)
Mr Gregory Campbell MP
Mr John Dallat
Mr William Irwin
Mr Trevor Lunn
Mr Patsy McGlone
Mr Mitchel McLaughlin
Ms Dawn Purvis
In Attendance: Ms Aoibhinn Treanor (Assembly Clerk)
Mr Phil Pateman (Assistant Assembly Clerk)
Miss Danielle Best (Clerical Supervisor)
Mr Darren Weir (Clerical Officer)
Also in attendance: Mr Damien Martin (Clerk Assistant)
Apologies: Mr John Dallat
Mr Adrian McQuillan
Mr Stephen Moutray
2:07 pm The meeting opened in open session.
The Committee noted correspondence from the Head of the Civil Service and agreed to reflect the content in its draft report.
Paragraph 39, read and amended.
Agreed: The Committee further decided to write to BBC NI and consequently agreed a draft letter for immediate issue.
The Committee noted correspondence from the Interim Chairman of NI Water and agreed to reflect its content in the draft report.
Paragraph 64, read, amended and agreed.
The Committee considered advice on selected paragraphs of the draft report.
Paragraphs 37, 39, 44, 62 and 81, read, amended and agreed.
Agreed: The Committee agreed that the title of the report should be 'Procurement and Governance in NI Water'.
4:30pm Mr Dallat left the meeting.
Agreed : The Committee agreed the Executive Summary subject to the amendments made in the main report.
Agreed: The Committee agreed the correspondence for inclusion in the report.
Agreed: Members ordered the report to be printed.
Agreed: Members agreed that the report would be embargoed until 00.01 am on Thursday, 3 March 2011.
Agreed: The Committee agreed to update its webpage to reflect the launch date of the report.
Agreed: Members agreed to launch the report with a press release to be agreed at a later meeting.
[EXTRACT]
Members present for all or part of the proceedings:
Mr Paul Maskey (Chairperson)
Mr Roy Beggs (Deputy Chairperson)
The Lord Browne
Mr John Dallat
Mr David Hilditch
Mr Patsy McGlone
Mr Mitchel McLaughlin
Ms Dawn Purvis
Mr Jim Shannon
Witnesses:
Ms Lian Patterson |
Department for Regional Development |
|
Ms Nicola Brennan |
Northern Ireland Water |
Also in attendance:
Mr Kieran Donnelly |
Comptroller and Auditor General |
|
Ms Fiona Hamill |
Treasury Officer of Accounts |
1. The Chairperson (Mr P Maskey): We will now move to consider evidence on the Audit Office's memorandum on procurement and governance in NI Water. Given that no member has declared an interest, we will proceed.
2. Mr Paul Priestly, the accounting officer for the Department for Regional Development (DRD) is before the Committee again today. You are very welcome to what is your second evidence session in a week, and I thank you for being so accommodating to the Committee's work programme.
3. Before I ask you to introduce your colleagues, I advise the witnesses that many questions will be asked today in what could be a long session. I ask you to answer the questions as fully and as succinctly as possible. It is important that you speak up and answer the questions, as issues were raised last week about some answers being long-winded and some of the questions not being answered at all. Today's session is very important, but it is equally important that we get it right and that the questions are answered.
4. Mr Paul Priestly (Department for Regional Development): Thank you, Chairman. With me today is Lian Patterson, the senior finance director in the Department for Regional Development, who also has responsibility for water policy in the Department. Also with me is Laurence MacKenzie, the chief executive of Northern Ireland Water, and Nicola Brennan, the head of internal audit in Northern Ireland Water.
5. The Chairperson: Thank you. At the outset, I want to make it clear that we are not here to reach conclusions on individuals. The Committee will consider the independent review team's (IRT) report on procurement and governance in NI Water and the associated memorandum that the Comptroller and Auditor General produced. We will follow the same format that was used last week. I will ask the first few questions. I would be grateful if answers to those questions were succinct.
6. We have seen copies of the internal audit deep-dive reports. Some of the findings are staggering. There are numerous examples of improper or unauthorised use of non-competitive contracts, contracts extended beyond the permitted period, and use of suppliers on a repeat basis by raising quotations, rather than holding a proper competition. Since our Committee was established, we have not dealt with a more serious case of complete disregard for public sector ethics. Mr Priestly, I understand that a number of reviews are ongoing. Can you please summarise the main findings and tell us what remains to be done?
7. Mr Priestly: From the outset, I acknowledge that the events that the Committee is considering today are shocking, indefensible and unacceptable. As you noted, the Executive's policy is that competitive tendering is the way to demonstrate value for money. These failures in Northern Ireland Water, where there was a total of 73 procurements by single-tender action at a total value of £28·4 million, are, rightly, to be condemned, and we have been let down by those charged with the stewardship of Northern Ireland Water.
8. As to the action taken, as the Committee knows, the Minister removed four non-executive directors from the board of Northern Ireland Water. The Minister announced yesterday the appointment of four interim non-executive directors to an interim board. Since the IRT report, we have completed the deep-dive audit and we have published the results of the deep-dive audit on the DRD website. We have completed the mapping exercise to determine which senior executives in Northern Ireland Water are responsible for those failures. That has led to disciplinary action against four individuals. Laurence MacKenzie and I have together drawn up a detailed action plan to implement all the recommendations in the independent review team's report. As recommended by the independent review team, DRD is now represented at the Northern Ireland Water audit committee. The Minister also announced yesterday that he is examining the overall governance arrangements in Northern Ireland Water. We have taken swift action to try to put things right. I am not going to hide my disappointment at the events that have taken place. We feel that we have now a firm basis to prevent any recurrence.
9. The Chairperson: I appreciate your last comments. You said that you have taken swift action, but how long has this been going on?
10. Mr Priestly: Failures have been going on for three years in a history of procurements by single-tender action.
11. The Chairperson: Has it not been going on longer than that? Some of the reports state that some of the single-tender procurements have been going on since 2004. You, as accounting officer, said that swift action was taken.
12. Mr Priestly: I meant that we have taken swift action since the issues were exposed and drawn to our attention. The scale and magnitude of what was going on was drawn to my attention on 18 January by Laurence MacKenzie as the accounting officer of Northern Ireland Water. At that point, I decided that there needed to be an urgent independent review, and I got the Minister's agreement to set up the independent review team. That was established very quickly and launched on 20 January to get to the bottom of what had gone wrong and to identify where responsibility and accountability lay. The review team delivered its final report to me on 18 February. Once I became aware of the problem, swift action was taken.
13. The Chairperson: As accounting officer, do you not think that it was your responsibility to have found that out before then? I know that it was brought to your attention following the recent appointment of Mr MacKenzie, but given that you are the accounting officer in the Department, was it not your job to have found it out prior to that point?
14. Mr Priestly: As I have said several times to the Committee, I accept that I have a responsibility to ensure that Northern Ireland Water spends public money with due regularity and propriety and achieves value for money. However, I am not responsible for the day-to-day operations and management of that company. As the Minister said in his statement to the Assembly, at no time was a "red flag" raised to the Department. Those issues were never raised through any of processes and procedures that the Department has in place for Northern Ireland Water, such as the quarterly shareholder meetings or assurance statements.
15. The Chairperson: Again I ask you to be brief. As the Department's accounting officer, can you tell us whether it was a failure on your behalf not to have found that out?
16. Mr Priestly: I do not believe that it is a failure. It is regrettable that it did not happen. The arrangements were in place, but it was not identified.
17. The Chairperson: Do you feel that the arrangements did not work?
18. Mr Priestly: I think that we were let down by the board and executives of Northern Ireland Water. They signed off assurance statements that assured us that there were no issues in those areas.
19. The Chairperson: I will be as brief as you have been, because I know that other members want to ask questions. My questions are about the scene. The Department was given assurances, and audits were conducted of NI Water over the years that the Department will have signed off. Was the issue not identified at any stage in the reports that you received from NI Water?
20. Mr Priestly: There is a history to the Department's being denied access to the company's internal audit reports. When I became the permanent secretary of the Department in December 2007, I had a number of concerns about those arrangements, and I decided that I would stiffen the governance and accountability arrangements. There was some blowback from the board of Northern Ireland Water at my attempts to do that, and I ended up asking the previous Comptroller and Auditor General to accompany me to a meeting with the board to explain that public money was involved and that the Comptroller and Auditor General and his office could follow that money back to the point of its expenditure. I subsequently wrote to the board and said —
21. The Chairperson: Does that mean that you had no control over the board?
22. Mr Priestly: In what sense do you mean "control"?
23. The Chairperson: You had to bring someone else along with you to meetings, as the board was not adhering to your requests.
24. Mr Priestly: No. I put my case to the board as the accounting officer and told them what I wanted to achieve and what I required to provide me with assurances about the control environment in Northern Ireland Water. There was some pushback against that. I brought the previous Comptroller and Auditor General with me to reinforce the arguments that I was making. Thereafter, I insisted that it happen. At that point, I also insisted that we had access to the company's internal audit reports, yet it still took a number of months before we finally got access.
25. The Chairperson: Should action have been taken sooner rather than later?
26. Mr Priestly: Absolutely; it should have been taken before I arrived in the Department. When I arrived, I saw those issues as weaknesses, and I set about tackling them. It is regrettable that it took so long to achieve the result that we wanted.
27. The Chairperson: It is very regrettable. However, it is your responsibility as the accounting officer in the Department to redeem that.
28. Moving on, page 18 of the report from the independent review team concludes that the breakdown in the governance framework was primarily the responsibility of the board of the NI Water board and the executives. If that is the case, what is your role?
29. Mr Priestly: The Department's role as a shareholder in Northern Ireland Water is to oversee and scrutinise it. As I said, I do not duck my ultimate responsibility for providing assurances on the company's regularity and propriety of expenditure and its achievement of value for money. I accept that that is my responsibility. However, I am not responsible for the day-to-day spending of that money, or for the operation and management of the company. We entrusted the stewardship of the company to the board and its executives. When the problems were brought to light, I believe that I took swift and appropriate action.
30. The Chairperson: Therefore, you, as accounting officer, do not believe that you had any responsibility to ensure that those issues were addressed sooner or, at least, to investigate and establish what was going wrong?
31. Mr Priestly: It is regrettable that it took so long for those issues to come to light. I am not sure whether, apart from taking over the management and running of the company, I could have been any more successful in getting to the bottom of the issues.
32. The Chairperson: I want to change tack for a moment. I will turn now to Mr MacKenzie. It certainly seems to me that you have had a particularly difficult time as chief executive of NI Water. I understand that, in your attempts to get to the bottom of some of the procurement issues, you did not always find that you had the full support of the board. I understand that, at one stage, you felt obliged to tender your resignation. Perhaps you could talk us through the difficulties that you have had since your appointment and how you have been able to deal with them.
33. Mr Laurence MacKenzie (Northern Ireland Water): If you do not mind, Chairman, I will go through the sequence of events to explain how it all happened.
34. On 27 July, I joined Northern Ireland Water. Prior to that, I had been with Viridian for almost a decade. For most of that time, I headed up Northern Ireland Electricity. The reason that I moved on was because I felt that I needed a fresh challenge. I certainly found one. When I applied for the job, I did not expect to be appointed to the post of accounting officer. By the time that I had taken up the role, however, the company's reclassification to a non-departmental public body (NDPB) had happened.
35. On my second day in post, Mr Priestly made me aware that he intended to appoint me as accounting officer. I did not really know what an accounting officer was. I had to do some fast reading to understand what my responsibilities were. I realised quickly that I would carry personal responsibility. I took that very seriously.
36. As far as the procurement and governance issue is concerned, my antennae went up on 10 August. Therefore, I joined on 27 July, and my antennae went up on 10 August. I got an e-mail from an individual who worked in the organisation that stated that that person wanted to award a named individual the contract continuation for 2010-11, which was 130 days at £775 a day. The person stated that that figure represented good value for money. When I did the arithmetic, more than £100,000 did not seem to me to be good value for money.
37. 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. Therefore, at that point, I decided that the right thing to do was to ask the head of internal audit to conduct an investigation. Around a month later, we essentially found that a single-tender action had been awarded to that individual. The way that the mechanism works is that a single-tender action for any amount up to £250,000 can be approved internally. For anything above that amount, the onus is on the company to approach DRD to ask for approval. From the work that had been done, it was obvious to me that no one had approached DRD to seek approval, either for the £600,000-odd of expenditure that had been incurred by that individual and, in particular, for the success fee, that is, savings that were identified in the particular contract but not delivered.
38. At that point in time, the individual told us that they had identified savings of £23 million. If you multiply £23 million by 6%, you get a very large number. I immediately brought the matter to the then chairman of Northern Ireland Water and, concurrently, made the departmental accounting officer aware of the findings. To be fair, I had made them aware as soon as my antennae had gone up in August/September.
39. I will read from board minutes that followed that report.
"The chairman noted that in his view a success-fee arrangement of 6% on the value of the sum recovered was not unusual in a commercial environment."
40. In my world, "recovered" is different from "identified". At that meeting, I confirmed my intention of continuing to look at contracts to see whether there were others. I was working on the basis that if there was one there could be others. I was generally surprised that the issue was not regarded as unusual in the organisation. I asked Nicola Brennan to undertake the first review, which was the contracts approval audit, which proved a difficult and time-consuming process. I received a first draft in the week commencing 11 January, and there was still some work to be done on it. However, the report highlighted the significance of the emerging issues.
41. I asked Nicola to circulate a draft to the executive management and call a meeting for Friday 15 January to go through the report. On top of the success fee of £775, I began to regard these as very serious issues. I did not have a good weekend, as I thought about what I was to face on Monday morning. I was concerned about several things, and, given the seriousness of the issues, I felt it appropriate to demonstrate how seriously I was taking them by tendering my resignation.
42. On the Monday, I circulated a summary report to the board and later that morning to the accounting officer in DRD; I also made the accounting officer aware of my resignation. I met the accounting officer the next day and was very reassured by the support of DRD. It asked me to withdraw my resignation, which I did when I saw the support that I was getting from the Department, as opposed to what I saw internally.
43. We commissioned further work, which is known as the deep-dive audit. The rest is a matter of record. There was £28 million of irregular expenditure for which we cannot demonstrate value for money, spanning 78 contracts, all of which predate my time in post. I regard the findings as deeply disturbing and the failings are largely indefensible.
44. This is desperate stuff. I have met some great people in my time at Northern Ireland Water who have had no part in these issues; they get up in the morning and want to do a good job. I am really sorry that once again we are in the spotlight for such an issue.
45. The Chairperson: Thank you. It is unfortunate. We would not hold these inquiries if we did not have to, but unfortunately we must.
46. The main point is that these are not small amounts of money, but millions of pounds. As you said yourself, £28 million was spent in irregular contracts. It is an awful amount of money. It surprises me that it was spotted within weeks, but in the years before it was not spotted or brought to attention. That is also highly irregular. That is one of the questions that we should ask, and some of our members will try to tease out further information as this evidence session continues. That is the sort of question on which we need to focus.
47. Mr McGlone: I want a fuller grasp of the sequence of events. We hear what you say to us, and I do not dispute the bona fides of your account. Are these occurrences subject to criminal proceedings or will any further investigations be conducted? Are they likely to turn up in any form in court?
48. Mr MacKenzie: There is no evidence of fraud.
49. Mr McGlone: That was not my question.
50. Mr Priestly: No criminal or court proceedings are pending.
51. Mr McGlone: Has any of the parties taken court action?
52. Mr Priestly: No.
53. Mr McGlone: That is OK. Mr MacKenzie has given his account. However, Mr Priestly, you said, if I picked you up rightly, that you noticed issues about the place when you came in. I am anxious to know the issues that you noticed, the issues that he noticed, whether there was a synchronicity, compatibility or a read-across, and why it took so long to come to the point that Mr MacKenzie, if it was as he said it was, started to uncover things that had not previously been uncovered.
54. Mr Priestly: When I became permanent secretary, I was concerned about the Department's oversight of Northern Ireland Water; I did not think that it was sharp enough. Let me be candid with you: my first quarterly shareholder meeting came very shortly after my appointment as permanent secretary. It would have been usual for the permanent secretary to chair that meeting, but I did not chair it; the person who had been acting permanent secretary chaired it.
55. I heard a series of issues: we have not agreed the budget for this year; we have not had access to internal audit reports; we have not had the mid-year assurance statement; we have not had access to the risk register. That rang alarms bells. I said that when I became chairman of this meeting, that would change. I will read from the record of the first meeting that I did chair —
56. Mr McGlone: When was that?
57. Mr Priestly: It was 8 May.
58. Mr McGlone: Two thousand and seven?
59. Mr Priestly: Two thousand and eight. The meetings take place quarterly. I continued by saying that I thought that further quarterly shareholder meetings should focus on the health of the company, its strategic direction, and its plan for delivering on its strategy. I wanted improved sharing of information by both parties. In that context, I expressed concern that the 2007-08 budget had not yet been approved and that the 2008-09 budget had not yet delivered. That would have left the Department and Northern Ireland Water very vulnerable in front of the PAC or the Regional Development Committee.
60. In reply, the then chief executive said that she felt that my tone was recriminatory. I said that it was not intended to be recriminatory but candid. If I could not say that to them in a quarterly shareholder meeting, where could I say it?
61. Mr McGlone: With regard to minutes, all we want is the factual accuracy of what went on as opposed to the exchanges between individuals and the exchange, intemperate or otherwise, that may have taken place. We understand the concept of a Go-co and shareholders. How frequently did DRD or the Department of Finance and Personnel (DFP) audit NI Water?
62. Ms Lian Patterson (Department for Regional Development): When the Go-co was set up in April 2007 it was responsible for its own internal audit function and so could no longer draw on the internal audit function that would previously have been provided by the Department when it was the Water Service.
63. Therefore, as a new organisation in April 2007 it set up its own internal and external audit functions. Its internal audit function was contracted out to Ernst & Young, a private firm of accountants, for the first two years, 2007-08 and 2008-09. At that time, the audit committee of NIW was responsible for liaising with Ernst & Young in agreeing the amount of internal audit time, which was decided as 360 days in the first year.
64. The shareholder unit had a role to see the internal audit plans but had no role at that time to approve them. Under Go-co status, that would have been the role of an audit committee because it was an operational activity. The internal audit function was set up, contracted out, and run for the first two years by an external firm.
65. Mr McGlone: Therefore the Department conducted no audits of NI Water in that period. Am I quite correct in saying that?
66. Ms Patterson: You are correct in saying that.
67. Mr McGlone: Secondly, I believe that you said that it was the Department's role to see internal audits. Chairman, it would be useful to find out how many times the Department saw those internal audits.
68. Ms Patterson: The Go-co was set up in such a way that the Department would not have had a right to do internal audits; the Go-co had to have its own internal audit function and committee.
69. As regards the Department's interaction in receiving internal audit reports, in 2007-08, which was the year that the company was established, there was tardiness in getting internal audit reports — that was raised with the company at the time — and in getting the mid-year assurance statement. Therefore six months into the Go-co's establishment, there should have been a mid-year assurance statement that started to give a read out as to the findings against internal audit reports. That mid-year assurance statement, which would normally have been expected by September or October 2007, did not come through until April 2008.
70. That was one of the triggers for the permanent secretary to write to the chairman in May, stating that such a late delivery was unsatisfactory and that the Department needed to have full access to all internal and external audit reports. After the letter came a response from the company and a bit more pushing back. In August 2008, the shareholder unit received the first internal audit reports since the company was established in April 2007. Since then, it has been receiving internal audit reports.
71. Controls were set up for the Department to engage with NIW's audit committee, whose chairperson I meet twice a year. Furthermore, the director of the shareholder unit meets the person who has responsibility for corporate governance in the company to get a read-out on internal audit.
72. Although the Department did not have a role in approving the audit plan, it could influence it. One area in which we felt that there was a need for more internal audit was the business improvement programme, through which a significant amount of money had been spent in the first three years. Therefore, the Department pushed back and got additions made to the internal audit plan to cover business improvement. Therefore, we influenced improvement where we believed that there was a weakness in the internal audit plan.
73. Mr McLaughlin: I want to make two points that relate to the current topic of discussion; there will be more detailed questions to come. NIW has been through significant transformation and changes of direction. With regard to governance failings, are we talking about a long-standing culture that goes much further back than the move towards privatisation that populated the new arrangements; or are we talking about governance that developed or proved to be faulty in the context of the more recent vintage of changes that took place during the past four or five years?
74. Mr Priestly: From evidence that I have seen as accounting officer, I would say that there is an element of both. Something seems to have happened when Northern Ireland Water became a Go-co, as though it thought that controls were removed. I kept hearing that "we are operating commercially". I kept pushing back against that and saying that because they were receiving hundreds of millions of pounds of public money, the rules on regularity, propriety and value for money continued to apply. Laurence, what did you find?
75. Mr MacKenzie: I agree with Mr Priestly. I had spent a great deal of time in the private sector. When I came to Northern Ireland Water, I saw an organisation that believed that it was in the private sector and behaved accordingly, without actually knowing how the private sector operated.
76. Mr McLaughlin: That sounds like many Departments.
77. Mr MacKenzie: I say that coming from an environment where there had been robust controls and where procurement was taken seriously and was approved at the appropriate level. Therefore, I believe that the culture in the company was that it believed that it had been freed of its shackles.
78. One of the things that surprised me was a reluctance to engage with the Department; I was told from early on to keep it at arm's length. I recall a non-executive colleague telling me to watch them. He told me a story about the frog that boiled: they will make the water nice and warm for you and keep making it warmer and warmer; you will get friendly with them until one day they boil you; therefore do not tell them too much. There was definitely a culture of reticence about telling the Department anything.
79. Mr Priestly: I will add just one point to that. For that reason, when setting up the independent review team, I was keen to have someone from the commercial world on it to tackle head-on the question of whether these people were operating commercially. He said to me privately that if they were in the commercial sector, I as chief executive would personally have to sign off any expenditure of more than £10,000. There would be no independent review; the door would be open and they would be asked to go through it.
80. Mr McLaughlin: That is precisely why I am interested in this discussion. It seems that alarm bells were not going off. I would have thought that, given the precipitate change of attitudes to accountability, particularly with respect to public money, that you, with your management structures and oversight role, would have recognised immediately that there had been a significant change from how the Water Service had been held to account in the past. The fact that alarm bells did not sound indicates to me that the pre-existing culture had been transposed onto the new arrangements.
81. Mr Priestly: As I have tried to explain, I arrived in the Department in December 2007; alarm bells did go off, and I started to sharpen governance and accountability. The letter to the then chairman focused on access to assurance statements, the audit committee, the audit programme, access to internal audit reports, risk management in Northern Ireland Water, business cases and post-project evaluations. These are serious issues that I was concerned about.
82. Mr McLaughlin: On 29 May 2008, in a different inquiry, you told the Committee that:
"I have taken steps to reinforce my role as the departmental accounting officer and to seek… assurances from the company that it is spending public money wisely and that it has in place proper systems of internal control and risk management."
Do you stand over that statement today?
83. Mr Priestly: That is what I was trying to do.
84. Mr McLaughin: You did not tell us that you were trying: you said that you had put in place those new arrangements.
85. Mr Priestly: I had put them in place. However, it is a truism that one can put in place all the arrangements that one wants, but if there is not the will to operate them, if there is a culture of keeping the Department at arm's length and denying it information, how does one get those arrangements to work?
86. Ms Patterson: In the assurance statement of 2008-09, we specifically asked for an additional clause to cover adherence to financial delegations set out in the original governance letter. The assurance that was provided by NIW in that year stated that NIW policy relating to the financial delegations had been applied in a format consistent with the governance letter and that NIW was not aware of any significant areas in relation to the financial delegations to which it had not previously drawn attention.
87. Therefore the Department had asked for the additional assurance and NIW had given an affirmation against giving it.
88. Mr McLaughlin: Let me give you something else to consider: on 28 May 2008, the chief executive, Katherine Bryan, resigned. You appeared before the Committee the following day to assure us that you had taken steps. On 1 June 2008, Chris Mellor doubled up as the chairperson and interim chief executive, and that appointment was approved by you.
89. Mr Priestly: It was approved by the Minister.
90. Mr McLaughlin: I am sorry? The Minister approved that appointment over your head? Did you give him a different recommendation? I do not like that answer. What recommendation did you give him?
91. Mr Priestly: The recommendation to the Minister was that Mr Mellor should double up as chief executive and chairperson.
92. Mr McLaughlin: That is what I asked you.
93. Mr Priestly: That is not best practice, but it is not unusual for a short period in such circumstances. We expected it to be a reasonably short period.
94. Mr McLaughlin: Was that one of the steps that you introduced to tighten governance and control?
95. Mr Priestly: No.
96. Mr McLaughlin: The Minister announced several interim appointments to take NIW forward in the short term; he also called for a re-examination of its business and governance model. Do you accept that the business model under which NIW operates has been a disaster and a complete failure?
97. Mr Priestly: No. I do not accept that failure in one area of governance means that the running of the entire organisation was a disaster. As we said at last week's hearing, Northern Ireland Water has a good history of achievement in investment, in its capital programme, in waste and water treatment plants and in producing credible results in drinking and waste-water quality.
98. Mr McLaughlin: Are you prepared to consider an alternative to the existing arrangements, or is your mind made up?
99. Mr Priestly: All options are open; ultimately, however, those are policy decisions for the Minister.
100. The Chairperson: I find it highly offensive that NI Water has treated the Department almost as an arm's-length company. It is definitely a case of the tail wagging the dog, and that was allowed to happen under the watch of the Department's permanent secretary.
101. Mr Hilditch: I had a couple of questions on the tightening of the governance and control arrangements in Northern Ireland Water; however, Mitchel has already dealt with those issues, and I will ask some questions on contracts instead.
102. Page 11 of the independent review team's report concludes that expenditure to date against contractor A, who was appointed under a single-tender award, was £660,000, with further claims of more than £900,000. Why was that contract awarded using the single-tender award process?
103. Mr Priestly: Mr MacKenzie spoke about that contract earlier and understands the detail of it. I will hand over to him to answer that question.
104. Mr MacKenzie: 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.
105. Mr Hilditch: Who is contractor A?
106. Mr MacKenzie: It is an organisation known as Contracting Out LLP.
107. Mr Hilditch: What initiated your investigation of that contract?
108. Mr MacKenzie: As I said, 13 or 14 days after I joined NI Water, I received an e-mail from an executive asking me to approve a further 130 days' work for that contractor at £775 a day. That raised my antennae.
109. Mr Hilditch: Will you provide a copy of the internal audit report into that contract?
110. Mr MacKenzie: Yes.
111. The Chairperson: Will that be sent to the Committee?
112. Mr MacKenzie: Yes.
113. Mr Hilditch: Expenditure that was not approved is irregular. How much irregular expenditure has been incurred by NI Water to date?
114. Ms Nicola Brennan (Northern Ireland Water): Nine hundred and ninety-nine thousand pounds was paid in full. No further payments are due.
115. Mr Hilditch: Were any contracts awarded to companies with a connection to the chair or to any other board members?
116. Mr MacKenzie: None that has not been declared. A small contract for £20,000 was let to an organisation the chairman of which was a non-executive director. He quite properly declared his interest, and the contract was properly tendered for.
117. Mr Hilditch: Can details of that be forwarded?
118. Mr MacKenzie: Yes.
119. Mr Hilditch: OK. Were any of those transactions recorded in NI Water's accounts?
120. Ms Brennan: They were.
121. Mr Hilditch: OK. Were any contracts awarded to staff members or former staff members of NI Water or the Water Service?
122. Mr MacKenzie: 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.
123. Mr Hilditch: Therefore the answer to that question could also be yes.
124. Mr MacKenzie: Sorry; I was a bit long-winded.
125. Mr Priestly: It certainly gives rise to a perception.
126. Mr Hilditch: Yes, it does indeed. Can details of that, too, be forwarded to us for further consideration?
127. Mr MacKenzie: Yes.
128. Mr McLaughlin: Just for the record, PPP —
129. Mr MacKenzie: Public-private partnership.
130. Mr McLaughlin: I have an idea what it was. Could you tell us just for the record?
131. Mr MacKenzie: Public-private partnership. The alpha and omega of public-private partnerships.
132. Mr Hilditch: How does the organisation deal now with perceived conflicts of interest? Is a policy in place?
133. Mr MacKenzie: A register of board members' interests is kept; they are not allowed to participate in discussions in which they have a conflict of interest. That register is maintained by the company secretary and updated quarterly.
134. Mr Dallat: Mr Priestly, as a long-serving member of the Public Accounts Committee, I know that this is not the first time that your Department has had to explain away financial disasters, embarrassments, and things that should not have happened. You will remember the Belfast-Bangor railway and the £13 million that went missing, and accounts put in skips and all that. How can you come back and explain yet another complete cock-up in how you manage your off-shoot organisations?
135. Mr Priestly: I am not in the least trying to explain the matter away; I said that it was reprehensible, deplorable, and insupportable. It happened, and I have sought, as accounting officer, to take due action to put things right, to find out where the blame lies, and to deal with it appropriately. I will not defend what happened. It should not have happened. It is unacceptable.
136. Our purpose is to assure you that we will ensure that it will not happen again and that we will learn the lessons and apply them across the Department to our other arm's-length bodies.
137. Mr Dallat: You took appropriate action with the board of the executive directors. Was the accounting officer among those?
138. Mr MacKenzie: That is me.
139. Mr Dallat: Well, you told me earlier that you had offered your resignation; that did not surprise me. What surprised me was that you did not resign.
140. Mr Priestly: Laurence had been with the company for a couple of months; he had uncovered this and brought it to my attention and I was shocked when he did. He told me that he had resigned. I asked him the reasons why he had resigned, and I said to him: "This is foolish, Laurence; it is you who are uncovering this malpractice." I assured him that I would take the matter seriously and that we would put in place an independent review that would quickly produce a report to get to the bottom of the affair.
141. On that basis and with my agreement, he decided to try to withdraw his resignation. The board of Northern Ireland Water contacted me to say that it was minded to refuse to allow him to withdraw his resignation. I said that, if the board did that, I would get the Minister to get Mr MacKenzie kept on the board and that Mr MacKenzie could not be allowed to resign.
142. Mr McLaughlin: That is very interesting, but I want to finish the point. I take some reassurance from the support that you offered to Mr MacKenzie. However, you reported to your board that you had uncovered a very serious issue, but the board did not support you. Is that not what provoked your resignation? When you offered your resignation the board accepted it, but now Mr Priestly tells us that some board members said that they were of a mind not to accept your retraction. It is a very interesting little sequence, is it not?
143. Mr Priestly: May I develop the point? The chairman and other members of the board approached me and said that I was overreacting. My reaction was that they did not seem to understand the seriousness of the matter: public money was involved and what happened should not have happened. However, I could not persuade them of that.
144. Mr McLaughlin: Do you think that they did not understand?
145. Mr Priestly: There is evidence that they did not.
146. Mr Dallat: I am trying to work out where the decisions were made. There was a dinner, or nosh-up, on 14 October that you, Mr MacKenzie, and the regulator attended. Is it normal practice for you and the regulator to sit round a table?
147. Mr MacKenzie: I think that the dinner to which you refer was when the regulator invited me to dinner in his offices at which other utility people were present.
148. Mr Dallat: It must be a good-sized office. Before we go any further, can you tell us what appointments process was used for the interim board?
149. Ms Patterson: The process was designed to get a mixture of people from a range of backgrounds. The interim board is expected to sit for up to nine months, because we intend to advertise by public appointment to appoint a permanent board. Meanwhile, the interim board is expected to hit the ground running, as it is important that it has the confidence of the consumer and the public.
150. In deciding the skills that we wanted for the interim board, we determined that there were four categories: the chairperson; a consumers' representative; someone with commercial experience and acumen; and someone with experience of public sector accountability, as NI Water is now an NDPB for public expenditure (PE) purposes.
151. The appointments process was used to identify those four skills. People who fit into each of those skill sets were interviewed by a panel comprising the permanent secretary, myself, and an independent assessor from the office of Felicity Huston, the Commissioner for Public Appointments. We have made sure to outline very clearly to those interviewed what membership of the interim board will entail. That will not be an easy role. We have also made sure and that they feel comfortable taking that role on. That has taken some weeks.
152. We provided advice to the Minister on recommendations for the panel, and this week he appointed the four members of the interim board.
153. Mr Dallat: Therefore, the Minister more or less ticked the boxes.
154. Ms Patterson: Absolutely not. The Minister felt that some of the panel's recommendations were not appropriate for a particular skill. The Minister has a role to ensure that the person appointed to represent the consumer is someone that he feels has the skills to do so.
155. Mr Dallat: Did all the appointees respond to a public advertisement?
156. Ms Patterson: No. Given the urgency —
157. Mr Dallat: How on earth did they know to apply?
158. Ms Patterson: I will clarify, if I may. The appointments process was discussed with Felicity Huston and the office of the Commissioner for Public Appointments. Given the urgency of getting an interim board in place and that the public appointments would be for a relatively short period, the competition for the interim board sits outside the normal full competition process. However, the appointments process for the permanent board will be done through the normal process of public advertisement, and it is expected to be launched quite soon.
159. Mr Dallat: I find that astonishing. I spend a great deal of time in my older years travelling eastern Europe to discover how such things happened prior to the fall of the Iron Curtain.
160. Mr McGlone: Did the Commissioner for Public Appointments approach you at any stage about the process that the Department was using for public appointments? If she did, what advice did she give you?
161. Mr Priestly: I am sorry; did she approach me —
162. Mr McGlone: Did she speak to you about public appointments?
163. Mr Priestly: On this —
164. Mr McGlone: Just bear with me. I asked whether Felicity Huston spoke to you personally about DRD's public appointments process.
165. Mr Priestly: I have met with Felicity Huston on several occasions to discuss the public appointments process that Northern Ireland Water uses. However, I cannot remember specific details or dates.
166. Mr McGlone: She can.
167. Mr Priestly: That is fine.
168. Mr McGlone: She voiced serious concerns to the Committee about the appointments process that DRD was following. You referred to guidelines; she referred to process and proper procedures. Anyway, we will park that matter there.
169. Mr MacKenzie, did any of your executive or non-executive directors, members of the board or senior staff in NI Water draw your attention to concerns about NI Water's procurement practices?
170. Mr MacKenzie: No.
171. Mr McGlone: No.
172. Mr Dallat: What is your view of consultants and how they are appointed?
173. Mr MacKenzie: My personal view is that an organisation learns more by doing things for itself than by asking consultants.
174. Mr Dallat: In an e-mail that you sent to Peter Dixon on 16 November you say:
"There are some sensitive souls in here. For example, I say that all future consultancy expenditure has to be approved, In advance, by me — they tell me I am being autocratic — I say — get used to It!"
I am trying to —
175. Mr MacKenzie: Given that I was concerned about the level of consultancy expenditure, one of the things that I did on taking up the post was to get the financial delegations so that management consultancy expenditure had to be approved by me to get costs under control.
176. Mr Dallat: Unfortunately, Northern Ireland Water was not always as sensitive about consultants. How much money was spent on consulting houses when setting up the governance arrangements for NI Water?
177. Mr MacKenzie: I do not have that information; I was not —
178. Mr Dallat: Not to worry; I will tell you: somewhere in the region of £46 million. Subsequent to all that public money being spent, a partner in Deloitte was brought on to your review team. Surely that was a conflict of interest.
179. Mr Priestly: Along with Lian, I advised the Minister about the composition of the independent review team. I will take you through our considerations. First, several of the big accountancy firms were caught up in the single-tender actions, so I could not look to them for an appointee. Secondly, the matter was urgent. Thirdly, Deloitte was not involved in the matter; therefore, we turned to it. I think that we got the right public sector appointment in the person from Deloitte; he is a person of great professionalism and integrity.
180. Mr Dallat: Are you saying that there was no conflict of interests, even though £6 million was spent on the company from which you brought that person? Come on.
181. Ms Patterson: A further reason was the limited list from which an appointee could be chosen. Ernst and Young were the internal auditors of the company, and KPMG were the external auditors. Therefore, those companies were excluded because of a conflict of interest. Several accountancy firms, including PricewaterhouseCoopers and Deloitte, were involved when the Go-co was set up. There is a limited family of large accountancy firms in Belfast. Of the four that we looked at, three were already contracted out.
182. Ms Purvis: You quoted from e-mail correspondence between Mr MacKenzie and Peter Dixon. What was the date of that e-mail?
183. Mr Dallat: It was dated 16 November 2009.
184. Ms Purvis: On the back of that, Chairperson, I raised the point with the regulator last week that Peter Dixon was to head up the independent review team. What is the nature of Mr MacKenzie's relationship with Mr Dixon, given that they were exchanging e-mails and that Peter Dixon then appears on the independent review team?
185. Mr MacKenzie: Peter Dixon and I were both chief executives of utilities. We have a relationship, we have common interests and we are regulated by the same regulator. He is a business acquaintance of mine; no more than that. I do not socialise with Peter Dixon. I think that I have met him for coffee three or four times since I took up the post, but I do not socialise with him or anything like that.
186. Ms Purvis: Did the permanent secretary not see a conflict of interest in that?
187. Mr Priestly: I did not consult Laurence or anyone else on the appointment of the independent review team. Lian and I did it, and we did it very quickly. Laurence informed me about these things on 18 January, and an independent review team was launched on 20 January. My desire was to get to the bottom of this as quickly as possible.
188. Ms Purvis: Did you not see any conflict of interest in that?
189. Mr Priestly: I know many people in the business community in Northern Ireland, and I have known Peter Dixon as a business contact for a couple of years. This is a very small place, so it is inevitable that people will know each other. The judgement to make is whether these people are professional and have high integrity and whether they undertook an evidence-based review. I think that the answer to the last question is yes — the review was evidence based. They reached their conclusions on the basis of evidence.
190. Ms Purvis: That was not the question that I asked. I asked whether you thought that there was a conflict of interest.
191. Mr Priestly: No, I do not believe that there was a conflict of interest.
192. Mr Dallat: You were both chief executives. That is very formal. Another e-mail reads:
"Peter
How would you be fixed for a 'catch up' next week? Lots going on!...
Would work for me
I need help from friends at the minute.
Hope things are fine with you now."
That is not a formal letter between two chief executives. I have several more e-mails here that clearly state that you and Peter Dixon are chums.
193. Mr MacKenzie: He is a business acquaintance.
194. Mr Dallat: It is all here.
195. Mr MacKenzie: He is a good friend, in the sense that he is a business acquaintance.
196. Mr Dallat: That is not what you told us a minute ago.
197. Mr MacKenzie: Apart from the occasional meeting for coffee, he is not a person that I socialise with.
198. Mr Dallat: Chairperson, I can tell you that the language in that e-mail is that of really good friends. Perhaps we will move on.
199. Mr Priestly, paragraph 4 of the independent review team's report states that, prior to the contracts approval review, each member of the executive team gave an assurance that, as far as they were aware, the rules were being followed. Did the executive team have no idea what was going on in the organisation, or was it being economical with the truth?
200. Mr Priestly: I think that it was the latter. At several points in this hearing, we have alluded to a culture in the organisation of people thinking that they were behaving commercially and that what they were doing was within the rules. It clearly was not. When Laurence arrived, he asked those executives for that assurance. I will hand over to him to say what he had in mind.
201. Mr MacKenzie: At my first board meeting, which was on the day after I arrived, an issue arose about something that had come to the board that day that it had not previously seen. The board asked me to get an assurance from each of the executives to the effect that there was nothing that the board should be aware of that it was not aware of and that there was nothing that the Department should be aware of that it was not made aware of. I got signed returns from each of them stating that they were aware of nothing.
202. Mr Priestly: I think that it is worth adding that those issues will have to be addressed in the ongoing disciplinary action.
203. Mr Dallat: Mr Priestly, the purpose of establishing NI Water as a Go-co was to allow it to operate freely in a commercial and competitive environment. Given that, how do you explain the widespread use of the single-contract awards that prevented the proper competition that was referred to earlier?
204. Mr Priestly: I will not try to defend the heavy use of single-tender actions. From the start of this hearing, I have said that I find that to be indefensible. It came as a shock to me when the extent of the issue and the financial sums that were involved were revealed.
205. Mr Dallat: Four years ago, a convoy of Transit vans was moving up and down the motorways and everyone was in employment. For the past year and a half, those vans have been sitting parked. Many belong to small-time contractors, who desperately needed the opportunity to tender for scarce work. It never even occurred to you to enquire whether there were opportunities in the former Water Service for them. Is that what you are telling me?
206. Mr Priestly: That is not what I am telling you. I am telling you that the practices that were followed are unacceptable and shocking. I am also saying that we should not damn the whole of Northern Ireland Water for that one area of lack of compliance with policy and procedure on operational expenditure.
207. Mr Dallat: Given that £28 million was involved, it is not only Northern Ireland Water that is damned; every Government Department is smeared by news like this. We have been in a new political arrangement here since 1998. People accepted that and believed that that was the end of anything that might have happened in the past, yet you are sitting here in 2010 with no explanation of why that was not discovered. That is what you are telling me.
208. Mr Priestly: I am not saying that. You have a report by the independent review team, which gives you the explanation.
209. Mr Dallat: Fairness and equality are the cornerstones of public sector ethics. However, in many cases, genuine suppliers had not been given the opportunity to bid. You seem to have no explanation for that, but we will move on. How independent is the independent review team? Is it signed up to the chief executive?
210. Mr Priestly: Sorry, I do not follow the question. What do you mean by "is it signed up to the chief executive"?
211. Mr Dallat: I did not intend to go into that, but I will now. One of the non-executive directors, Mr Donald Price, was retained, while the others were sacked and their names smeared all over the place. Why was that?
212. Mr Priestly: In considering and advising the Minister on the action to be taken against the non-executive directors, we were required by law to treat each of them as individuals. I have to tell you that Don Price's attitude and approach were different to those of the other non-executive directors. He recognised the seriousness of the situation, and he wanted to be part of addressing it. He is also recognised in the independent review team's report as having done good work on the audit committee, where he flagged up such issues. He made it clear that he wanted to be part of putting the situation right, and the Minister judged that he should stay as a non-executive director.
213. Mr Dallat: Therefore, is it true that he signed an undertaking to give unequivocal support to the chief executive officer (CEO) in implementing any outcomes that resulted from the independent review team's report?
214. Mr Priestly: The Minister asked Don Price to give him three assurances, one of which was that he would support the chief executive in implementing the independent review team's recommendations.
215. Mr Dallat: Did he sign that?
216. Mr Priestly: He gave the assurance.
217. Mr Dallat: Did he sign it?
218. Mr Priestly: He wrote a letter to the Minister in which he said that he was happy to agree to those conditions.
219. Mr Dallat: Did the other non-executive directors not do that?
220. Mr Priestly: I am not following you.
221. Mr McGlone: You will in a minute.
222. Mr Dallat: You will in a minute, do not worry. It would be good for the Public Accounts Committee to see that letter, which was signed. In fact, it would be a good idea for us to see all the correspondence, so that we, as an independent body, could make an independent assessment of what is going on in Northern Ireland Water. I have nothing more to add at the minute.
223. Mr McGlone: I have a supplementary point on what has become a material issue. I have e-mail correspondence from Donald Price that is dated 21 February 2010. It refers to the fact that:
"-The issues reflect non-adherence to procedures rather than lack of a control/governance framework
-This non-adherence to procedures was not picked up by Internal Audit(despite 3 Audits on Procurement in 2009) nor were they picked up by Halcrow and at no time were they reflected in reports or assurance statements to the Board.
Despite this, the Panel from the outset has seemed determined to find Governance failures by the Board rather than working with the Board to ensure the necessary corrective actions."
I presume that the reference to "the Panel" is the independent review team.
224. However, in the light of what you said, I am trying to figure out why Mr Price would apparently do a volte-face in such a short space of time. I am also wondering why he would sign a letter and retain his position on the board, given what he said in that e-mail. The Committee will come to the audit later, but I am anxious to hear your views on that. It is material to the Committee's deliberations today and to the shenanigans that seemed to have been going on.
225. Mr Priestly: I can answer only on the actions that the Department took and on the judgement and the advice that was given to the Minister. I have explained why the Minister decided that Don Price should be kept on the board of Northern Ireland Water.
226. Mr Dallat: Are you saying that you still do not know what is going on in Northern Ireland Water?
227. Mr McGlone: It is apparent that you do not.
228. Mr Priestly: I think that that is unfair.
229. Mr McGlone: Quite frankly, sir, you are sitting here today and we are asking you questions. While £28·4 million was being thrown out the door, you were sitting about the place for two years. Mr MacKenzie then came on the scene, and we are now trying to establish and get to the bottom of what happened. The Committee is here to represent the public interest.
230. Given the way that this is being played out today, you would think that the Department had absolutely no financial control over a Go-co into which it was pouring millions of pounds. No audits were carried out, and we will find out later on who was responsible for that. What was going on? Was this governance, or was someone just playing games?
231. Mr Dallat: It seems as though it was Christmas every day.
232. Lord Browne: I want to address my first question to the Treasury Officer of Accounts. The Committee has heard about NI Water's extensive use of single-tender awards. Indeed, 78 such contracts were awarded at a cost of some £28·4 million. It would be useful to know how that compares with the rest of the public sector. Are any central records kept of the type of contracts that are awarded?
233. Ms Fiona Hamill (Treasury Officer of Accounts): No. I asked that question in advance of today's hearing, and we do not hold a central listing of Departments' single-tender action decisions. Departmental accounting officers are responsible for signing off on those decisions.
234. Lord Browne: Would it be advisable to retain such records in the future?
235. Ms Hamill: That is the sort of recommendation that the procurement board will look at.
236. Lord Browne: I note that DFP issued detailed comprehensive guidance on the award of single-tender contracts for the first time this week. Why has it taken four years for that guidance to be issued?
237. Ms Hamill: I think that that guidance was issued for the purposes of clarity. As a result of the Northern Ireland Water situation and some previous cases that the Committee has examined, it became clear that Departments and public bodies required further clarification. That guidance was prepared by Central Procurement Directorate and agreed by the procurement board.
238. Lord Browne: Thank you, Fiona. Mr Priestly, it is clear from appendices 1 to 3 of the contracts approval report that many consultants were engaged in staff substitution. Everyone would agree that that represents very poor value for money. How did that come about, because it seems quite irregular?
239. Mr Priestly: I do not want to keep falling back on the defence that Northern Ireland Water was operating at arm's-length. I was not responsible for its day-to-day management and operations; Ministers deliberately set it at arm's-length. I agree with you that the evidence points to an overdependence on management consultants and on using them for staff substitution. When I became permanent secretary, I worked with Northern Ireland Water to try to get it to drive down its use of consultants. We did that with some success; we at least began the process, and when Laurence MacKenzie came along, that accelerated.
240. Lord Browne: Were the consultancy posts widely advertised?
241. Mr MacKenzie: I think that a number of them were, because they were done on the basis of a single-tender action.
242. Lord Browne: Were the appointments made on strict job criteria?
243. Mr MacKenzie: I do not know, because I was not there. The people who were involved would have had the skills to do the job. However, it was probably costing far more to pay a consultant to perform the role of a normal member of staff than to employ a member of staff.
244. Lord Browne: Therefore, the organisation employed a lot of consultants. Will you provide the Committee with a list of all staff substitutions by number, value, company, post held and the length of tenure from the date of the establishment of Northern Ireland Water in April 2007?
245. Mr MacKenzie: Certainly.
246. Lord Browne: How do you regard value for money? What was the additional cost of using contract staff in those posts instead of having full-time employees?
247. Mr MacKenzie: We will give you as good an estimate of that as we can.
248. Lord Browne: I will return to the award of single-tender contracts. Regardless of the individual facts, if it was discovered that board members constructed those contracts knowing that they would need to be extended and that the eventual costs of those contracts would be above the tendering threshold, would that, in your opinion, constitute fraud or corruption?
249. Mr MacKenzie: The answer is no.
250. Mr McLaughlin: In those circumstances, even if you were satisfied, would you think it prudent to refer it to the anti-fraud unit in the Department to protect the public money interest?
251. Mr MacKenzie: If I thought that there were kickbacks or anything like that I certainly would, but no evidence of that was found.
252. Mr McLaughlin: Fair enough. Mr Priestly, do you have the same view?
253. Mr Priestly: My view is that that is evidence of lazy and bad practice. It is almost allowing a contractor to get into the lifeblood of the organisation. They are providing a service, which may be a very good service, but it is not proper public contracting. Our policy is that there should be competition.
254. Mr McLaughlin: Should I take that as a no and that you would not think it necessary to refer it to the anti-fraud unit?
255. Mr Priestly: There has to be at least prima facie evidence of a fraud before it should be referred.
256. Lord Browne: I note from paragraph 4.1 of the Comptroller and Auditor General's memorandum that PricewaterhouseCoopers (PWC) conducted the independent review of centre of procurement excellence (CoPE) status. Was PWC the recipient of any single-tender award contract?
257. Mr Priestly: PWC was the recipient of the single-tender award that has the highest value in this whole affair.
258. Lord Browne: How much did it receive in total?
259. Ms Brennan: There were actually three single-tender actions that we found to have been awarded to PWC, and they totalled £2·2 million.
260. Lord Browne: According to page 27 of the deep-dive report into operating expenditure, PWC also carried out a strategic review of procurement in Northern Ireland Water. Is that included in that £2·2 million?
261. Ms Brennan: That particular piece of work was awarded through due process. It was not a single-tender action.
262. Lord Browne: It was not a single-tender award, but PWC received money for it.
263. Ms Brennan: It did.
264. Lord Browne: Following up on that, and this is another question for Fiona, how do you explain the appointment of PWC to conduct the accreditation of Northern Ireland Water as a CoPE in 2009, given that, as we have just heard, it benefitted significantly from what we now know to have been a flawed tendering regime? We have also heard that PWC conducted the strategic review.
265. Ms Hamill: The appointment of PwCs to undertake the reassessment of CoPEs in 2009 would have been a separate procurement exercise carried out by the central procurement division; it would have had no tie-in to any specific departmental organisation or body.
266. In that respect, all local consultancy firms would have expected to have been a supplier of services to just about every other government body. Therefore, it would not have been an issue, as the Central Procurement Directorate is part of DFP rather than DRD or Northern Ireland Water. Therefore it would not have been picked up.
267. Lord Browne: Do you not agree that anyone concerned with ensuring that public money was spent wisely would be of the opinion that a review of how contracts were awarded could not be carried out by the very company that was awarded those contracts?
268. Ms Hamill: A review of how contracts were awarded was the Northern Ireland Water deep review.
269. Lord Browne: I am trying to comprehend how —
270. Ms Hamill: That would not have been a basis of the decision. If CPD had been aware that there were issues and concerns about a supplier, those issues and concerns would have been taken into consideration appropriately within public procurement practices. I am not aware that CPD had any concerns at the time that it awarded the contract for the CoPE assessment exercise. I would need to let the other witnesses speak to the separate exercise of the review of Northern Ireland Water procurement.
271. Lord Browne: I am just struggling to comprehend how anyone could be of the opinion that Northern Ireland Water should not have informed DFP that PricewaterhouseCoopers was in receipt of so many of the very contracts that it was asked to review and therefore give DFP the chance to appoint a more suitable company. I cannot understand the board's reason for not speaking up. Why did DRD, for example, as the sole shareholder, not force that issue?
272. Ms Hamill: I understand your concern. It is worth noting that contracts at Northern Ireland Water as a Go-co held with a consultancy practice locally would not have been reported through the normal consultancy reporting cycle. PWCs is a core provider of generally very good services to public bodies; it would be expected to be seen as a supplier.
273. Lord Browne: Do you agree that future reviews of the administration and activities of Northern Ireland Water should not be carried out by individuals or firms that have been awarded a contract by that very company? Would that not be better?
274. Ms Hamill: I will take that concern back for Northern Ireland Water and for advice from the Central Procurement Directorate.
275. Mr Beggs: In the deep-dive review of the operation expenditure there appears to be a serious problem with the accuracy and completeness of contract records. Given that some dates on the database were wrong, that one contract was not even on the database, and some expenditure was posted against wrong contractors, how were you ever going to get a good contract management system?. It was not an effective system.
276. Mr Priestly: I do not understand that database. It is owned by Northern Ireland Water, so I will have to hand over to Ms Brennan.
277. Ms Brennan: Northern Ireland Water was in the process of setting up a contracts database when we were looking at that area; that is why it was not complete and did not have all the contractor details on it. Indeed, one recommendation that we made was that the database become fully populated.
278. Mr Beggs: Are you saying that you were operating with all those contracts and you did not have a central point until the deep-dive review?
279. Ms Brennan: That was ongoing because it was a new process.
280. Mr Beggs: It was obviously needed. Mr Priestly, I notice in the independent review team's report that Northern Ireland Water's senior personnel were trying to minimise the significance of the findings and rationalising events. I can interpret that in one of two ways: either NIW had no idea about public sector procurement policies or it was trying to minimise the failings that had occurred. What was your reading of what it was doing?
281. Mr Priestly: My reading was the same as yours: NIW did not seem to recognise or acknowledge the seriousness of the failures. When I pointed out their seriousness, I got reactions such as: this is a company in transition and we are trying to operate commercially. I answered that this is public money that must be spent with regularity and propriety and we must be able to demonstrate value for money. I sent a private e-mail to Chris Mellor, expressing the fear that he and his non-executive colleagues did not understand the seriousness of the matter. Several of them sent me quite threatening letters that looked as though they had been written by lawyers, asking whether I thought them unfit to be non-executive directors.
282. Mr Beggs: Did those people receive training? They should have needed minimal training as they were appointed at board level. However, if they all came from outside the public sector and had no experience of public sector accountability issues, they should have received training. Were they aware that you expected them to be accountable for their actions in that way?
283. Mr Priestly: Some were from the public sector; they had a great deal of experience and plenty of training.
284. Mr Beggs: Mr MacKenzie said that the directors were unaware of the procurement policy that operated in the public sector. Equally, I would have thought that private sector procurement would want value for money, competitive tenders, and good value for shareholders. What was your sense of this? How strange was this to you?
285. Mr MacKenzie: It was strange; it was not what I had been used to in my earlier career.
286. Mr Beggs: That says a great deal about the limited experience of those people and how they were appointed; it strikes me that they did not have sufficient experience and that they did not adopt the training that they should have had.
287. Mr McGlone: I want to make a point about what Roy has touched on. We are focusing on non-executive directors and issues of training. Hearing this would almost scare those of us who have served on boards. Having served on a board, I know that board members rely on the executive directors and the full-time paid officials of the company or the body that you serve on to provide you with detailed professional information. All a board member can do is base his judgement on what is presented to him.
288. Mr Beggs: Neither does one rely on those who say "our experts said". If you think that they are failing, it is up to you as a board member to step in. That is your responsibility.
289. Mr McGlone: — there has been internal and external audit.
290. Mr Beggs: No. A board member is appointed to be responsible; it is up to him to exercise that responsibility, irrespective of what officers working to him say or do; otherwise he need not be on the board. I have another question for Mr MacKenzie.
291. Mr McLaughlin: I have another supplementary question, arising from Mr Beggs's earlier question. Mr Priestly, you interpreted correspondence from board members as somewhat threatening. Did you respond to it?
292. Mr Priestly: After taking legal advice.
293. Mr McLaughlin: Can you share that correspondence with the Committee?
294. Mr Beggs: I thank Mr MacKenzie for his integrity in bringing this issue forward so that it has reached the public domain; it could easily have been hidden away by new policies and buried in the past. I wish to thank you for exposing it and tendering your resignation to force the issue.
295. How will you address what seems to have been a deeply embedded culture of poor purchasing and bad practice in Northern Ireland Water so that we can have confidence in its future performance?
296. Mr MacKenzie: We have taken several actions since those matters became apparent. We looked at the documentation to guide people along the right path, as it were, and refined it, revised it, put it into simple language and used flow charts, and so on, to point out decision points; we also ran seven training sessions, several of which I attended, for management to point out its responsibilities and how the process ought to work. We told people that if they were in any doubt about whether they were following the rules, they must stop and ask; they should not do something that could catch them out later.
297. The issue has been significant for the organisation, and people are responding to that. Every day, I see people ask what the correct procurement process is and ensuring that they follow it. It has been a big shock to the organisation.
298. Mr Beggs: I take it that that was a practice used in the private sector, never mind the public sector. Is that correct?
299. Mr MacKenzie: Yes. In my previous job we had definite financial delegations; people knew what they were allowed to spend and what they were allowed to authorise; they knew the process. It is a matter of putting that robust process in place in NIW.
300. Mr Beggs: Page 22 of the review team's report indicates that the full complement of non-executive directors was not in place between July 2007 and July 2008. Did that place additional pressure on board members? Why was the board allowed to be without a full complement for a year?
301. Mr Priestly: I accept that not having a full complement of non-executive directors did impose additional pressure. When I became permanent secretary in December, I asked why we were not at full complement. I was told that the Minister had taken the decision that while the Assembly and Executive were considering the independent water review panel's report, he did not want us to appoint additional non-executive directors because he thought that that would give the impression of pre-empting the Assembly and Executive's decisions on the report. As soon as those decisions were taken, which, I believe, was in January, I sought the Minister's agreement to appoint additional non-executives. We went through the public-appointments process, and it took until July 2008 to appoint additional non-executive members.
302. Mr Beggs: Was no consideration given to appointing interim board members to fill those places?
303. Mr Priestly: We had discussions with the Minister at which options were discussed, although I cannot remember everything that was discussed at the time. However, I remember asking whether we had sufficient non-executive capacity on the board.
304. Mr Beggs: Page 17 of the report states that the chairperson of the audit committee resigned in July 2007 and was not replaced; that occurred while Northern Ireland Water was waiting for the outcome of the independent review. A new audit committee chairperson was not appointed until November 2008, which meant that the committee was without a chairperson for almost 17 months. What happened to the audit committee during that period?
305. Ms Brennan: There actually was a chairperson. When Rose Hynes resigned, John Ballard, who was another non-executive director at the time, took over the chairmanship of the audit committee.
306. Mr Beggs: Did it continue to meet as regularly as it had done previously?
307. Ms Brennan: Yes.
308. Mr Beggs: Was it not inappropriate for the chief executive to be on the audit committee so that it would have a quorum? The audit committee scrutinised the chairman and chief executive while he sat on the committee. Was that issue not raised?
309. Mr Priestly: My understanding was that while he was acting chief executive, the chairman was not a member of the audit committee; he was an attendee at audit committee meetings.
310. Mr Beggs: If he was an attendee, he would not be counted in the quorum. Is that not correct?
311. Ms Brennan: Presumably he was counted as a part of the quorum. I am not sure about that, but the committee was operating.
312. Mr Beggs: He was either part of the quorum or he was not. That is another aspect of governance that needs to be clarified, not only for this case but for other situations.
313. Mr Shannon: If this were a boxing tournament, Paul, you would have been knocked out in the first round. There are many issues for which you must answer.
314. In the report, Northern Ireland Water is an accredited CoPE, yet the independent review team says that Northern Ireland Water failed to follow its own procedures for authorising single-tender action contracts, and it failed to observe EU regulations for advertising contracts and extending contracts. This is the second time that this Committee has observed significant procurement failures — last time was with an education board. What confidence can the Committee, and the tax payers of Northern Ireland, have in a CoPE accreditation process that could not at any stage identify Northern Ireland Water's failure to follow elementary good practice?
315. Mr Priestly: I cannot take issue with that: it calls into question the credibility of the process for accrediting CoPEs. For that reason, the procurement board has agreed with the Department that a review will take place of Northern Ireland Water's CoPE status. We will conduct a gateway-type review to look into the issue and determine whether it should retain its CoPE status or whether it needs to improve — and what exactly needs to improve — in order to retain CoPE status.
316. Ms Hamill: I can add to that answer. On the wider NICS spectrum, rather than just focusing on Northern Ireland Water, the procurement board is responding to concerns about this and other cases. It has asked Central Procurement Directorate to review the CoPE assessment methodology and to report to the procurement board this November with a recommendation on how the assessment process for CoPEs can be strengthened and to look at how we can build assurance — and, in particular, audit assurance — into that process to ensure that not only has the CoPE processes but that the organisation is compliant with them. The methodology will be revised and reported on in November.
317. Mr McLaughlin: I am please to hear that; it was reported to the Finance Committee yesterday. When was that decided? I have a suspicion that it may have something to do with today's business.
318. Ms Hamill: Recommendations for an NICS-wide review went before the procurement board's meeting on 17 June. The procurement board does not meet frequently as it is chaired by the Minister, but it was at that meeting that the decision was taken.
319. Mr Priestly: Was the review of Northern Ireland Water referred to?
320. Mr McLaughlin: The review is to apply across the board.
321. Ms Hamill: The approach to the review of Northern Ireland CoPE status was agreed at that meeting.
322. Mr Shannon: I thank Fiona for that information.
323. The Finance and Personnel Department has looked into this as well and has referred to public procurement practice generally in the Northern Ireland public sector. It also commented that it was inappropriate to consider the remarks of the detailed assessment of any of the CoPEs. What we are saying is that there will have to be changes.
324. The report also gave the impression that an in-depth review had been carried out. I cite two passages from the CoPE review of September 2009 to which Paul or his team can respond. Paragraph 2.34 states —
"In assessing the level of accountability in public procurement within the CoPE organisations, an assessment of the existence of approval hierarchies to manage financial risk, payment of orders, payment authorisation was scrutinised. In addition, evidence of proper working procedures was examined, especially with regard to how a preferred/suitable method of procurement was decided, as well as supplier and product selection including subsequent engagement and payment."
325. There is an impression that an in-depth review was carried out. I quote also 2.54 that:
"The extent to which CoPEs meet the EU Directives and UK regulations and how they document decisions for selecting restricted and negotiated contracts was reviewed. NAO audit reports, CoPE procurement procedures and evidence of contracts awarded were reviewed. This was an area where all the CoPEs performed well."
326. I am glad that there will be a review. I ask this question of Lian and PricewaterhouseCoopers: were you caught out in that process, and were you, perhaps, holding things back? I have written here: "half-hearted attempt to review".
327. Mr Priestly: A half-hearted attempt to review?
328. Mr Shannon: I am not happy, and I do not think that the Committee is happy, that the report gives the impression that an in-depth review was carried out when it was not.
329. Mr Priestly: I cannot answer for the CoPE review that took place at Northern Ireland Water. What I can say is that Laurence and the Department are working hand in hand to improve arrangements, and we will ensure that the review of Northern Ireland Water's CoPE status is just that: does it have the skills, training, procedures and practices to conduct proper procurement. Otherwise, it casts doubt on the credibility of the CoPE arrangement.
330. Mr Shannon: I think so, too, and we need that assurance for our own confidence in the process. Time will tell whether that delivers, although I hope that it will.
331. Your report refers to a training programme for all managers and staff in important issues such as the creation of business cases, tendering processes, financial delegations, payments and the collation of management information. Training in all those areas is very important. The report also states that Northern Ireland Water scored 87 out of 100 in the "people procurement expertise and people procurement competency". The company was given exemplar status.
332. Sometimes, as an elected representative, you take a wee snippet of a word. I have an English dictionary in my desk, and I looked up "exemplar". The definition, and this is an interesting one, is a group of superheroes from Marvel Comics, or, referring to the Latin, a model or a book to copy. What were they: superheroes from the Marvel Comics or Latin students in white gowns? Perhaps you can tell us what exemplar status means.
333. The independent review team found problems with purchasing and has since introduced a programme to address that, namely the system that led to exemplar status. How can that be applied when CoPE scored so highly?
334. Mr MacKenzie: There were failings; not everyone followed the right process.
335. Mr Priestly: We are talking about a proportion of procurement on operational expenditure that was irregular; let us be in no about that. However, I am reluctant to damn the whole organisation. Northern Ireland Water has a huge capital programme; it does a great deal of capital procurement, and none of the work that Laurence and Nicola did showed any problems with that. Indeed, there is a good deal of other operational expenditure procurement that has been fine. We should not damn the whole organisation because of that one block of failures, regrettable and reprehensible though they were.
336. Mr Shannon: We are not damning the whole organisation; we are pointing out the parts of it that failed. Failures of such magnitude raise concern. When I think of the term "deep dive", I think of an intense audit report that goes into almost forensic detail.
337. In 1999, a three-year contract was awarded to a consultant called Atkins, and it was extended on numerous occasions without any further competition. Perhaps you could tell us how that could happen and why there was never, at any stage, any competition in relation to that procurement.
338. Mr Priestly: It happens because of lazy and improper practice and because a contractor gets into the lifeblood of the organisation and makes themselves indispensable; it is not defensible and it should not happen. Contracts should not be extended beyond their natural life unless there is a clause in the contract to enable that to happen; even then, it should be exceptional. Our policy is that competitive tendering is the way to drive value for money. I will not try to defend those practices.
339. Mr Shannon: How much in total was paid to Atkins under that contract from March 2002 when the original contract expired? It would be good to have those figures on record.
340. Mr MacKenzie: Four point four million pounds.
341. Mr Shannon: How much was paid after 2007?
342. Ms Brennan: After 2007, the Atkins contract was split into two separate pieces of work. Another area of the company took over one piece, and the total value that has been incurred since April 2007 with Atkins is £6·6 million over those two pieces, which were extended beyond the permitted contract period.
343. Mr Shannon: On the Atkins contract, then, if I have got the figures right, we are talking about £11 million. Is that correct?
344. Ms Brennan: We would have to come back and confirm the pre-2007 figure because we do not have it to hand.
345. Mr Shannon: If you can come back to the Committee, we will put those figures on record.
346. Mr McLaughlin: Why was the contract split?
347. Ms Brennan: You might have noticed in the report that there was an issue where there was a scope change to the contract in 2003. The contract was originally for what are known as water zonal studies, and in 2003 there was an addition to the contract to provide construction project management services. In 2007, asset management took over the water zonal studies, which originally happened in the engineering and procurement directorate; therefore the expenditure was split between one area of the business and another post-2007.
348. Mr McLaughlin: I may have asked the wrong question; I am sure that we can come up with an explanation. Why was it, with hindsight, a good decision? Did it circumvent, say, the procurement and competition guidelines? Should that decision have been taken? Could it have been done in a more appropriate fashion?
349. Ms Brennan: It should have been re-tendered once the contract expired in March 2002.
350. Mr Shannon: My last question relates to the archived contracts. Every one of the 46 contracts had been extended beyond the permitted period, and other serious breaches were identified. Will you do any work on this on the basis of the information that you have received? Will further work be done to identify all breaches in the archived contracts and, indeed, any of the live contracts still to be examined?
351. Ms Brennan: What you refer to is contract extensions. Although "archived" means that those contracts are no longer in use, when we carried out the audit work we examined them because they were in existence during the Go-co period and had stopped at some point in the past three years.
352. Therefore, none of the 46 contracts that you mentioned is still in use.
353. We have identified that a small number of other contracts from the live contracts database are still running on contract extensions outside the permitted term, and, following our audit report, the procurement department took steps to put re-tenders out to market. Of the six live contracts, five are already under way and are due to be awarded by November 2010 at the latest, because the Official Journal of the European Union (OJEU) process means that it takes four to five months to award a contract. Therefore, corrective actions are under way.
354. Mr Shannon: Do you have a definitive figure for the total amount of unapproved or improper expenditure for the archived contracts? You must have some idea.
355. Mr Priestly: The total figure that I gave at the outset was that there were 73 contracts, with £28·4 million having been spent.
356. Mr MacKenzie: Yes, that is the total quantum of everything.
357. Mr Shannon: Should those contracts have been published in the European journal?
358. Mr Priestly: A number of contracts should have been advertised on a Europe-wide basis.
359. Mr MacKenzie: There is a threshold, which is roughly £300,000. The figure must be converted from euro to sterling, but, roughly, all utility contracts with a value of over £300,000 must be advertised in the European journal and be open to competition.
360. Mr Shannon: Did we lose out on potential savings because the contracts were not published in the European journal?
361. Mr MacKenzie: Those contracts did not go to tender; therefore, it is impossible to demonstrate whether the best value for money was achieved.
362. Mr McLaughlin: The Commissioner for Public Appointments produced two audit reports on your Department's public appointments process. The first, which was in 2006-07, considered the appointment of the chairperson of the Harbour Commissioners, and the second, which was in 2007-08, examined the appointment of two NIW non-executive directors. Both audits raised concerns about the way that DRD handled probity and conflict of interest. The commissioner's report on NI Water stated that:
"A probity issue arose at interview in relation to one candidate. There is no clear evidence or record that this issue was fully explored to identify whether the candidate met the standards required".
The report continued:
"The Minister was not subsequently advised of the probity issue in the submission and this left him fully exposed to embarrassment had he exercised his right to appoint this particular candidate."
363. As the accounting officer, can you tell us whether you consider that the defective appointment procedures that your Department operated go some way towards explaining the subsequent need to dismiss four board members?
364. Mr Priestly: I will resist the temptation to return to the issue of probity. However, probity issues were fully considered and raised with the Minister, and the person concerned was not appointed, because probity ruled him out. If you look carefully at the commissioner's report, you will see that she said that those matters were presented to the Minister orally, rather than being documented and given to him on paper. However, probity was considered and taken into account during the decision-making process.
365. Mr McLaughlin: Is that an appropriate way for that to be managed? Would it not have been helpful to have some form of record, if, for example, the candidate felt discriminated against?
366. Mr Priestly: The commissioner certainly took that view and said in her report that such matters should be documented in future.
367. Mr McLaughlin: Do you accept that they should be documented?
368. Mr Priestly: I am simply taking issue with the perception in her comments that probity was not considered or raised with the Minister.
369. Mr McLaughlin: We have established that good practice is that such matters should be documented. Could you answer my initial question?
370. Mr Priestly: In the appointments to which you are referring, we have learned the lessons. Probity issues were discussed and documented.
371. Mr McLaughlin: Does that mean that you do not accept that the appointments process was defective?
372. Mr Priestly: No, because there were no probity issues with the non-executive directors whom we appointed at the time.
373. Mr McLaughlin: Do you think that the process stands up to examination, is defensible and should continue?
374. Mr Priestly: I thought that the process that we used at that time to appoint those two non-executive directors was good. The reflection that I would make and the lessons that we have leaned are that we made too much of a fuss about the candidates' having to meet all the criteria. In fact, it was too complicated; they were made to fill in forms that, I think, the commissioner concluded were excessive.
375. Mr McLaughlin: It could be my fault, but I am having difficulty understanding this. If the interview and appointment process has been amended, in what way was it amended and what was the rationale for making those amendments?
376. Mr Priestly: We learned the lesson from the first appointments process, after we were criticised for not documenting on record that issues to do with probity and conflict of interest were raised with every candidate. We offered the Minister written advice, which was supplemented by my telling him that there was a conflict of interest and a probity issue that I thought rendered the candidate unappointable. In a subsequent competition, I asked the commissioner's appointee to the panel to pursue conflict-of-interest and probity issues. Those were documented and reported where relevant. In the advice that was given to the Minister and of the successful candidates, I do not believe that any of them had conflict or probity issues that would have rendered them unappointable.
377. Mr McLaughlin: Are such issues are explored at interview stage?
378. Mr Priestly: Absolutely.
379. Mr McLaughlin: What was over-complicated? That is what confused me. What do you not do now that you did then?
380. Mr Priestly: The specification for all the criteria that candidates had to meet was far too complex. When criteria are specified, people are required to demonstrate that they meet each of them. They were being faced with an application form that was overwhelming, and the commissioner's view was that that was, first, unnecessary and, secondly, overwhelming for people and would put them off applying. That is the lesson that we have tried to learn.
381. Mr McLaughlin: I am sorry for being so obtuse. You and the commissioner have now closed any initial gap and addressed those reservations. In the appointments process for the remaining non-executives and the chair, are the issues dealt with by the new and amended process that you and the commissioner have signed off on?
382. Mr Priestly: I am not clear who you mean by the "remaining non-executives and the chair".
383. Mr McLaughlin: In the continuing process going forward, are there a set of protocols or guidelines that are robust and have been signed off by the commissioner in particular?
384. Mr Priestly: I do not think that they have been formally signed off, but we have taken the report that she gave us and implemented the points that she made. I am reasonably assured that we will comply with what she has said we must do.
385. Mr McLaughlin: Mr Chris Mellor was the former chairperson and interim CEO. The Minister dismissed him and other board members from their positions, who, I am sure, would describe that as fairly robust action. We have heard some of the detail on what started that chain of events. Do you feel that, in your position as accounting officer, you adequately advised the Minister when recommending those individuals in the first instance?
386. Mr Priestly: In fact, I was not the permanent secretary at the time that those recommendations were made. To answer on behalf of the Department, I looked at the advice that was put forward at the time, and I felt that it was adequate.
387. Mr McLaughlin: What was the gap between their appointment and your coming into office? I may have got confused; was it a couple of months?
388. Mr Priestly: I am sorry, I do not know when Chris Mellor was appointed.
389. Ms Patterson: February 2006.
390. Mr Priestly: I am told that he was appointed in February 2006, and I arrived in the Department in December 2007. I was there for the appointment of two non-executive directors following earlier discussion about the need to increase non-executive capacity. That was when Declan Gormley and Don Price were appointed to the board.
391. Mr McLaughlin: Mr Mellor had previously worked as the chief executive of Anglian Water Group (AWG), which is the owner of Anglian Water. When interviewing Mr Mellor, was the Department aware of media reports that he had been dismissed from that position?
392. Mr Priestly: The Department was aware.
393. Mr McLaughlin: Was it aware at the time?
394. Mr Priestly: Yes.
395. Mr McLaughlin: What reference checks did the Department carry out for that appointment? Is that a matter of record?
396. Mr Priestly: I cannot say, but we can check and let you know.
397. Mr McLaughlin: Will you, please? Did the Department address past performance at the interview stage?
398. Mr Priestly: Again, we will have to check.
399. Mr McLaughlin: You would expect that it would have, especially if you are telling us that it was aware that he had been dismissed from his previous post.
400. Mr Priestly: I cannot say, and I would prefer to give you a factual reply.
401. Mr McLaughlin: That is OK; I would prefer that too. Will you send us that information? Given the catalogue of issues that is detailed in the report and as the departmental accounting officer with ultimate responsibility for the public finances that are under your ambit, would you say that you now have a robust and sufficient insight into the governance, accounting and performance of NIW?
402. Mr Priestly: I feel that I am in a stronger position now than I was when I took up my post, but never say never. Touch wood that we do not get into that situation again. I feel that we are in a stronger position with the chief executive that we now have. However, as I said, I have found the revelations that have come out since last autumn to be shocking. You work with people believing that they are being professional and have high integrity, but I have to tell the Committee that, at various points during this affair, we four witnesses have felt exposed and vulnerable. I have found myself having to give support to Laurence, Lian and Nicola. I have found myself going to the Comptroller and Auditor General for support and asking whether I am doing the right thing, and, thankfully, I am being encouraged that I am doing the right thing.
403. It has been difficult for the people who thought that they were doing the right thing to feel that we are not and that we are almost victimised. I am not looking for your sympathy, but it has been tough.
404. Mr McLaughlin: I intended to ask you a question that was derailed somewhat by some earlier discussions, so I will not revisit it, but one issue came from that. Do you know whether Mr Mellor holds any other public appointments?
405. Mr Priestly: He does, yes.
406. Mr McLaughlin: Here?
407. Mr Priestly: Not in Northern Ireland.
408. Mr McLaughlin: Can we have some detail on that for our report?
409. Ms Purvis: After Northern Ireland Water was reclassified as an NDPB, what changes were made to your control over the company?
410. Ms Patterson: I will track back to the history of the classification, because it is important. When the Office for National Statistics (ONS) first reclassified Northern Ireland Water in October 2008, the Department was told that the company was being reclassified for public expenditure purposes only and that, for all other areas, NIW would remain as a Go-co and the governance arrangements would not be changed. However, a few months after that, in January 2009, when we came to finalise the year accounts for 2008-09, it became clear that the reclassification meant that there would be a budgetary pressure, which was £38 million in that year. At that stage, the Department realised that, even though the advice was that the reclassification was for PE purposes and not for governance, that could not have been the case. That was because if the reclassification were to bring budgetary pressures and would mean that we would need to make bids in monitoring rounds, we felt that it went further that being for PE purposes.
411. Once that became more apparent, we started to work through how it would play out. There are a lot of difficulties with managing the hybrid, as we call it, which means that the company is a Go-co under company law but an NDPB for public expenditure purposes. For example, a Go-co that operates in the way intended will not be affected by, for example, cuts to public expenditure, because its budget will be protected for three years through the price control process that the regulator sets. That is an example of the type of issue that arises when one body has two different statuses or is two animals. There are an awful lot of complexities in trying to manage through that process.
412. At that stage, in June 2009, it struck us that we needed to harness NIW's public sector spending much more because of the need to monitor its budget much more closely. Previously, the Department did not need to keep such a tight rein on the company's budget. Under previous Go-co rules, NIW could have teamed and laden and brought money from one year to another. Now that it is part of the PE system, it is subject to the same rules as every Government Department. It receives a budget each year, and, if it spends more than that, that is considered an overspend. For those reasons, we took the decision to appoint a sub-accounting officer, and we tried to manage that much more closely when Laurence MacKenzie came in as chief executive.
413. Ms Purvis: Given that it took nine months to appoint a sub-accounting officer, was there a lot of uncertainty about the NDPB status?
414. Ms Patterson: Yes, there was. As I said, the initial indication was that the reclassification was for PE purposes, which effectively would have meant that it was entered differently on the Treasury database. However, reclassification should not have affected the company's governance structures, because NIW's board is a board under company law, and the PE aspect takes it to a different place in how it spends its money. To answer the question directly, there were an awful lot of complex issues. I accept that that appointment appeared to take a long time, but we got a clear idea of what was involved only as we went through each stage.
415. Ms Purvis: Why was the chief executive not appointed as a sub-accounting officer anyway, given that, prior to reclassification, Northern Ireland Water received significant amounts of public funds from the outset?
416. Ms Patterson: When NIW was established as a Go-co, the governance letter was set up in agreement with the Treasury, DFP, the Strategic Investment Board, the Department and NIW as a Go-co. That governance letter outlined, effectively, the rules by which the Go-co and the Department would operate its controls over spend. I do not want the Committee to think that, because there was no accounting officer status, nothing was in place. The governance letter clearly set out the roles and responsibilities of each side. When it became more apparent that NIW no longer had the flexibilities that it used to have to manage its budget, it became necessary to appoint a sub-accounting officer. However, it was always required to follow the appropriate rules on regularity and propriety that all bodies that spend public money have to. That happened from the outset.
417. Mr Priestly: When Lian and I came to the conclusion that it was sensible to designate the chief executive as a sub-accounting officer, we still had to argue that through, even in the Department, to see how it fitted against the governance letter. We continued to argue that it did not make sense and that, if the body is termed an NDPB and treated like an NDPB, it is essential that the chief executive is appointed as a sub-accounting officer. That took a bit of time.
418. Ms Purvis: Page 13 of the IRT report says that many of the failures to follow procurement procedures pre-date the Go-co status, when the former Water Service was an executive agency in the Department. Why did your Department not identify those fundamental failures in procurement prior to the production of the contracts approval internal audit report?
419. Mr Priestly: I am sorry; I simply cannot answer that. I do not know why they had not been approved.
420. Ms Purvis: Are you going to investigate why they have not been found?
421. Ms Patterson: The scope of the review was to go back to the start of April 2007. We looked at the internal audit work that was done in the former Water Service before vesting, and we looked retrospectively at the coverage that was given to areas such as procurement. My analysis is that there seemed to be adequate internal audit, but I am afraid that I cannot give a further or firmer answer as to why that was the case.
422. Ms Purvis: You obviously looked at DRD internal audit reports at the time. Are you planning a more forensic internal audit of the procurement procedures that were in place prior to 2007?
423. Ms Patterson: We do not intend to do that at this stage, because things continue to evolve in approaches to auditing. Our focus would be on ensuring that our current auditing covers what is currently happening.
424. Ms Purvis: I have a number of other issues on governance and internal audit that I would like to clarify, just so that I can have the process clear in my mind. One of the issues that I looked at in the report was the number of meetings between DRD officials and those from Northern Ireland Water. Mr MacKenzie, how often did the full board of Northern Ireland Water meet in a year?
425. Mr MacKenzie: It met on 10 occasions. There were supplementary meetings —
426. Ms Purvis: The full board met on 10 occasions. Mr Priestly said at the start of the meeting that DRD was not involved in the day-to-day running of the company and non-executive directors were not involved in that either. However, on reading the independent review team's report, I find it striking that departmental officials had 80 meetings a year with Northern Ireland Water, yet the full board had 10 meetings a year.
427. The outcome was that four board members were sacked. It seems to me that there is an imbalance in there somewhere, in that in its oversight role, the Department for Regional Development had 80 meetings a year, yet in its oversight role, the full board had 10 meetings a year. There is something wrong in that. I just want to explore that a bit further, Mr MacKenzie. Who was responsible for the extension of contract A? Who sent you the e-mail?
428. Mr MacKenzie: The person concerned was the then commercial director of the organisation.
429. Ms Purvis: Can you name him?
430. Mr MacKenzie: His name is David Gilmour.
431. Ms Purvis: What happened to that individual?
432. Mr MacKenzie: That individual is no longer in the organisation.
433. Ms Purvis: Was he sacked or did he resign?
434. Mr MacKenzie: We went through a restructuring exercise, and his post was made redundant.
435. Ms Purvis: Can you explain the governance mechanisms that are in place for the board and procurement processes and procedures?
436. Mr MacKenzie: It was not a standing item on the board agenda. The board would have been aware of, and had a role in, approving any single-tender action worth over £250,000. It would have had a role in approving contracts with a value of over £10 million.
437. Ms Purvis: What mechanism was in place to ensure that the board had a clear picture of procurement administration?
438. Mr MacKenzie: The board would have been made aware of exceptions as they arose, but, in my time there, it had not asked for any particular information on procurement.
439. Ms Purvis: Does that mean that the board would have expected that people would have come to it with particular contracts, sign-offs or approvals?
440. Mr MacKenzie: Yes.
441. Mr Priestly: Further to that, it is the board's responsibility to put in place the control framework and to monitor it.
442. Ms Purvis: I know that; I just want to explore something else. If there had been breaches in procurement administration, how would the board have known about them?
443. Mr MacKenzie: It would know by their being pointed out by an internal audit or, in the case that we are looking at, through my advising it.
444. Ms Purvis: Does that mean that, up to that point, the internal audits had not brought any administrative breaches to the board's attention?
445. Mr MacKenzie: There was an internal audit of procurement in the summer of 2009, and that recommended some improvements.
446. Ms Purvis: How did the board react to that?
447. Me MacKenzie: The report would have gone to the audit committee.
448. Ms Brennan: It did go to the audit committee.
449. Ms Purvis: How did the board react to that?
450. Mr MacKenzie: The board's audit committee saw the report. The route is that the audit reports go to the audit committee and the chairman of the audit committee updates the board on what happened in the committee.
451. Ms Purvis: Does that mean that the board would not have had full sight of the audit report and would have depended on an update from the chairman of the audit committee?
452. Mr MacKenzie: Yes.
453. Ms Purvis: Did the board decide on a plan of action, or did the chairman of the audit committee ask the board to recommend one?
454. Mr MacKenzie: The audit report contains recommendations for improvement, and management responds to those recommendations and agrees to make them within a specified time.
455. Ms Purvis: When you received the e-mail on 10 August, you initiated a review of the contract. Is that right?
456. Mr MacKenzie: Yes. That is right.
457. Ms Purvis: When you discovered irregularities in the contract, did you report that to the full board?
458. Mr MacKenzie: I reported it to the chairman, who wrote a note to the full board. When I became aware of the issues, which was when I got the report in October, I sent a summary of them to the chairman and said that I had found those issues. He advised the non-executive directors about the issue.
459. Ms Purvis: What did the board do?
460. Mr MacKenzie: That was in mid-October. There was a board meeting at the end of October at which the matter was considered. I think that the senior independent non-executive director read the report prior to the meeting. I was not party to it, but I understand that he and the chairman had a discussion. The board discussed the matter at the end of October, and I said that the action that I was taking forward was very clear, which was to continue with the contracts approval review. That was around 28 October.
461. Ms Purvis: What did the board do? Did it support you in taking that action?
462. Mr MacKenzie: The board was supportive of me taking that action forward, and I said that I would report back to it in due course.
463. Ms Purvis: Therefore, did the board support the internal audit review of contracts approval?
464. Mr MacKenzie: Yes.
465. Ms Purvis: When you became aware of the findings of the draft contracts approval, to whom did you report?
466. Mr MacKenzie: I sent a note to the chairman, and, on the same day, I advised the permanent secretary.
467. Ms Purvis: Did you advise the full board or any of the rest of the board, or was it just the chairman?
468. Mr MacKenzie: I think that I circulated a note to the full board.
469. Ms Purvis: Therefore, you did circulate a note to the full board that day. Was the full board was aware of the draft findings?
470. Mr MacKenzie: Yes.
471. Ms Purvis: When did it get sight of the full report?
472. Mr MacKenzie: I gave the full report to the chairman that day.
473. Ms Purvis: When did the full board have sight of the full report?
474. Mr MacKenzie: I assume, although I cannot be sure, that the chairman circulated it to the board that week.
475. Ms Purvis: I am trying to find out how the board failed to act in all this.
476. Mr MacKenzie: I am not saying that the board failed to act. That is not a judgement that I made. I am saying that when the board became aware that I had made the permanent secretary aware of the findings, the chairman expressed to me that the board was very dissatisfied.
477. Ms Purvis: These are issues with potential conflict.
478. Ms Purvis: The board had written to DRD about a potential conflict between the chief executive's accounting officer role and his role as a director of the company. In the board's opinion, the way that you were acting around that meant that your accounting officer role took precedence over your role as director of the company.
479. Mr MacKenzie: I felt that, as an accounting officer, I had to be completely transparent with the departmental accounting officer about the issues that were emerging.
480. Ms Purvis: To whom did you tender your resignation?
481. Mr MacKenzie: To the chairman.
482. Ms Purvis: What did the chairman say?
483. Mr MacKenzie: He said that he was bitterly disappointed that I was resigning; he thought that I had made a positive start in the job.
484. Ms Purvis: Did he ask you to reconsider your resignation?
485. Mr MacKenzie: He said that he would not share the fact that I had resigned with other board members and that he would come to Northern Ireland on the Wednesday to discuss the matter with me.
486. Ms Purvis: Therefore he had not accepted your resignation.
487. Mr MacKenzie: He had not.
488. Ms Purvis: Did he explain to you that he believed that you had acted inappropriately in not first informing the board of your findings?
489. Mr MacKenzie: He said that he thought that I should have told the board and let it deal with the matter and, in due course, let the Department know about the issue.
490. Ms Purvis: Were there any procurement failures when you were the head of Northern Ireland Electricity?
491. Mr MacKenzie: Not that I recall.
492. Ms Purvis: When did you withdraw your resignation?
493. Mr MacKenzie: As I recall, I resigned on the Monday, and I withdrew my resignation on the Wednesday evening.
494. Ms Purvis: Why did you do that?
495. Mr MacKenzie: I withdrew my resignation because I was buoyed up by the support from the Department.
496. Ms Purvis: Did the Department offer to sack a number of non-executive directors to your satisfaction?
497. Mr MacKenzie: It did not.
498. Ms Purvis: What assurances did the Department give you for you to remain in post?
499. Mr MacKenzie: It said that it felt that I was the person who was bringing those matters to the surface and that it would support me in continuing to do that.
500. Ms Purvis: Did that include a report headed by your friend Peter Dixon?
501. Mr MacKenzie: The permanent secretary suggested Peter Dixon. I use the term "friend" loosely; as I said, he is a business acquaintance. During the independent review, my relationship or otherwise with Peter Dixon was raised. The permanent secretary asked me about the matter, and I put on record the details of that relationship. I am sure that that is available for the Committee.
502. Ms Purvis: Mr Priestly, how did you distinguish between the five non-executive directors when you made a recommendation to the Minister to sack four of them?
503. Mr Priestly: That recommendation was based on what was said in the independent review team's report about the good work that Don Price had done as chairperson of the audit committee. It was based on how Don Price had reacted to the independent review team's creation, on how seriously he took the failings, and on his wish to be part of addressing those failings.
504. Ms Purvis: Do you not think that the other non-executive directors had taken the issues seriously, given that the whole board supported Mr MacKenzie in his actions and in taking the issue forward?
505. Mr Priestly: I can only repeat what I said to the Committee earlier in this hearing: the chairman of Northern Ireland Water was telling me that I was over-reacting, that the problem was not serious and that there were explanations for all the failures; he did not believe that the internal audit report was as serious as had been made out. As I said, I am happy to provide the Committee with an exchange of e-mails in which I told Chris Mellor that I feared that he and his non-executive colleagues did not understand the seriousness of the matter.
506. Ms Purvis: How did you select the panel for the independent review?
507. Mr Priestly: First, I was after people with the rights skills, professionalism and integrity. I also wanted someone who had accountancy skills. We have been through how the choice was limited with regard to the accountancy firms that were involved in auditing Northern Ireland Water or which were involved in the single-tender actions. Therefore, I resolved that we should go for the public sector partner of Deloitte.
508. Secondly, I was after someone who had been a public sector accounting officer who would therefore understand that role and who would understand regularity, propriety and value for money. I went through various candidates until I found one who was prepared to take the job. Some of them were, shall we say, reluctant to get involved.
509. Finally, part of what was coming back to me was the fact that, "we were operating commercially". I was keen to have someone from a private sector utility who could address that issue.
510. Ms Purvis: You are operating commercially and being audited publicly? You just said, "we were operating commercially".
511. Mr Priestly: No.
512. Ms Purvis: You did.
513. Mr Priestly: With respect, perhaps I garbled my words, but what was being said to me by the non-executive directors and others was, "we were operating commercially". That caused me concern, because they are dealing with hundreds of millions of pounds of public money.
514. Ms Purvis: How much was the panel paid for the report?
515. Mr Priestly: Forty-two thousand pounds.
516. Ms Purvis: For how many days' work?
517. Ms Patterson: Twenty days in one case, 22 days in another case, and the third person did not receive payment; therefore I do not have the details of the days involved.
518. Ms Purvis: Therefore it was about 22 days' work in total.
519. Ms Patterson: Yes.
520. Ms Purvis: Does that include expenses and secretarial expenses?
521. Ms Patterson: It includes expenses for those individuals. There was another, much lower, cost for secretarial expenses, which I can provide to the Committee.
522. Ms Purvis: I would like to see that.
523. I am concerned about the e-mail that Patsy McGlone read out earlier from Don Price stating:
"the Panel from the outset has seemed determined to find Governance failures by the Board".
524. That calls into question the whole report. What changes did you seek to the draft report, Mr Priestly?
525. Mr Priestly: As part of the process of consulting, the Department, Northern Ireland Water and its chief executive circulated a first-draft report, and I responded on behalf of the Department raising some concerns.
526. Ms Purvis: What changes did you seek to the report?
527. Mr Priestly: I thought that I had that information with me. However, I wrote to the panel saying that I thought that the report was not clear enough in identifying where responsibility and accountability should lie. If memory serves, there was an annex that highlighted several factual errors and proposed drafting changes.
528. Ms Purvis: I would appreciate it if you could forward those changes to the Committee. Thank you.
529. I am uncomfortable — as, I am sure, are other members — with the process as it has been outlined. The report found that there was an appropriate framework of financial delegation in place; that the board had driven improvements in procurement; and that it had received assurances from the executive team. However, I fail to understand, given that the report also cannot find out who was responsible for the breaches, that four non-executive directors were sacked.
530. I put it to Mr Priestly that the Department and the Minister could not deal with the flak from another chief executive resigning from Northern Ireland Water and that you bent over backwards to ensure that Mr McKenzie remained in post.
531. Mr Priestly: That is simply not the case.
532. Ms Purvis: Many of the issues that we have drawn out today point in that direction. I do not see, and neither has it been explained clearly, where four non-executive directors are culpable for those alleged failures in governance; I see breaches in administrative procedures, which are the responsibility of a management team. I cannot find where there have been failures in governance, particularly as the independent review team reported that the frameworks and the appropriate approvals were in place and that the board had received assurances from the executive team that it had been informed properly and fully. I will leave it there.
533. Mr Dallat: There are a couple of issues that I want to mop up. Dawn Purvis has given us some very valuable food for thought; she mentioned the cost of the independent review team that set up the whole thing. There seems to be some doubt about whether it cost £40,000 or nearer £50,000.
534. Ms Patterson: It cost £42,300, excluding VAT; if VAT is added, the amount is closer to £50,000. However, the Department can claim back VAT, so the cost to the Department is —
535. Mr Dallat: As least that was before VAT went up. Is it true that you paid one person £1,100 a day, another £800 a day and that £350 was thrown in for secretarial expenses?
536. Ms Patterson: Those rates are correct. The rate of £1,100 a day was £400 cheaper than the government procurement framework rate.
537. Mr Dallat: It was a real bargain.
538. Ms Patterson: The framework rate was £1,500 a day.
539. Mr Dallat: Many of us picked the wrong career, but then you have to pay when you need a show trial.
540. Mr MacKenzie, I am sorry for going back to the dinner that you had with the regulator, but you told us that your relationship with Peter Dixon was just that of one chief executive to another. This is important for our report. You e-mailed the board of directors the following day about that nosh-up. It seemed to be very friendly stuff, and you say that you received useful inputs from Gerry. I take it that that is Gerry Loughran of Phoenix Gas, or is it a different Gerry?
541. You also sent a special e-mail to Mr Dixon, which puzzles me.
542. Mr MacKenzie: Mr Dixon was to have been at the dinner but had to pull out.
543. Mr Dallat: And you missed him, obviously.
544. Mr MacKenzie: I merely told him what had happened at the dinner.
545. Mr Dallat: It was just one chief executive to another, but you missed him and you thought of sending him an e-mail the next day.
546. Mr MacKenzie: To tell him what had happened at the dinner.
547. Mr Dallat: Of course, that was not the end of the e-mails between you and him. On the 27th, you sent him another one, saying that you needed help from friends. Could you explain that?
548. Mr MacKenzie: Yes. I was going through a very difficult process. We had just received the draft determination for the price control, and we were being asked to deliver some £56 million of opex savings across a three-year period. Peter deals with the same regulator as I, and I was keen to understand how he had handled such issues.
549. Mr Dallat: That sounds plausible enough, but, according to the e-mails, he was a friend.
550. Mr MacKenzie: He is a business acquaintance.
551. Mr Dallat: That is changing by the second. Amazingly, Mr Dixon was appointed to the independent review team to sit in judgement on another regulated utility as an impartial and independent member. Is it not starting to sound like an old boys' club?
552. Mr MacKenzie: He was appointed by the permanent secretary not by me.
553. Mr Dallat: One of the terrible things about this country in the past was the social circle of friends who controlled everything. I was sure that that was in the past. I hope that my interpretation of the e-mails that you sent do not lead me to the wrong conclusion. I will go home wondering how much clarity we have really achieved. You said that you were in favour of openness and clarity, but you are not very good when it comes to the Freedom of Information Act 2000 (FOI). You like to keep things back.
554. Mr MacKenzie: I do not know what you mean.
555. Mr Dallat: Well, let me see. You have received freedom of information requests, but you have held information back. You know that.
556. Mr MacKenzie: Any information that we have been asked for under FOI has been given, including anything that I have been asked for.
557. Mr Dallat: I will want to check that, Chairperson, because that is not my information. Requests for information under FOI were extremely hard to extract, and, in some cases, not extracted at all. I may be wrong in blaming Mr MacKenzie rather than the Department, but —
558. Mr MacKenzie: I have provided everything that I have been asked for under FOI, Mr Dallat.
559. Mr Dallat: I will clarify that, Chairperson, because it is important. Has the Department withheld any FOI requests?
560. Mr Priestly: FOI requests on this issue?
561. Mr Dallat: Yes. That is all that we are discussing.
562. Mr Priestly: We have responded to the FOI requests that we have received in connection with this issue. As far as I am aware, we have made full disclosure, except in relation to information about the appointment of interim board members. I cannot remember under which section of the Freedom of Information Act 2000 that information was withheld, but it is work in progress; it is to be published, and it is legitimate to withhold it.
563. Mr Dallat: I do apologise, Mr MacKenzie; the Department is the culprit. On at least three occasions, you did not release information that was asked for in FOI requests. That kind of information would have been freely released by any other Department. Perhaps the Committee could get that information.
564. Mr Priestly: I am happy to release to you the FOI requests that we received and the information that we divulged. I am not aware that we have withheld information.
565. Ms Hamill: Freedom of information requests are made under statutory authority. Therefore, if an individual has a concern that information has not been released, he or she can appeal to the Information Commissioner.
566. Mr McGlone: Just before I get into this wee bit here, I am concerned by what Ms Patterson said. The problems around procurement predate the establishment of NI Water as a Go-co, and you have accepted that. Indeed, many of the personnel who, as Mr MacKenzie knows, were in the Water Service, moved over to Northern Ireland Water. I am deeply concerned to hear that. The focus is, correctly, on NI Water, but some of those bad habits, it has been accepted, existed prior to NI Water, in the Water Service under DRD, as it was then. There does not seem to be any deep will on the part of the Department to go back and look at those bad practices.
567. There have been issues about procurement. In some ways, it bugs me that those practices could have been going on and loads more money could have been blown, yet the Department does not take that on board, nor does it want to investigate those practices forensically in case there are attendant problems that, if there are personnel with shoddy habits, may pop up in some other guise within the Department's remit. That concerns me deeply.
568. I will move on to a few other issues. Colleagues have referred to an e-mail. What role does Mr Price have in NI Water at present?
569. Mr MacKenzie: He is a non-executive director and chairman of the audit committee.
570. Mr McGlone: When a chairman of the audit committee says that:
"non-adherence to procedures was not picked up by Internal Audit (despite 3 Audits on Procurement in 2009) nor were they picked up by Halcrow and at no time were they reflected in reports or in assurance statements to the Board."
571. That is a pretty legitimate statement coming from a person of his standing, whom Mr Priestly obviously holds in great respect in the Department. Over this period of problems in procurement, how many audits were conducted, whether internal or external, departmental, with an external auditor or with an internal auditor in NI Water or Water Service, as it was at that time?
572. Ms Brennan: There were two internal audits before the issues that arose with contractor A approval.
573. Mr McGlone: Therefore in total there were just three internal audits and they were all carried out in 2009.
574. Ms Brennan: Yes. Originally, under the three-year audit plan, internal audit was due to carry out a review of procurement in 2008-09. That was deferred to 2009-2010 at the request of management because new processes were being put in place at the time and the audit committee approved that.
575. Internal audit carried out its review in the summer of 2009, and several recommendations were made on weaknesses in the process from a compliance perspective. Recommendations were made to put controls in place to enhance compliance and to detect where procedures were not followed. Sample testing was carried out in the audits; unfortunately, that sample testing did not detect any issues with how particular contracts had been awarded: we did not find any exceptions, but we did identify issues in the process.
576. Mr McGlone: Therefore two internal audits were carried out; and then there was a third one. Did you head up those audits?
577. Ms Brennan: Yes.
578. Mr McGlone: Therefore three internal audits were carried out, two of which found nothing, and the third — was it the contract compliance one?
579. Ms Brennan: The first two did not find "nothing"; they made some —
580. Mr McGlone: They did not find significant issues around procurement that have now hit the fan.
581. Ms Brennan: They found issues with the process, but the methodology —
582. Mr McGlone: Answer my question, please. Did they find significant procurement issues, the issues that we are discussing here today?
583. Ms Brennan: They did not find issues of the nature that were found subsequently.
584. Mr McGlone: That answers my question.
585. What issues were raised by your contract compliance audit report that issued to Mr MacKenzie and others in September?
586. Ms Brennan: It raised issues around the process. The procurement function was just establishing monitoring procedures, for example, to flag up far enough in advance to business users when contracts were reaching their expiry dates. That was one of the issues that we raised.
587. Mr McGlone: Mr Chairperson, I think that it would be useful for the Committee to obtain that report so that the Auditor General and the Committee could compare and contrast it with what ultimately emerged. We will consider it when it comes.
588. Let us move on to other issues. I want to touch upon comments made by colleagues. We have already heard about the relationship, whatever it might be, the dinners and stuff, that John referred to. We heard about another person who was on the independent review team who was a partner in a significant Belfast firm that had earned upwards of £6 million from the Department. In many ways one of the things that we question is at this stage if people who are in the network who either have a past financial benefit derived from the Department or, potentially, a future one clearly where something nice could be added to their CV. I would certainly question the merits of the independent outcomes of a report written in circumstances like that, where there may be an interest there, either past or future. That is another aspect that we need to explore in relation to the independence of the outcomes of the report.
589. I will move on to other issues. We were touching there on the number of times that the matter was audited internally. Can you provide me with details as to how many times it was audited externally, if it was externally audited, or if the Department, either in a cursory manner or a formal manner, actually said, "let's have a look at the books"? I presume that that is readily available.
590. Ms Brennan: The external audit?
591. Mr McGlone: Yes: how many times that was done over the period that the problems that we are discussing today were not noticed.
592. Ms Brennan: The external audit management letters over the first two years in which the organisation was a Go-co did not identify any issues with procurement.
593. Mr McGlone: Therefore the external audit — that is four audits so far — did not identify any procurement issues, and another audit identified process issues.
594. Ms Brennan: I will just clarify one point, if you will allow me. The audit approach that is accepted in line with professional standards is that sample tests be carried out. Only if one became aware that there was a particular issue would one go into deeply substantive work, which we did as soon as Laurence became aware of the issue with contractor A. That is when we covered a high number of the transactions, and through that we found a percentage of non-compliance issues.
595. Mr McGlone: The only thing that I can conclude from that is that the audits were not extensive enough and were clearly inadequate, because the whole purpose of auditing, as we know sitting here, is to determine if there are issues or problems in there and to discern those and act on them promptly. So far we have established that there were five audits.
596. Ms Brennan: The statutory audit takes place every year and covers all key financial areas.
597. Mr McGlone: Just to clarify, how many audits took place in the period under discussion, either carried out by the Department, NI Water or externally?
598. Ms Brennan: NI Water carried out two internal audits, and there were external audits carried out each year.
599. Ms Hamill: When we talk about external audits we are talking about the audit of the financial statements and the information below that; we are not talking about the audit of the processes and detailed behaviour.
600. Mr McGlone: That is fine. Therefore you are talking about two, and then there was a third one.
601. Ms Brennan: The third one — the contracts —
602. Mr McGlone: Unless Mr Price here is —
603. Ms Brennan: There was the audit into contract A as soon as Laurence became aware that there might have been an issue with the contract.
604. Mr McGlone: All I want to know is how many audits took place. Was it three, two, four, or what?
605. Ms Brennan: There were three internal audits, including the audit of contractor A.
606. Mr McGlone: And none was carried out in 2008?
607. Ms Brennan: No internal audit was carried out in 2008.
608. Mr McGlone: OK. That is all I wanted to establish.
609. Mr Dallat: Who were the external auditors?
610. Mr MacKenzie: KPMG.
611. Mr McGlone: Thanks for that. Mr Priestly, is it a fact that your Department and Northern Ireland Water's internal auditors, Ernst and Young, agreed not to release internal audit reports to the Comptroller and Auditor General?
612. Ms Patterson: Yes.
613. Mr McGlone: It should be a simple yes or no answer.
614. Ms Patterson: The simple answer is that, yes, for a time the Department did agree.
615. Mr McGlone: Why?
616. Ms Patterson: When the company was set up as a Go-co, Ernst and Young were the external providers, and NIW's board had signed a contract with Ernst and Young for that service.
617. The conditions of the contract prevented the Department providing those reports to anyone outside the Department and the company. However, I want to put on record that, when that was brought to my attention, I did not, and do not, agree with that condition, particularly where an NDPB is concerned. Indeed, when the Audit Office completed its accounts last year, it raised that in its management letter. At that stage, I opened a dialogue with NIW and the chair of the audit committee to explain that that condition was not appropriate, because the Audit Office has the right to get in on any public money. I also said that the decision needed to be overturned. With Paul's help, we negotiated the removal of that condition with Ernst and Young, so that for this year's audit, the Audit Office had full and open access to everything that was done in NIW.
618. Mr McGlone: Who negotiated such a condition? More importantly, who signed up to the contract?
619. Ms Patterson: At the time that the contract was put in place, such a condition would not have been an unreasonable request. Northern Ireland Water had been established as a Go-co, and the privy of relationship under company law was between the external contractor and the board of directors. However, with the turning of the governance arrangements and the reclassification of NDPBs, it becomes nonsensical, because —
620. Mr McGlone: It is nonsensical, but that is not what I asked you. I did not ask you whether it was reasonable or unreasonable; I asked you who was responsible for signing up to the contract.
621. Ms Patterson: I am sorry, but I do not have that information.
622. Mr McGlone: Perhaps you could find that out for us.
623. Ms Hamill, are you aware of any other public bodies in which the access rights of the Comptroller and Auditor General have been limited and denied in such a way?
624. Ms Hamill: No. Apart from the specific issue relating to the Go-co, I am not aware of any other such situations. If the Comptroller and Auditor General found any difficulty in accessing such information, I would expect him to come directly to me so that I could resolve the problem.
625. Mr McLaughlin: Utilities have been privatised elsewhere. Were such confidentiality clauses and commercial sensitivities standard operating practices in that context?
626. Mr MacKenzie: Yes, they were.
627. Mr Priestly: Chairperson, I wonder whether it would be possible to have a comfort break for a few minutes.
628. The Chairperson: It has been a long session, so we can have a break for five minutes.
Committee suspended.
On resuming —
629. The Chairperson: We have a quorum again, so we will go back into open session. Mitchel McLaughlin just said to me while the meeting was suspended that Mr Priestley had to go out for a leak. That is quite ironic, given that we are talking about NI Water. [Laughter.] It was Mitchel McLaughlin who said it, not me.
630. Mr McGlone: Before we begin again, I will formally hand over for the record the e-mail that was referred to earlier.
631. I refer you to paragraph 24 of the internal audit section of the independent review team's report. Mr Priestly, why did the Department not engage with the chairperson of Northern Ireland Water's audit committee until fairly recently, despite having received such critical assurance statements?
632. Mr Priestly: Perhaps I am taking you up wrongly, and I apologise in advance if I am. The assurance statements that we received from Northern Ireland Water were misleading. Northern Ireland Water assured us that nothing was going wrong. It took a very long time for us to get access to the internal audit reports. It was not part of the Go-co's governance arrangements for us to be represented on the company's audit committee. That issue became relevant when the company was changed to an NDPB. It is regrettable that it took so long, but we got there eventually.
633. Mr McGlone: The PAC's April 2008 'Report on Good Governance — Effective Relationships between Departments and their Arm's Length Bodies' recommended that:
"a department should be represented at the audit committees of each of its arm's length bodies."
As you sit here today, you are probably hoping that the company is very much an arm's-length body. The Department of Finance and Personnel accepted that recommendation in the corresponding memorandum of reply of 11 July 2008, but here we are, two years later. Did that recommendation not transfer to relevant Departments? Why was there a slow take-up by DRD?
634. Ms Patterson: The Department has an arm's-length body subcommittee of the board, which considered the PAC's recommendations shortly after the memorandum of reply issued. Given that, at that time, Go-co/NDPB status referred to public expenditure purposes only and said that governance should not be changed, the committee took the decision not to place someone on to the NIW audit committee but to place someone on to the Translink audit committee. I do not want you to think that a thought process was not gone through. It was, and that was the decision that was taken. The fullness of time has now shown that the NDPB means much more than just PE. I accept that the process was slower than it should have been.
635. Mr McGlone: Perhaps I am having a bit of a senior moment, but, to be honest with you, I do not understand how a Department can do that. If there had been someone there with competency, possibly even yourself, the issue would have been picked up on much earlier. I just do not understand it. Rather than go through the convoluted thought process that I have heard so much about today, perhaps the Department could give us some clarity in writing about why it did not happen pronto.
636. Finally, on page 8 of the update that Mr Priestly provided to the Committee on 9 June 2010, it is set out that the appointment of the new post of procurement compliance officer was limited to an internal trawl. Mr MacKenzie, how did you come to that decision, given the performance of the staff? As we heard today, nothing was picked up on in regular audits, yet you opted for an internal trawl. Why was an external trawl not used? We have heard so much about how wonderful external people are and how beneficial they are to the Department and to NI Water. A lot of them have had an interest, albeit a vested interest, you could argue, and input into quasi-independent reviews and so on. Why did you do that?
637. Mr MacKenzie: We are faced with very challenging efficiency targets this year. Many people who work in Northern Ireland Water are very competent. It seemed to me that someone in our organisation who had the appropriate skill set and who had not been involved in this area previously would have been a suitable candidate. We have been through an interview process, and we have found someone who has never been part of procurement before but who has all the skills necessary to be a procurement compliance officer.
638. Mr McLaughlin: Does employment guidance and good practice say that are you required to look for candidates internally before advertising externally?
639. Mr MacKenzie: As part of our process, we always look to see whether there is a suitable internal candidate before we advertise externally.
640. Mr McGlone: I think that perhaps the tenet of Mitchel's point is that, irrespective of what you always do, and I mean no disrespect to Mr MacKenzie, some things have been done regularly. That does not necessarily make it the right thing. Have you sought advice on the matter from, for example, the Equality Commission, the Department or other external bodies?
641. Mr MacKenzie: We discussed it with the Department, and I believe that the candidate who we have found for the role has all the necessary competencies.
642. Mr McGlone: That was not my question. The person that you have found may have all the competencies. I want to know about the process by which you got to that point. We heard today about concerns over public appointments. Did you seek clarity or advice from the Equality Commission or your human resources (HR) unit about the appointment of that person, who may be aptly qualified for the role, to ensure that you went through the proper employment practices and procedures?
643. Mr MacKenzie: Yes. We went through a proper process internally, whereby the job was advertised internally and anyone in the organisation could have applied. People applied for the job. We held a fair interview process, the entire process was managed by the HR function and a suitable candidate was found.
644. Mr McGlone: Who sought the appropriate advice?
645. Mr MacKenzie: I sought the appropriate internal advice from HR, which ran the process for us in line with fair procedure.
646. Mr McGlone: That is all I wanted to know, after all that.
647. The Chairperson: Some other members want to ask questions, but I ask them to be as brief as possible, as it has been a long session.
648. Mr Hilditch: I will deviate slightly. I am concerned that another major issue is perhaps hiding around the corner. The jungle drums are out. The independent audit was not a fundamental review; it concentrated only on the report. The One programme, which is nothing to do with Christine Bleakley, I hope, looked at amalgamating systems, such as IT systems. I understand that it cost between £60 million and £80 million. How has the value for money for the One programme been demonstrated independently?
649. Mr MacKenzie: We are going through an internal validation process. That is almost complete. It will seek to validate the benefits derived from the One programme, and our internal audit team will work to ensure that that validation process is appropriate.
650. Mr Hilditch: It has been flagged up to me recently that the jungle drums are out. I hope that nothing is hiding round the corner.
651. Mr McGlone: Ms Brennan, did you work with Ernst and Young previously?
652. Ms Brennan: That is correct.
653. Mr McGlone: By what method did you come to NI Water?
654. Ms Brennan: I came in through an external recruitment exercise that was carried out in July 2008. I joined NI Water with the objective of establishing the internal in-house audit function.
655. Mr Priestly: It was an open competition that was publicly advertised.
656. Ms Brennan: Yes.
657. The Chairperson: I have a couple of other questions to ask. You will be glad that the session is nearing its conclusion. A number of reports were before the Committee today, and, having read them, I imagine that NI Water's latest accounts will have been qualified. I will ask the Comptroller and Auditor General to comment on that.
658. Mr Kieran Donnelly (Comptroller and Auditor General): I understand that the accounts for Northern Ireland Water for 2009-2010 were signed off a couple of days ago. They have not been qualified, which might be a surprise. I audit the accounts of the parent Department, which is DRD, and I will sign those off today before the summer recess. I have qualified the parent Department's accounts and will report on those. Therefore, it seems a bit incongruous that Northern Ireland Water's accounts are not qualified, given the gravity of the issues. The heart of the matter is that, whenever I sign off any accounts throughout the public sector, I give an opinion on two things: first, whether the accounts are true and fair at the commercial end; and secondly, I give a regularity opinion that the accounts conform to the Assembly's intentions. An auditor is not required to give a regularity opinion on the accounts of a Go-co. That is a weakness that we should think about.
659. The Chairperson: I am sure that, now that members have heard that, we will consider it when we conclude our inquiry. Given the concerns about procurement and governance in NI Water, not only the Committee but the public will be looking for assurance that there are no similar activities in, for example, Translink, which is another limited company that receives significant public funding from your Department. Can you give us any assurance on that?
660. Mr Priestly: The assurance that I can give the Committee is that, in the light of what happened in one of our arm's-length bodies, Lian, the relevant director and I are having another look at our governance of Translink and at areas where we may want to change and tighten things up or seek different and better assurances about their practice.
661. The Chairperson: Have you started to look at that, or is that just coming up in the light of our inquiry?
662. Mr Priestly: We have started to look at that. I have a draft letter about changes that I want to make that I am about to clear with the Minister and that I intend to send to the chairman of Translink.
663. The Chairperson: Is that recent?
664. Mr Priestly: I am ready to send the draft to the Minister. We have been thinking about that for the past few months, since these matters emerged.
665. The Chairperson: Therefore, you have been thinking about it for the past number of months, but you have the letter at only the draft stage. It is good that there is a draft letter, and, hopefully, it will be signed off as soon as possible. We certainly do not want another evidence session about any other of the arm's-length bodies of the Department for which you are the accounting officer. We appreciate all the work that has been done.
666. This is one of the worst cases that I, as Chairperson of this Committee, have come across concerning the total breakdown of procurement controls. I am sure that Committee members, some of whom have been on the Committee longer than I, think the same. It is incredible that a body that gets two thirds of its funding from public funds should have ignored the most basic rules and shown a complete disregard for public sector principles.
667. The Committee will consider today's evidence and will probably need an articulated lorry to deliver all the other information that we asked you to provide. I dare say that the Committee will undertake a lot of deliberation on the matter, and you will hear the outcome of those deliberations in due course. If the Committee seeks more information, it will put that request in writing to you.
668. Thank you. It has been a very long session. I appreciate your time and effort.
A great deal of information obtained through freedom of information requests was submitted to the Committee by members of the Committee and by correspondents to the Committee. This has been an invaluable resource and is reflected in the timeline above. The extracts reproduced in this appendix are those submitted by members in evidence on the 1st July 2010 at the Committee's evidence session; and those relied upon in assertions in the main body of the report.
1.1 On 1 April 2007, the Water Service, an Executive Agency of the Department for Regional Development (DRD), became Northern Ireland Water Ltd (NI Water), a Government owned Company (GoCo) - a limited company, with DRD as the 100 per cent shareholder. NI Water is constituted, and operates, under company law. Within DRD, a Shareholder Unit was established to manage relationships between the Department and the Board of NI Water.
1.2 The Government's aim in establishing NI Water as a GoCo was to provide the organisation with the commercial and operational freedom required to deliver its business, balanced by a robust monitoring framework. Therefore, the Board of NI Water is responsible and accountable for the operation of the company, for delivering the objectives of the strategic business plan, and for compliance with the regulatory framework.
1.3 Mr Priestly, DRD Accounting Officer, has previously explained to PAC[1] that the governance arrangements were established in such a way that DRD would not interfere in the day-to-day operations and management of the business. However, he recognised that he did have "a responsibility as both a representative of my Minister and of the shareholder interest in Northern Ireland Water to ensure that it is delivering against its objectives. Moreover, while Northern Ireland Water is receiving significant amounts of public money, I, as accounting officer, consider it my responsibility to receive assurances from the company's board and executive management that they are delivering value for money and spending that money properly and wisely".
2.1 In establishing NI Water as a GoCo, there was the assumption that income would be generated from industrial, commercial and domestic water charges and that eventually NI Water would become self-financing. However, since domestic water charges have yet to be introduced, DRD continues to fund NI Water. To enhance NI Water's governance and accountability, DRD introduced supplementary governance arrangements in May 2008.
2.2 In the PAC evidence session of 29 May 2008 Mr Priestly said that "I have taken steps to reinforce my role as the departmental accounting officer and to seek further assurances from the company that it is spending public money wisely and that it has in place proper systems of internal control and risk management". In January 2009, following the Executive's decision to further defer domestic water charges, NI Water was reclassified as a Non Departmental Public Body (NDPB) for public expenditure purposes with effect from the 2008-09 financial year. The reason given by the Office of National Statistics[2] for the reclassification was that an insufficient amount of NI Water's income was derived from charges for it to be considered self-financing and therefore a Public Corporation.
2.3 As a result of reclassification, DRD had to assess and deal with the potential impacts this had on the cost of capital charges, borrowing capabilities, spending authority, accounting treatment and VAT treatment. As a direct result, DRD determined that there was a need to carry out closer monitoring of NI Water in order to avoid over or underspend. DRD therefore introduced what it considered to be stricter governance arrangements, such as closer monitoring of NI Water by the Shareholder Unit, the appointment of the new Chief Executive as Accounting Officer (in September 2009, 9 months after re-classification) in support of the DRD Accounting Officer and greater scrutiny over internal audit findings and related management action plans.
3.1 Under the governance structure DRD:
3.2 However, for the period 19 July 2007 to 7 July 2008 the complement of Non Executive Directors was not compliant with The Combined Code on Corporate Governance. Furthermore, from 1 July 2008 to 28 July 2009, the Chair, who had previously been Chief Executive of Anglian Water, doubled up as Chief Executive following the Chief Executive's resignation on 28 May 2008. The current Chief Executive took up his position on 27 July 2009.
3.3 In the 21 month period from the establishment of NI Water in April 2007 to December 2008, three members of the NI Water Board resigned from the Company – namely one Non Executive Director (19 July 2007) who was also Chair of the Audit Committee, one Chief Executive[3] (28 May 2008) and one Executive Director (December 2008).
4.1 During 2009-10, NI Water has carried out a number of internal audit reviews into procurement. These reviews, which were specifically initiated by the new Chief Executive, identified a large number of high value contracts that had not been subject to competition or proper approval. The Chief Executive kept the Department fully appraised of the situation as various audit reports became available.
4.2 In light of the gravity of the issues identified in the Contracts Approval Internal Audit Report, an Independent Review Team was commissioned jointly by the NI Water Chief Executive and the DRD Accounting Officer[4].
4.3 The Scope of the review was to:
4.4 The three week review commenced on 25 January 2010. The key findings arising from the report are:
4.5 In response to these findings, the Department has advised that:
5.1 On 9 December 2009, the Committee of Finance and Personnel considered the Report into the "Review of Centres of Procurement Expertise Status and Policy Implementation". This report was produced by PriceWaterhouseCoopers (PWC) who were engaged by the Procurement Board in 2009 to conduct the Review of CoPE Status and Policy Implementation in each centre, including NI Water. The terms of reference were to:
5.2 In the Review, each of the CoPEs scored above the 800 point 'exemplar' standard against the criteria set, with NI Water scoring 814 out of a possible maximum score of 1,000. However, since the production of NI Water's Independent Review Team Report, the Committee of Finance and Personnel have been in contact with PAC (11 December 2009, 16 April 2010, 2 June 2010) updating it on the concerns that have been raised. The Committee of Finance and Personnel has queried the award of exemplar status to NI Water in light of the serious deficiencies identified in the Independent Review Team's Report.
6.1 I wish to place on record that the DRD Accounting Officer contacted my office when concerns were first raised in January 2010. He copied me into the Terms of Reference of the Independent Review Team and has kept me abreast of the situation, as it has developed. He also sent me a copy of the Report on 11 March and outlined the subsequent action taken by the Minister. Communication with the Department since the report was first commissioned has been both timely and comprehensive.
6.2 NIAO is the auditor of the DRD Resource Account which includes funding to NI Water. In reviewing the account, my staff have previously raised serious concerns relating to the governance of NI Water in our management letters to DRD. This included the appointment of the NI Water Chair as Chief Executive, which effectively undermined the Board's independent oversight role (see Annex A). In response, my staff were told that the Department regarded the appointment of the Chair as Acting Chief Executive as a short term measure and would work with the Board as it sought to appoint a new Chief Executive. At that stage, it was recognised that the appointment process could take 6-9 months; in the end it took 14 months.
6.3 Further concerns have also been raised over NIAO access to NI Water Internal Audit Reports. As part of our audit of the DRD Resource Account we requested sight of NI Water Internal Audit Reports held by the Department in June 2009. However, the Department told us that it was unable to grant us access as it had signed a confidentiality agreement with NI Water's Internal auditors. The Department advised that it was required to sign a Confidentiality Agreement due to NIW's initial status as a GoCo when it was not anticipated that Internal Audit reports would have been required to be provided to the NIAO. When the Department later approached NIW to seek to secure the consent of Ernst and Young to release the reports to NIAO we were told that they would only agree to forward copies if NIAO acknowledged that:
6.4 My staff refused to sign such restrictive clauses and subsequently received the Internal Audit Reports in April 2010 following the intervention of the DRD Accounting Officer.
[1] Evidence Session 29 May 2008 - Managing Sickness Absence in The Northern Ireland Civil Service
[2] The Office of National Statistics is the executive office of the UK Statistics Authority, a non-ministerial department which reports directly to Parliament. One of its functions is to decide on the classification of all entities and transactions for the purpose of producing national accounts
[3] When the Chief Executive resigned in May 2008, she received a severance package totalling £266,000.
[4] The membership of the team was made up of, Peter Dixon - CEO Phoenix Gas, Jackie Henry – Partner in Deloitte, and Glenn Thompson - consultant and a former Accounting Officer
_fmt.jpeg){kind=logo}
