Session 2007/2008

Sixteenth Report

PUBLIC ACCOUNTS COMMITTEE

Report on Northern Ireland Tourist Board – Contract to Manage the Trading Activities of Rural Cottage Holidays Limited

TOGETHER WITH THE MINUTES OF PROCEEDINGS OF THE COMMITTEE
RELATING TO THE REPORT AND THE MINUTES OF EVIDENCE

Ordered by The Public Accounts Committee to be printed 17 June 2008
Report: 35/07/08R Public Accounts Committee

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Public Accounts Committee
Membership and Powers

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

The Public Accounts Committee is appointed under Assembly Standing Order No. 51 of the Standing Orders for the Northern Ireland Assembly. It has the power to send for persons, papers and records and to report from time to time. Neither the Chairperson nor Deputy Chairperson of the Committee shall be a member of the same political party as the Minister of Finance and Personnel or of any junior minister appointed to the Department of Finance and Personnel.

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

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

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

Mr Thomas Burns**               Mr Trevor Lunn
Mr Jonathan Craig                  Mr Mitchel McLaughlin
Mr John Dallat                        Ms Dawn Purvis
Mr Simon Hamilton                 Mr Jim Wells*
Mr David Hilditch

* Mr Mickey Brady replaced Mr Willie Clarke on 1 October 2007
* Mr Ian McCrea replaced Mr Mickey Brady on 21 January 2008
* Mr Jim Wells replaced Mr Ian McCrea on 27 May 2008
** Mr Thomas Burns replaced Mr Patsy McGlone on 4 March 2008
*** Mr Paul Maskey replaced Mr John O’Dowd on 20 May 2008

Table of Contents

List of abbreviations used in the Report

Report

Executive Summary

Summary of Recommendations

Introduction

The Ethical Standards Required from Public Officials

The Adequacy of Guidance on Handling Conflicts of Interest

The Promotion of a Culture of Open Reporting to Those with a Governance Role

Commercial Realism and Building Exit Strategies into Poorly Performing Programmes and Projects

Appendix 1:

Minutes of Proceedings

Appendix 2:

Minutes of Evidence

Appendix 3:

Clerk’s letter of 2 May 2008 to Mr Stephen Quinn CB, Accounting Officer, Department of Enterprise, Trade and Investment

Correspondence of 21 May 2008 from Mr Stephen Quinn CB, Accounting Officer, Department of Enterprise, Trade and Investment

Appendix 4:

List of Witnesses

List of Abbreviations used in the Report

LEDU                                               Local Enterprise Development Agency

The Department                               Department of Enterprise, Trade and Investment

The Tourist Board                            Northern Ireland Tourist Board

C&AG                                              Comptroller and Auditor General

CIPFA                                             Chartered Institute of Public Finance and Accountancy

DFP                                                 Department of Finance and Personnel

NICS                                               Northern Ireland Civil Service

Executive Summary

Introduction

1. This report addresses two main areas of concern – shortcomings in the handling of a senior official’s conflicts of interest by the Northern Ireland Tourist Board and the Tourist Board’s commercial involvement at the public expense, in activities related to holiday cottage accommodation.

2. Government departments and their sponsored bodies administer large sums of public money and are responsible for the proper conduct of public business. This Committee and the public expect that Government bodies will do this to the highest standards. When conflicts of interest are not disclosed or managed properly this undermines public confidence in the standards of public administration.

3. Good governance has been a major theme of this Committee’s work and the effective and transparent management of conflicts of interests has been a key aspect of this work. This is not difficult but simply a basic principle of good public administration.

4. This case is one in a string of conflicts of interest with which this Committee has had to deal. The Committee considers this is an important case study as it provides valuable lessons to the wider public sector on how to deal with, and how not to deal with, conflicts of interest.

5. Lessons have also been set out in this report for public bodies when they engage in commercial activities. The initial business plan envisaged the company would break even and become self sustaining in three years. A decade and a half on, the company is still losing money. The public expects that public money will be committed only after a careful and realistic assessment of commercial prospects, and having provided for an economical way out if things go wrong. The Committee reiterates the warning given in 2001 that departments need to be alert to the dangers of optimistic assumptions in investment decisions.[1]

The Ethical Standards Required from Public Officials

6. This Committee, in its report on the ‘Hospitality Association of Northern Ireland: A Case Study in financial management and the public appointments process’[2] said it expects the senior public officials to show real leadership in relation to upholding probity and standards in public life. This case demonstrates that chief executives of arm’s length bodies also need to provide clear leadership on ethical issues. It is essential that they instinctively recognise the dangers of conflicts, actual or perceived and get to grips with them when they come to light.

7. A personal relationship in public business almost invariably creates a situation which is at least capable of being perceived as prejudicial to the public interest. The appropriate response to potential conflicts of interest will almost always be that the official should declare that interest, it should be recorded, and he or she should withdraw from involvement with any aspect of the case.

The Adequacy of Guidance on Handling Conflicts of Interest

8. The Committee was disappointed that lessons had not been learned from cases of conflicts of interest previously examined – including a previous Public Accounts Committee report on the Tourist Board in 2002[3]. Over time, cases such as this erode the public’s trust in the behaviour of senior officials. The Committee agrees with the Department of Finance and Personnel’s view, expressed by the Treasury Officer of Accounts, that guidance is and should remain based on principles. The Committee was told it would be impossible have a rule for every situation. The session also highlighted, however, that officials who are faced with conflicts of interest would benefit from more accessible guidance on assessing, managing and reporting conflicts.

9. Although witnesses were generally content with the guidance currently available on conflicts of interest, the Committee considers that there is considerable potential for it to be improved and strengthened. It also needs to be consolidated into a short, straightforward guide that is readily available to public officials. It would be particularly useful for recruits from the private sector if the guidance gave worked examples of the principles being applied.

10. The Committee has previously emphasised the importance of whistle-blowing and the importance of achieving full compliance with the requirement for whistle-blowing policies[4]. Sometimes when things go wrong, as in this case, the involvement of whistle-blowers is the reason that the truth comes out. Robust and well-publicised arrangements are an important alert system and this case illustrates their value.

The Promotion of a Culture of Open Reporting to Those with a Governance Role

11. The Committee emphasises that senior officials must be open and forthcoming with Board members and, in the case of arm’s length bodies, with sponsoring departments. Officials must provide them with the information they need to make properly informed judgements. If officials are not open with those who are best placed to advise them, they should not be surprised when things go wrong.

Commercial Realism and Building Exit Strategies into Poorly Performing Programmes and Projects

12. By the time the Tourist Board came to let the Rural Cottage Holidays contract, the business was run down and in a very weak financial position. The Tourist Board did not have an exit strategy in place from the outset and it is still trying to find a way out.

13. The Committee was told that getting involved in the scheme in the first place, back in the 1990s, when the situation in Northern Ireland was very different from today, was a classic case of “optimism bias” in economic appraisal. This was an understatement. It has cost the taxpayer several hundreds of thousands of pounds to date and the onerous outstanding lease commitments are still costing public money. The Committee considers that the positive financial outlook painted for the venture in the 1990s was even less realistic then that it appears today, and at no stage was the company likely to be commercially viable.

Summary of Recommendations

The Ethical Standards Required from Public Officials

1. The Committee recommends that the most appropriate response to any potential conflict of interest must be that the official should declare that interest, it should be recorded, and, if appropriate, he or she should withdraw from involvement with any aspect of the case. All personal relationships between public officials and people they have contact with in an official role should be treated in the same way as any business relationship (see paragraph 18).

3. The Committee recommends that, where conflicts cannot be avoided because there are exceptional and persuasive reasons for continuing involvement, strong mitigating controls must be put in place to ensure that the principles of objectivity and integrity are not compromised. The decision to manage the conflict and the adequacy of the controls implemented should be documented and approved by a senior official. Any conflicts that are managed rather than avoided should be reported to audit committees who should ensure that the controls are adequate and have been applied effectively (see paragraph 19).

4. The Memorandum issued to Accounting Officers on their appointment makes clear their duty to uphold high standards of propriety. The Committee recommends that, as part of this Departmental Accounting Officers should ensure that their arm’s length bodies have provided staff with adequate training on ethical issues. Particular attention should be given to the quality of induction training and mentoring for officials recruited from the private sector (see paragraph 20).

5. The Committee recommends that each Department should designate an existing senior official as being responsible for supporting the Accounting Officer on ethical matters and for monitoring on and advising on ethical behaviour across the Department and its arm’s length bodies. The Committee sees this as analogous to the developing practice in the private sector and the requirement for private sector accounting firms to have a designated ethics partner (see paragraph 21).

The Adequacy of Guidance on Handling Conflicts of Interest

6. The Committee recommends that the Department of Finance and Personnel should issue a short guide consolidating the guidance on conflicts of interest, including succinct case studies, so all public officials have a handy guide to avoiding, recognising, recording and managing conflicts of interest. Such a document would be especially useful to recruits from the private sector who are often not as familiar with public sector standards and who are quite likely to encounter conflicts of interest, having moved to the public sector (see paragraph 26).

7. The Committee recommends that a test of public perception should be an important aspect of determining whether action is required for potential conflicts of interests. Finely honed arguments about what may or may not be prejudicial to the public interest may well be made but the public will always be wary of perceived favouritism by officials (see paragraph 27).

8. The Committee recommends that the Department of Finance and Personnel ensures that all public bodies have robust, well publicised (internally and externally) whistle-blowing arrangements in place (see paragraph 28).

The Promotion of a Culture of Open Reporting to Those with a Governance Role

8. The Committee emphasises that Board and Audit Committee roles must be fully respected. They are responsible for ensuring the proper governance of public bodies and officials must be open with them (see paragraph 36).

9. The Committee recommends that when officials commission independent reports on governance matters they must provide them to their audit committees and sponsoring departments. Commissioning such reports is not done lightly and it is self-evident that their results should be reported in an open and timely manner (see paragraph 37).

10. The Committee recommends that all departments obtain regular assurance statements from their arm’s length bodies. The Committee expects reports on governance matters to feature in assurance statements. It is clear that the standard of regular assurance obtained depends on full and open disclosure, particularly from sponsored bodies (see paragraph 38).

Commercial Realism and Building Exit Strategies into Poorly Performing Programmes and Projects

11. The Committee recommends that a reasonable balance must be achieved in the equitable sharing of risks and rewards in projects between the private and public sectors. Both in terms of renovating the 11 cottages and the marketing operation, this case highlights what can go wrong when the public sector dabbles in commercial activities. The cottage owners secured exceptionally favourable terms with the Tourist Board in the 1990s as did the agent when it offloaded the contingent liabilities to the public sector in 2005 (see paragraph 44).

12. The Committee recommends that credible exit strategies should be a condition of approval for long term commitments. The various reviews described to the Committee in this case have not led to a clear way out. The Committee is amazed that the Department and Tourist Board let Rural Cottage Holidays drift on for so long. The Committee wishes to be kept informed of the progress towards ending these onerous public sector financial commitments and expects a report on the cost of doing so (see paragraph 45).

13. Time and again this Committee has examined the unfortunate consequences when the public sector sets up companies to distribute taxpayers’ money, for example, LEDU, the Emerging Business Trust, the NI Events Company and now Rural Cottage Holidays is just another. The Committee expects that where any new companies are set up there must be an undoubted case for doing so. Where this is the case, which should be rare, the Committee would wish that the Department of Finance and Personnel rigorously ensures that the business case and governance, accountability and financial management arrangements are watertight (see paragraph 46).

Introduction

1. The Public Accounts Committee met on 1 May 2008 for an evidence session with the Department for Enterprise, Trade and Investment (the Department) and the Northern Ireland Tourist Board (the Tourist Board). The session related to the Comptroller and Auditor General’s (C&AG’s) report: “Northern Ireland Tourist Board: Contract to Manage the Trading Activities of Rural Cottage Holidays Limited”.

2. The witnesses were:

• Mr Stephen Quinn CB, Accounting Officer, Department of Enterprise, Trade and Investment;
• Mr Alan Clarke, Chief Executive, Northern Ireland Tourist Board;
• Ms Kathryn Thomson, Chief Operating Officer, Northern Ireland Tourist Board;
• Mr David Thomson, Treasury Officer of Accounts; and
• Mr Kieran Donnelly, Deputy Comptroller and Auditor General.

3. The Committee examined the C&AG’s report on the Tourist Board’s management of a number of conflicts of interest, arising at various different times, on the part of one of its senior officials.

4. This case shows what happens when public bodies do not fully manage a conflict from the start. Mistakes made at the outset left the Tourist Board open to criticism of undue favouritism, particularly given the late disclosure of the first conflict and the way it developed.

5. The case also highlights the very serious consequences for the senior official concerned in failing to declare fully his conflicted business relationship. All public officials have an overriding duty of candour. The senior official’s dismissal should send out a clear signal to all public officials on the importance of understanding and espousing the highest standards of integrity expected from public officials. The Committee welcomes the strong action ultimately taken by the Tourist Board.

6. The Committee considered the Tourist Board’s involvement with Rural Cottages Holidays from the 1990s onward. The Committee recognises the different economic circumstances and Government priorities that existed when support was provided to rural tourism at that time. The sales and marketing operation was clearly a long term loss making project which the 200 rural cottage owners could use at their discretion during the low season. There was no exclusive agreement with them to use the booking system and consequently it must have been a cheap service available to rural cottage owners.

7. The Committee is concerned that the Tourist Board also locked itself into a deal that afforded significant advantages to the cottage owners, whose derelict properties were renovated and continue to be maintained into the long term at public expense. These arrangements clearly did not provide value for money and were packaged in a way that the Tourist Board cannot easily get out of.

8. In taking evidence on the C&AG’s report, the Committee focused on four main issues. These were:

• the ethical standards required from public officials;
• the adequacy of guidance on handling conflicts of interest;
• the promotion of a culture of open reporting to those with a governance role;
• commercial realism and building exit strategies into poorly performing programmes and projects.

The Ethical Standards Required
from Public Officials

9. Public officials must declare and make known their interests so that an independent assessment can be made as to whether the conflict can be avoided or, if not, effectively managed. Equally, Accounting Officers are responsible for providing clear, decisive leadership on ethical standards to public officials. The Department told the Committee that it operated interlocking mechanisms which are designed to develop a culture of awareness of the ongoing importance of corporate governance and financial control that would include managing potential conflicts of interest.

10. In its evidence to the Committee, the Tourist Board fully accepted that it had made some mistakes in handling the conflicts of interest in this case. The Chief Executive said that, if circumstances similar to those which emerged in February 2005, that is, the disclosure by the senior official of a friendship with one of the bidders for the contract, came to light now, he would respond differently. The Tourist Board told the Committee that, although a personal relationship existed, it was not prejudicial to the public interest. Nevertheless the Tourist Board acknowledged that it would have been much better, from a perception point of view, to have removed the official from the process immediately.

11. The Committee considers that a personal relationship in public business will almost always create a situation which is at least capable of being perceived as prejudicial to the public interest. This case demonstrates this clearly. All public officials must be alert to this risk.

12. The Committee acknowledges that the Tourist Board assigned responsibility for the assessment of the bids to the then Finance Director and that this was an important step in managing the risk. But the failure to remove the official from the negotiations showed a lack of understanding of the risks associated with the disclosure. The Committee notes that the disclosure of the friendship in February 2005 was some three months after the official was aware that his friend’s company was one of the bidders, during which time he was in charge of the negotiations. The fact that this belated disclosure was not recorded and that minutes were not kept of discussions with him were important failures of procedure and led to a disagreement over the timing of the declaration of the conflict. The delay in disclosure in itself should have been an immediate cause for concern and led to his immediate removal from the procurement process. By not doing so there was, at the very least, a perception of favouritism. The Department admitted that, by not doing so, this left a residual concern about public perception and about whether the official was making information available to a third party.

13. A feature of this case was the rolling nature of disclosures. The Tourist Board said that by November 2005, when it became aware that the official’s wife was working for his friend, concerns were already being raised. Much was made by the Tourist Board in its evidence of its subsequent reliance on legal advice and a consultant’s report.

14. From an early stage, it was obvious that a conflict of interest existed. The Committee is of the view that the legal advice and consultant’s report served to drag out the process and hindered prompt notification to those who should have been told what was going on, and in particular, the Audit Committee. Even if there had been room for doubt as to the significance of what was emerging, the appropriate response would have been for it to have been recorded, reported and the relevant official withdrawn from any involvement with Rural Cottage Holidays.

15. The Committee considered whether adequate training was provided in the exacting ethical standards of conduct and behaviour required of public officials. The official concerned was damning about the poor quality of training provided to him. The Tourist Board denied this and told the Committee that the training provided included training in public accountability and the offer of the assistance of a mentor in Invest NI, as he had been recruited from the private sector. The Department told the Committee that, by and large, it leaves the design and delivery of induction training and guidance in public sector ethics to its non-departmental public bodies and does not monitor it routinely.

16. The Committee was told that many individuals recruited into the Department and its arm’s length bodies will already have a professional background. The Department noted that they include people who are qualified accountants and company secretaries who are fully exposed to issues of corporate governance and financial control by virtue of their professional training and development. For example, the Committee was advised that it was a member of the corporate finance group in Invest NI who spotted the problems in the Emerging Business Trust. While the Committee accepts that professional qualifications are an important source of financial skill, public sector standards of propriety and accountability are not necessarily part of the professional training, particularly for those who qualified while in the private sector.

17. The Committee is concerned at the number of poorly managed conflicts of interest that are reported to it and considers that there is an insufficient awareness of the high standards expected in the proper conduct of public business, which in part, may be due to the quality and frequency of training. The Committee was concerned that the Department was not much more pro-active in ensuring its arm’s length bodies (such as Invest NI and the Tourist Board) had provided their staff with adequate training on ethical issues.

Recommendation 1

18. The Committee recommends that the most appropriate response to any potential conflict of interest must be that the official should declare that interest, it should be recorded, and, if appropriate, he or she should withdraw from involvement with any aspect of the case. All personal relationships between public officials and people they have contact with in an official role should be treated in the same way as any business relationship.

Recommendation 2

19. The Committee recommends that, where conflicts cannot be avoided because there are exceptional and persuasive reasons for continuing involvement, strong mitigating controls must be put in place to ensure that the principles of objectivity and integrity are not compromised. The decision to manage the conflict and the adequacy of the controls implemented should be documented and approved by a senior official. Any conflicts that are managed rather than avoided should be reported to audit committees who should ensure that the controls are adequate and have been applied effectively.

Recommendation 3

20. The Memorandum issued to Accounting Officers on their appointment makes clear their duty to uphold high standards of propriety. The Committee recommends that as part of this, Departmental Accounting Officers should ensure that their arm’s length bodies have provided staff with adequate training on ethical issues. Particular attention should be given to the quality of induction training and mentoring for officials recruited from the private sector.

Recommendation 4

21. The Committee recommends that each Department should designate an existing senior official as being responsible for supporting the Accounting Officer on ethical matters and for monitoring on and advising on ethical behaviour across the Department and its arm’s length bodies. The Committee sees this as analogous to the developing practice in the private sector and the requirement for private sector accounting firms to have a designated ethics partner.

The Adequacy of Guidance on
Handling Conflicts of Interest

22. The Tourist Board told the Committee that reasonably robust guidelines on conflicts of interest were in place at the time of the initial disclosure in February 2005. These were enhanced in 2006 as a result of the independent consultant’s findings following the disclosure of a further conflict involving the senior official and the interested party in the original conflict. Guidance used included the code of conduct contained within the staff handbook. The conflict was assessed using guidance issued by the Chartered Institute of Public Finance and Accountancy (CIPFA). Yet the Tourist Board admitted that mistakes were still made.

23. The Department and the Department of Finance and Personnel (DFP) told the Committee that the current guidance on conflicts was accessible, robust and serviceable, based on the fundamental principle that public servants must always be aware of the potential for conflicts of interest. Both Departments pointed out that civil servants should look to the Northern Ireland Civil Service’s (NICS) Code of Ethics and the NICS Staff Handbook, documents addressed to civil servants and issued by DFP. The Committee was advised that there are also references to the need to avoid conflicts of interest in guidance available to the wider public sector, including Government Accounting and in a range of documents issued by Her Majesty’s Treasury. DFP had concluded that the guidance was sufficient and that it was impossible to have a rule for every situation.

24. The Committee completely agrees that guidance should be principles based. Nevertheless, the Committee notes that despite all of this guidance being available, it was still not sufficient in this case to prevent the mistakes which the Department and Tourist Board both acknowledged were made. Indeed further guidance from an accountancy body was needed to assess whether the conflicts were prejudicial to the public interest. Both the Department and the Tourist Board fully accepted that the official should have been removed from the case when he first notified the Tourist Board of his friendship with a bidder.

25. This case also demonstrates that whistle-blowers can make a real impact in raising concerns over poor standards of public administration. Sometimes the involvement of whistle-blowers is the only means by which the truth comes out, for example, when an interest is not disclosed, deliberately or otherwise.

Recommendation 5

26. The Committee recommends that the Department of Finance and Personnel should issue a short guide consolidating the guidance on conflicts of interest, including succinct case studies, so all public officials have a handy guide to avoiding, recognising, recording and managing conflicts of interest. Such a document would be especially useful to recruits from the private sector who are often not as familiar with public sector standards and who are quite likely to encounter conflicts of interest, having moved to the public sector.

Recommendation 6

27. The Committee recommends that a test of public perception should be an important aspect of determining whether action is required for potential conflicts of interests. Finely honed arguments about what may or may not be prejudicial to the public interest may well be made but the public will always be wary of perceived favouritism by officials.

Recommendation 7

28. The Committee recommends that the Department of Finance and Personnel ensures that all public bodies have robust, well publicised (internally and externally) whistle-blowing arrangements in place.

The Promotion of a Culture of Open Reporting to those with a Governance Role

29. One of the most surprising features of this case was that the Tourist Board’s Audit Committee and Board were not told about the conflict until very late in the day. Furthermore, the significant change in the final agency agreement, with the liabilities being retained by the public sector, was not communicated to the Board. Clearly it should have been.

30. In recent years, the roles of Boards and Audit Committees have become very well defined. They are now a crucial part of the corporate governance set up in the public sector and provide the type of checks and balances that are absolutely necessary at the top of any well run organisation. In this case officials took advice from legal advisers, consultants and the Department’s internal auditors – and no doubt good advice was obtained from these sources. However, the Committee is concerned that not only was advice not sought from the Board and Audit Committee, they were not even told what was going on until the very end of the matter.

31. The Committee put it to the Department that a secrecy culture remains at the Tourist Board. This was not accepted by the Department, although it acknowledged that there were shortcomings in formal recording and reporting. The Department said that there have been considerable improvements in the Tourist Board’s systems and controls since the previous Public Accounts Committee severely criticised it in 2002. This was acknowledged in the C&AG’s report.

32. The Committee accepts that the Tourist Board has progressed from a low point in 2002 and made very necessary improvements. However, the Committee encourages the further promoting and embedding of a culture of openness and disclosure.

33. The Committee noted that the independent consultant’s report was not presented to the Board of the Tourist Board or the Department as recommended by the consultants. The Department of Finance and Personnel pointed out that any report prepared by consultants containing significant issues of concern should be passed to the Audit Committee once such issues had been assessed by management. This case illustrates what can go wrong when reports do not reach the Audit Committee or the Northern Ireland Audit Office. If officials are not open with those who are best placed to advise them, they should not be surprised when things go wrong.

34. The Department described an interlocking mechanism of monitoring systems intended to mutually reinforce each other and keep good governance very much on the radar of all senior staff in the Department and non-department public bodies. The Accounting Officer noted that he personally sees and comments on all internal audit reports and indeed reviews, in advance, draft reports that indicate limited opinions. The Committee was impressed with the direct and timely interest in governance reports taken at the very top of the organisation.

35. The Committee probed why these mechanisms did not work in this case and why a reference to the conflict of interest at the Department’s Audit Committee was not followed up. The Department’s Accounting Officer said he had racked his brains about that and his best recollection is that it was mentioned in general terms as a potential conflict that was being managed. He was vexed that it was not minuted. This Committee is of the view that the reference to the matter at the Audit Committee must have been very vague for this Accounting Officer not to have noted it. In any case, it clearly should have been minuted. A senior official in the Department was told about it by phone in January 2006, but no record was made of the call. The Department accepted that the case had been handled very casually at times. The Committee was told the best way to have dealt with it formally would have been through quarterly assurance statements from the Tourist Board to the Department but that they were, at that time, newly introduced and had not been properly completed.

Recommendation 8

36. The Committee emphasises that Board and Audit Committee roles must be fully respected. They are responsible for ensuring the proper governance of public bodies and officials must be open with them.

Recommendation 9

37. The Committee recommends that when officials commission independent reports on governance matters they must provide them to their audit committees and sponsoring departments. Commissioning such reports is not done lightly and it is self-evident that their results should be reported in an open and timely manner.

Recommendation 10

38. The Committee recommends that all departments obtain regular assurance statements from their arm’s length bodies. The Committee expects reports on governance matters to feature in assurance statements. The standard of regular assurance obtained depends on full and open disclosure, particularly from sponsored bodies.

Commercial Realism and Building Exit Strategies into Poorly Performing Programmes and Projects

39. The Tourist Board told the Committee that Rural Cottage Holidays had a wide remit geared towards stimulating the rural economy and providing real gains to the economy. The Department told the Committee that it was set up in the 1990s when the situation in Northern Ireland was very different from today. The Tourist Board admitted it is unlikely that it would address these issues by setting up a limited company now. This method of structuring the project has complicated any exit strategy. The Department told the Committee that the 200 cottage owners who used the sales and marketing service, including the booking system, were meant to be the ultimate beneficiaries of the policy and that the whole point of the project was to create revenue that would flow to the owners. The Department noted that the lack of an exclusivity deal was of great benefit to the owners. Rural Cottage Holidays was used only as a vehicle to top up less saleable periods in the year.

40. The Tourist Board presented the Committee with a rather forlorn picture of Rural Cottage Holidays’ financial viability in the run up to the agency agreement to offload the sales and marketing function. It said that the company was struggling to provide a service and the brand and reputation were deteriorating. There was little interest due to the low value of the brand and the company’s poor trading history. The Department told the Committee that if the company’s contingent liabilities were allowed to be a deal breaker, and to block the late proposal of the preferred bidder to change the procurement from an outright sale of the company to an agency agreement, its accumulating losses would have been left with the taxpayer. The Committee is disappointed that the Department allowed this situation to get to this non negotiable position. Rural Cottage Holidays should never have been allowed to be a burden on the public purse for so long.

41. It very much looks as though the only winners are the owners of the properties rather than the wider rural economy or the public purse. Derelict properties were renovated using mostly public money. Public money was and is committed to carrying out maintenance and repairs and after the 21 year lease expires these properties revert to the owners. The Department advised the Committee that some £500,000 had been spent on maintenance alone between 1993-94 and 2006-07, including some £53,000 spent in 2006-07. Cottage owners’ maintenance costs continue to be an on going cost to the taxpayer. This was an exceptionally good deal for them.

42. The Committee identified that the Tourist Board did not originally have an exit strategy. There have been numerous reviews from 1999 onwards to try to find a way out. This included testing the market in 2001 in an attempt to sell the company but no buyer was found. The Tourist Board told the Committee it now has an exit strategy involving negotiating the termination of complex lease agreements.

43. Given that Rural Cottage Holidays’ financial performance is so spectacularly different from its original objective of becoming self sustaining within 3 years, it is difficult to see how the initial case was justified, even during a period when rural tourism and the rural economy faced difficult times. The Department said that the business case was clearly based on market failure. It told the Committee that the Tourist Board and others were trying to find a way of generating revenue streams for people in rural areas, and that was a laudable policy objective. The Department admitted this was a classic case of what is now called “optimism bias” in economic appraisal. The Committee was told that if the Department were to do the same thing again, it would get a different answer with the business case.

Recommendation 11

44. The Committee recommends that a reasonable balance must be achieved in the equitable sharing of risks and rewards in projects between the private and public sectors. Both in terms of renovating the 11 cottages and the marketing operation, this case highlights what can go wrong when the public sector dabbles in commercial activities. The cottage owners secured exceptionally favourable terms with the Tourist Board in the 1990s as did the agent when it offloaded the contingent liabilities to the public sector in 2005.

Recommendation 12

45. The Committee recommends that credible exit strategies should be a condition of approval for long term commitments. The various reviews described to the Committee in this case have not led to a clear way out. The Committee is amazed that the Department and the Tourist Board let Rural Cottage Holidays drift on for so long. The Committee wishes to be kept informed of the progress towards ending these onerous public sector financial commitments and expects a report on the cost of doing so.

Recommendation 13

46. Time and again this Committee has examined the unfortunate consequences when the public sector sets up companies to distribute taxpayers’ money, for example, LEDU, the Emerging Business Trust, the NI Events Company and now Rural Cottage Holidays is just another. The Committee expects that where any new companies are set up there must be an undoubted case for doing so. Where this is the case, which should be rare, the Committee would wish that the Department of Finance and Personnel rigorously ensures that the business case and governance, accountability and financial management arrangements are watertight.

[1] Report on Grants Paid to Irish Sport Horse (NIA 4/00/R, Session 2000-01)

[2] Report on Hospitality Association of Northern Ireland: A Case Study in financial management and the public appointments process (NIA 36/07/08R Session 2007-2008)

[3] Report on the Northern Ireland Tourist Board. (NIA 01/02R, Session 2002-03)

[4] Report on Tackling Public Sector Fraud (NIA 13/07/08R, Session 2007/2008)

Appendix 1

Minutes of Proceedings
of the Committee Relating
to the Report

Thursday, 1 May 2008
Senate Chamber, Parliament Buildings

Present: Mr Roy Beggs (Deputy Chairperson)
Mr Jonathan Craig
Mr Simon Hamilton
Mr David Hilditch
Mr Trevor Lunn
Mr Mitchel McLaughlin
Ms Dawn Purvis

In Attendance: Mrs Patricia Casey (Assembly Clerk)
Mrs Gillian Lewis (Assistant Assembly Clerk)
Mrs Nicola Shepherd (Clerical Supervisor)
Mr John Lunny (Clerical Supervisor)

Apologies: Mr John O’Dowd (Chairperson)
Mr John Dallat
Mr Ian McCrea

The meeting opened at 2.00pm in public session, with the Deputy Chairperson in the Chair.

2.02pm Mr Hamilton joined the meeting.

3. Evidence on the NIAO Report ‘Northern Ireland Tourist Board – Contract to Manage the Trading Activities of Rural Cottage Holidays Ltd’.

The Committee took oral evidence on the NIAO report ‘Northern Ireland Tourist Board – Contract to Manage the Trading Activities of Rural Cottage Holidays Ltd’ from Mr Stephen Quinn, Accounting Officer, Department of Enterprise, Trade and Investment, Mr Alan Clarke, Chief Executive, Northern Ireland Tourist Board (NITB), and Ms Kathryn Thomson, Chief Operating Officer, NITB.

The witnesses answered a number of questions put by the Committee.

2.27pm Mr Craig left the meeting.

Members requested that the witnesses should provide additional information to the Clerk on some issues raised as a result of the evidence session.

3.35pm The evidence session finished and the witnesses left the meeting.

[EXTRACT]

Thursday, 17 June 2008
Room 375, Parliament Buildings

Present: Mr Roy Beggs (Deputy Chairperson)
Mr Simon Hamilton
Mr David Hilditch
Mr Trevor Lunn
Ms Dawn Purvis
Mr Jim Wells

In Attendance: Mr Jim Beatty (Assembly Clerk)
Mrs Gillian Lewis (Assistant Assembly Clerk)
Mrs Nicola Shepherd (Clerical Supervisor)
Mr Darren Weir (Clerical Officer)

Apologies: Mr Paul Maskey (Chairperson)
Mr John Dallat
Mr Mitchel McLaughlin

The meeting opened at 12.23pm in closed session with the Deputy Chairperson in the Chair.

4. Consideration of the Committee’s Draft Report on Northern Ireland Tourist Board – Contract to Manage the Trading Activities of Rural Cottage Holidays Limited.

The witnesses attending were Mr Kieran Donnelly, Deputy C&AG, Mr Stephen McCormick, Director, and Mr Joe Campbell, Audit Manager, NIAO.

The Committee considered the main body of the report paragraph by paragraph.

Paragraphs 1 – 10 read and agreed.

Paragraph 11read, amended and agreed.

Paragraphs 12 – 14 read and agreed.

12.30pm Ms Purvis joined the meeting.

Paragraphs 15 and 16 read and agreed.

Paragraph 17 read, amended and agreed.

Paragraph 18 read and agreed.

Paragraph 19 read, amended and agreed.

Paragraph 20 read and agreed.

12.40pm Mr Wells left the meeting.

Paragraph 21 read, amended and agreed.

Paragraphs 22 - 29 read and agreed.

Paragraph 30 read, amended and agreed.

Paragraphs 31 read and agreed.

Paragraph 32 read, amended and agreed.

Paragraphs 33 – 38 read and agreed.

12.55pm Mr Wells rejoined the meeting.

Paragraph 39 read and agreed.

Paragraphs 40 – 42 read, amended and agreed.

Paragraph 43 read and agreed.

Paragraphs 44 – 46 read, amended and agreed

The Committee considered the Executive Summary of the report.

Paragraphs 1 – 4 read and agreed.

Paragraph 5 read, amended and agreed.

Paragraphs 6 and 7 read and agreed.

Paragraph 8 read, amended and agreed.

Paragraph 9 read and agreed.

Paragraph 10 read, amended and agreed.

Paragraphs 11 – 13 read and agreed.

Agreed: Members ordered the report to be printed.

Agreed: Members agreed that the Chairperson’s letter to Mr Stephen Quinn CB, requesting additional information and the response would be included in the Committee’s report.

Agreed: Members agreed to embargo the report until 00.01am on Thursday, 3 July 2008, when the report would be officially released.

Agreed: Members agreed not to hold a press conference to launch the report.

[EXTRACT]

Appendix 2

Minutes of Evidence

1 May 2008

Members present for all or part of the proceedings:
Mr Roy Beggs (Deputy Chairperson)
Mr Jonathan Craig
Mr Simon Hamilton
Mr David Hilditch
Mr Trevor Lunn
Mr Mitchel McLaughlin
Ms Dawn Purvis

Witnesses:

Mr Stephen Quinn		Department of Enterprise, Trade and Investment
Mr Alan Clarke Ms Kathryn Thomson		Northern Ireland Tourist Board

Also in attendance:

Mr Kieran Donnelly		Deputy Comptroller and Auditor General
Mr David Thomson		Treasury Officer of Accounts

1. The Deputy Chairperson (Mr Roy Beggs): I remind members and visitors that mobile phones must be turned off; even if they are on silent mode, they interfere with the recording equipment.

2. On behalf of the Public Accounts Committee, I extend a warm welcome to the members of the Tynwald Public Accounts Committee, who are visiting the Northern Ireland Assembly and watching today’s proceedings, which I hope will benefit them.

3. Apologies have been received from John O’Dowd, the Chairperson, who has a previous engagement, and from John Dallat and Ian McCrea, who are also otherwise engaged.

4. This afternoon, the Committee will discuss the Northern Ireland Audit Office report ‘Northern Ireland Tourist Board: Contract to Manage the Trading Activities of Rural Cottage Holidays Limited’. I welcome Stephen Quinn, accounting officer of the Department of Enterprise, Trade and Investment; Alan Clarke, chief executive of the Northern Ireland Tourist Board (NITB); and Kathryn Thomson, chief operating officer of the Northern Ireland Tourist Board. Thank you all for attending.

5. The Committee is examining the Northern Ireland Audit Office report on the contract for the management of Rural Cottage Holidays and ascertaining how lessons can be learned from that experience. Good governance has been a major theme of the Committee’s work. The effective and transparent management of conflict of interests is a key plank in that work. It is not rocket science; it is a basic principle of good public administration. When conflicts are not managed properly, public confidence in the quality of Government is undermined.

6. The Committee will examine the case study and what can go wrong. It will also consider what lessons must be learned by the wider public sector. That is perhaps the reason that the report is of particular interest to the Committee.

7. I emphasise that the purpose of this session is not to investigate the conduct of any individual. The Committee will use the points raised in the report to consider any shortcomings in the actions of the public body in question, and it is hoped that lessons will be learned from which that organisation — and the wider public sector — will benefit.

8. Mr Quinn, at a senior level, your Department did not know about the conflict of interest in the deal until one of the unsuccessful bidders complained to the Minister.

9. The Department had monitoring arrangements in place with the Tourist Board, and, given previous problems, you should have had the board on special watch. Indeed, your Department had given evidence to the Public Accounts Committee previously on matters that concerned the board. That means that there have been previous governance problems in your Department’s sponsored bodies. What assurances can you give the Committee that your Department now has sufficiently robust processes so that such problems can be picked up on and nipped in the bud early?

10. Mr Stephen Quinn (Department of Enterprise, Trade and Investment): Thank you very much, Chairman.

11. The Department first became aware of a conflict of interest when it was informed by the Northern Ireland Tourist Board in January 2006, which was before the Minister received the letter from the unsuccessful bidder in December 2006.

12. Regarding your point about systems, there is a concern that not only should there be guidance in place, but that it is applied effectively and in a practical way. Our system can be split into several sections: audit programmes; audit committees; risk management processes; assurance statements; and oversight and liaison arrangements.

13. Internal audit reports are an essential source of empirical evidence on corporate governance and financial control in the Department and its non-departmental public bodies (NDPBs). I see, and comment on, all internal audit reports. I see, in advance, those draft internal audit reports that are beginning to indicate a limited assurance. I receive internal audit annual assurance reports from our internal audit service. I see all NIAO management letters in regard to the Department and its NDPBs. Therefore, I receive continuous intelligence about issues that are raised in the internal and external audit processes.

14. The DETI audit committee signs off the annual internal audit programme. Our most recent meeting was last month, when the Audit Office representative complimented the scope and coverage of the Department’s audit programme. At audit committees, we also consider specifically and routinely everything that has shown a limited internal audit opinion. DETI representatives attend meetings of the Northern Ireland Tourist Board audit committee.

15. The Department and its NDPBs have risk registers, which are updated quarterly. The departmental audit committee and the departmental board are made aware of any significant new risks and changes to existing risks. The NDPBs have similar risk management arrangements.

16. I receive quarterly assurance statements from the Department’s two deputy secretaries and from the chief executives of the NDPBs. I then take advice from the Department’s accountability branch, which consults the Department’s sponsor division and internal audit. Therefore, we always seek assurance that those statements are comprehensive and that they pick up on relevant issues. I also see the draft annual statements of internal control.

17. Oversight and liaison arrangements constitute quarterly meetings between senior staff in both the Department and the NDPBs. Risk, audit and accountability matters are a standing element of that quarterly agenda.

18. The Department and its NDPBs have registers of interest that are updated from time to time. Furthermore, anyone who attends a departmental board meeting, or an audit committee meeting, must declare a conflict of interest at the outset.

19. That is an outline of the main systems that put our guidance into practice. Each element is intended to mutually reinforce the others. We hope that if one element does not pick up on a problem, another element will. The systems comprise not only mechanisms and processes; they are designed to create a culture in which senior staff, and, indeed, all staff, in the Department and its NDPBs are given an ongoing sense of the importance of corporate governance and financial control.

20. The Deputy Chairperson: Do you accept that you were advised of the potential and of the actual conflict of interest at a very late stage?

21. Mr Quinn: Yes.

22. The Deputy Chairperson: Mr Clarke, you did not tell the Audit Office about the potential and the actual conflict of interest, and you told the Department of Enterprise, Trade and Investment about them only at a very late stage. They were not discussed in your statement of internal control, you did not tell the Northern Ireland Tourist Board’s audit committee or board, and you mentioned them to the Department only in passing.

23. Why was the matter not freely disclosed to the Audit Office at a much earlier stage? I am sure that it would have helped to keep you right. As its role is not just to protect the Department and public funding, it would have protected you had you sought advice. Given that, why was the information not shared? Your failure to share it has almost created an impression that you were trying to sweep the matter under the carpet.

24. Mr Alan Clarke (Northern Ireland Tourist Board): The report makes clear that there was a series of rolling disclosures on the matter. I will discuss those three disclosures briefly. The first disclosure was made around February 2005. At that time, it related to a personal conflict, and we managed it internally. The second disclosure was made in November 2005, and at that stage I took advice on the matter from internal human resources. I followed that up by taking legal advice. We had a meeting with the Department in December 2005, during which we drew the matter to the attention of the internal audit service, which advised that we should proceed with an independent investigation of the matter. There was then a change of circumstances during December 2005.

25. In early 2006, I discussed the matter with the chair of the audit committee and the chair of the Tourist Board, and we agreed — following the advice from the internal audit service — to carry out an independent investigation of the matter. That report was concluded in March 2006, and it then went to the chair of the audit committee, with copies sent to myself and to the chairman of the Tourist Board. We make it very clear in paragraphs 52 and 59 of the Audit Office report that we should have brought the matter to the attention of the audit committee at a much earlier juncture than we did.

26. The independent investigation raised certain issues that required clarification from the director. On the basis of the consultant’s report, we took further legal advice in March 2006. That stated that we should await the director’s return to work before we concluded the investigation so that certain outstanding questions could be dealt with. That investigation was completed in July 2006, at which stage I took it to the chair of the audit committee. At that time, we had already implemented an action plan as a result of the report. Paragraph 58 of the Audit Office report makes it clear that some sensitivities existed in relation to the matter.

27. The chair of the audit committee and I then decided that the action plan had been well advanced. In January, we informed the Department of our intention to carry out the independent investigation. We acknowledge in the report that we should have brought it to the audit committee, and had we done that, we would have apprised the Audit Office and the internal audit service of the Department at a much earlier juncture than we did. We accept that fully.

28. The Deputy Chairperson: There is a quotation from the Chairman of the Westminster Committee of Public Accounts in the Treasury handbook on regularity and propriety that reads:

“Potential conflicts of interest are very serious matters indeed. We do not have to prove that something wrong has happened as long as the potentiality for that wrongdoing exists”.

29. Do you accept that, in the early stages, the matter was approached very casually — for example, by having verbal conversations — and that written documentation should have existed early on?

30. Mr A Clarke: Yes, we accept that. That is clarified and acknowledged in paragraph 50 of the report. The initial conversation concerned a friendship. I took action at that time, but I accept fully that that should have been documented.

31. The Deputy Chairperson: Thereafter, it seems that the lack of written documentation had an impact on how other issues were dealt with. Do you accept that that may have resulted in the issues not being handled with the appropriate level of seriousness?

32. Mr A Clarke: A series of rolling disclosures was made. As outlined in paragraph 50, there was no written record of the first disclosure; however, I removed the director from the assessment process and Kathryn took control of that and of the bids.

33. The second disclosure was fully documented. We took legal advice and advice from human resources, we commissioned an independent investigation, and I reported to the chairperson of the audit committee. At that stage, we acknowledged that we should have informed the entire audit committee, and the chairman of the Tourist Board was fully aware of the situation. There was no attempt to conceal the matter: I liaised openly with the board. However, we fully accept that the matter should have been referred to the entire audit committee.

34. Mr Craig: I want to follow up on some of the Deputy Chairperson’s remarks, Mr Clarke. You said that by 2004 or 2005 you knew that there was a potential conflict of interest. Paragraph 68 of the Audit Office report states:

“The Department told PAC in 2002 that new guidelines on conflict of interest would be at the forefront of its process for appointing a new NITB Chairman”.

35. That deals with a past conflict of interest that became a problem. Given that the incident happened as long ago as 2002, why were lessons not learnt about the problems that can be created by a conflict of interest? Why was the 2005 matter not dealt with more quickly?

36. Mr A Clarke: Based on what happened in 2002, and after the Public Accounts Committee covered conflicts of interest in the same year, we devised and implemented a full action plan. Paragraph 4 of the report recognises that “considerable improvements” have been made in the board’s corporate governance since 2002. Reasonably robust guidelines on conflict of interest were in place at the time of the first disclosure. After we commissioned an investigation by external consultants into the second disclosure in November 2005, we enhanced that guidance in 2006.

37. At the time of the first disclosure, I read the guidance that existed at that time, which clarifies the relationship between public duties and private interests. However, the process was based on a code of conduct that was contained in the staff handbook. As paragraph 13 makes clear, I made an assessment of the conflict of interest based on guidance from the Chartered Institute of Public Finance and Accountancy (CIPFA). I used the existing code from our staff handbook to assess the conflict of interest and CIPFA guidance on whether to take the matter forward. My assessment was that the external consultants had assessed the submitted bids, and the work that we were doing at that time was on the leases of the 11 cottages. However, I accept fully, as is acknowledged in the report, that the matter would have been much clearer had the director of industry development been off the issue in February 2005.

38. Mr Craig: Did you not recognise that you were taking a risk, at least where public perception was concerned, which is a serious issue for bodies such as yours?

39. Mr A Clarke: I acknowledge that the issue was more perceived than actual. The actual issue was resolved by putting Kathryn in charge of the assessment of the bids. Also, at that stage, most of the work was connected to the 11 leased cottages rather than the tenders, which was on the sales and marketing side. To reduce the impact on public perception, it would have been better had the director been removed in February 2005.

40. Mr Craig: I want to ask Mr Quinn a similar question, although I do not want the same answer, because the Deputy Chairperson mentioned this subject earlier. You have tightened up all the procedures, and I assume that public perception will be taken into account more in future. Is that the case?

41. Mr Quinn: Absolutely; I agree entirely. I find myself in complete agreement with the chief executive’s evidence. The substance of the February 2005 disclosure was dealt with by putting the finance director in charge of the assessment and the subsequent recommendation. However, that left a residual concern about the perception and maybe about whether or not the member of staff with the conflict of interest might be making information available to a third party. Paragraph 50 of the report details the Tourist Board’s acknowledgement that the individual should have been removed from further involvement, and the Department readily endorses that view.

42. Mr Craig: The final bullet point of paragraph 30 at appendix E of the Audit Office report states:

“It is a matter of record from Senior Management Team colleagues that I frequently questioned the appropriateness of me being present at Senior Management Team meetings where the subject of RCH (Travel Solutions/Cottages in Ireland) was discussed.”

That is a damning and alarming statement from the former director of industry development. As an accounting officer, Mr Clarke, do you accept that you have a responsibility to your staff to give them clear, decisive leadership on the ethical standards that are expected of them?

43. Mr A Clarke: Absolutely.

44. Mr Craig: I accept that. Do you accept that it is not enough to rely on external training providers when you need to be satisfied that senior members of your team — not to mention the rest of the staff — understand the rules and, more importantly, the boundaries?

45. Mr A Clarke: First, regarding paragraph 30, Ms Thomson and I attended those senior management team meetings, and neither of us can recollect any such statement being made. If it had been made, it would have been minuted, and the director would have had the opportunity to correct the minutes at a subsequent meeting.

46. Secondly, regarding the training aspect, paragraph 4 of the report recognises that there have been improvements to the Tourist Board’s corporate governance. That has not happened by accident; we have put a lot of emphasis on corporate governance over the past number of years. All directors attend our audit committee now, for example, and all members of the senior management team are given public accountability training. It is not merely a case of putting the training into place; we also ensure that it operates in practice.

47. Mr Quinn mentioned the internal audit service reports. They are sent to our audit committee and are scrutinised there. Any weaknesses in the system are picked up and approved during that process. We have received an “overall satisfactory” opinion from internal audit service for the past number of years.

48. Mr Craig: I accept that the situation regarding that individual’s presence at senior management team meetings is one person’s word against another, but it is alarming to see it in the report. However, I accept your word.

49. The situation came about because an unsuccessful bidder complained that a director failed to disclose his connections to Travel Solutions. That highlights and demonstrates the value of whistle-blowers in these scenarios, and sometimes their involvement is the only reason that one gets to the bottom of a lot of the situations. Given that nothing is 100% foolproof, what else have you done to ensure that arrangements for whistle-blowers are as robust as they can be? Have the arrangements been publicised across your area of responsibility?

50. Mr Quinn: I draw the Committee’s attention to paragraph 36 of the Audit Office report, which makes the point that there is a duty of candour on employees to declare their interests. However, a full declaration was not made in this case. The Tourist Board could not have been expected to know about the individual’s directorship; it would not have come into their line of sight. Therefore, no blame should be attached to the Tourist Board. I commend the Tourist Board for the promptness and effectiveness of its actions following the whistle-blower’s disclosure to the Minister.

51. Matters relating to this case have never had a higher level of general awareness than they have now, and that is due to your Committee’s report on the Tourist Board in 2002 and to the Westminster PAC’s report into the Emerging Business Trust (EBT) in 2006, meetings on which I attended. I mentioned the interlocking mechanisms that we operate, each of which require people to think about potential conflicts of interest, corporate governance and financial control issues.

52. Therefore, the systems are quite robust, and I am sure that the guidance is robust. I read the guidance that was in place in early 2005, and it was perfectly robust and serviceable. It was improved in 2006, but those improvements were incremental rather than fundamental.

53. It is worth emphasising two points. First, the director clearly knew that he was obliged to make declarations, because he made two — the first in February and the second in November 2005. Secondly, the chief executive knew that he was obliged to manage conflicts because the key point in respect of the February disclosure was that he put the finance director in charge of the assessment and recommendation processes.

54. Mr Hamilton: I want to discuss Rural Cottage Holidays Ltd in general and, principally, the financial situation, which appendix A of the Audit Office report outlines in stark detail. It indicates that £1·5 million was available for capital and marketing investment in the project in 1993. It also reveals that only 11 of the initially identified 27 cottages were renovated.

55. What criteria were used to select those 11 cottages, given the conflict of interest that the report highlighted? The Committee seeks assurances that there are no connections between the owners of those 11 properties and anybody who is connected to the Tourist Board.

56. Mr A Clarke: The project was set up in the early 1990s, when tourism in Northern Ireland was very different to what it is today. It was set up to develop rural tourism and to be a demonstration project that was based roughly on the French gîte system.

57. The original objective of the scheme was to have many more leased cottages in place than currently exist. The focus was primarily on TSN areas, that is, those parts of rural Northern Ireland where both need and market failure were greatest.

58. I am not totally aware of the criteria that were used — perhaps Kathryn has more detail. Most of the 11 cottages that are currently leased to the Northern Ireland Tourist Board are primarily in TSN areas in the glens of Antrim. In the early 1990s, there was a call under the scheme for cottage owners to come forward. I must say that the way in which the process operated was somewhat historical.

59. Ms Kathryn Thomson (Northern Ireland Tourist Board): I cannot give answers about the criteria today, but we can certainly get that information and provide it to the Committee. I am not aware of any connections between the current cottage owners and anybody employed by the NITB.

60. Mr Hamilton: You might not have this information available either, but what other costs were incurred in addition to the initial capital outlay? Is it possible to provide the Committee — either now or at a later date — with the renovation, maintenance and administrative backup costs that were incurred?

61. Ms K Thomson: We can certainly provide a detailed analysis of all the costs that were incurred. At a high level, the company has been running at a loss of approximately £20,000 a year. Additionally, the Tourist Board incurred costs for staff and administration that were never charged to the company.

62. Mr Hamilton: You mentioned the losses of £20,000 a year. The accumulated loss is approximately £200,000. That runs very much contrary to the initial plan, which was to break even and be self-sustaining within three years and then to transfer back into the private sector and run at a profit. Clearly, that has not happened.

63. The Tourist Board has been left in the position of having to fund Rural Cottage Holidays Ltd by approximately £40,000 or £50,000 every year. Presumably, that will continue for the entire lease period, which has around 21 years yet to run. Is it fair to say that that was not a good use of taxpayers’ money?

64. Mr A Clarke: I will answer that question in two ways. At a strategic level, Rural Cottage Holidays had two arms: first, it had the leased cottages with the intention of renovating them to make them available for holiday visits; and secondly, the wider aspect of the plan was to provide a sales and marketing arm for rural cottages throughout Northern Ireland. Well over 100 cottages participated in the sales and marketing element of the scheme. It had the renovation capital element of improving cottages in rural parts of the Province for visitors. It also had a much wider remit, which was more geared towards stimulating the rural economy and providing real gains to that economy.

65. One might argue whether a company limited by guarantee was the right vehicle to achieve that. In many ways it was not. I take you back to a previous answer: it was set up in the early 1990s when the situation in Northern Ireland was very different from that of today. I do not imagine that we would ever tackle it in that way today. Kathryn might be able to add more details.

66. Ms K Thomson: In tendering the contract, the NITB was seeking to find a mechanism to continue to provide a sales and marketing booking facility to support rural tourism and to protect the income stream to rural tourism providers. Now that NITB has secured that, it is looking at how it manages what it has left. It is looking at pursuing an option of trying to transfer those leases back to the owners. We recognise that it is not, as Alan has said, how we would manage the situation today.

67. Mr Hamilton: That is a fair point. It looks as though the bigger winners were the owners of the properties rather than the rural economy or the public purse. On first impression, it does not look like a bad idea to target rural cottages and traditional buildings that might attract foreign visitors. Why has it not broken even, given the fact that — as Mr Clarke said — tourism has changed radically since the early 1990s and we have a much bigger market? The cumulative losses suggest that the occupancy rate is fairly low. What is the occupancy rate?

68. Mr A Clarke: I am not sure what the occupancy rate is overall. The figures have increased over the past four or five years. One of the reasons why it is not as commercially viable as it should be is the fact that there never were exclusive contracts between Rural Cottage Holidays Ltd and the cottage owners. Most commercial businesses operate on the basis of an exclusive contract, whereby they sell all 50 or 52 weeks to the customer. Due to the market failure and historic nature, the cottage owners had the rights to sell the cottages directly at peak periods. Rural Cottage Holidays Ltd was used only as a vehicle to top up the less saleable periods of the year. For example, July and August and Christmas and the new year generally were sold and no commission was paid. Part of the sales and marketing contract was to try to move it to a more commercial business.

69. Mr Hamilton: I have a question for Mr Quinn about the deficit. Obviously the public purse will have to pick up the tab of the majority, or 90%, of the cost of the cottages for the foreseeable future. Given that it is spectacularly different financially from the original objective, it is difficult to see how the initial business case would have been justifiable. What was the business case and how did it differ so widely?

70. Mr Quinn: I have not gone as far back as the 1993 business case. However, it appears that the business case was clearly based on market failure. Northern Ireland tourism was not a good proposition in the early 1990s — certainly not rural tourism. The Tourist Board and others were trying to find a way of generating revenue streams for people in rural areas, and that was a laudable policy objective. However, it strikes me as a classic case of what is now called “optimism bias” in economic appraisal. During the 1990s, the Treasury revised the economic appraisal guidelines to require one to make an allowance for what is called optimism bias. People might assume that a scheme will break even in three years, when, realistically, one has to add a contingency to provide for optimism against that. If we were to do the same thing again, we would get a different answer with the business case.

71. Mr Hamilton: If we were doing it again — “if” being the operative word.

72. Is there any explanation as to why the sharing of risk and reward is so imbalanced and slanted towards the cottage owners?

73. Mr Quinn: No, and I will defer to my Tourist Board colleagues on that point. The cottage owners were meant to be the beneficiaries of the policy. The whole point of the project was to create and encourage revenue streams that would flow to the rural cottage owners. They did get a good deal. The lack of an exclusive deal was a very good deal for the rural cottage owners, but they were meant to be the beneficiaries of the policy.

74. Mr Hamilton: Is there any explanation as to why the public purse is locked in for such a long period? There is no obvious exit strategy available to insulate the public purse from such a high risk.

75. Mr Quinn: I believe there is such an exit strategy. However, I will ask Ms Thomson to discuss that.

76. Ms K Thomson: We have an exit strategy, and we are currently carrying out an appraisal to ascertain how best to pursue this. NITB has been left with — and currently holds — the 11 long-term leases on the cottages. Those leases are quite complex in their make-up. We have been taking legal advice and working with both DETI and the Department of Finance and Personnel (DFP) to come to an arrangement to terminate those leases.

77. Mr Quinn: The staff subsidy that went to the sales and marketing operation has now been dealt with. That was bought out with the marketing grant over the first three years, but following that, the burden on the taxpayer should be removed.

78. Mr Hamilton: Therefore, there was no exit strategy originally. That means that the strategy that you refer to has been developed only recently. I suppose that this goes back to the optimism bias at the time and the fact that there did not seem to be a need for an exit strategy at that early stage.

79. Ms K Thomson: Over the years, there have been several reviews of operations. In 1999, we conducted our first review to examine the operations, as they were not profit-making. At that time the capital programme was still ongoing, and the conclusion of that review was to halt the capital programme. That is why NITB currently has only the 11 cottages.

80. A further review was carried out in 2000 because the company continued to be loss-making. In 2001, as a result of the findings of that review, we market-tested in an attempt to sell the company. Unfortunately, no one declared an interest in purchasing the company. NITB continued to manage the company, but the situation did not improve.

81. In 2003-04, we again commissioned a review to consider how best we could divest of this activity. We did not want to simply shut down the company as we were mindful to protect the interest Mr Quinn has outlined, to protect rural tourism, and to protect the income stream to rural tourism providers and to people in areas of social need, whom the project had been set up to benefit.

82. Mr Hamilton: Paragraph 69 of the Audit Office report states that when the Department of Finance and Personnel was asked about conflicts of interest, it said that “substantial guidance” was available outlining how public servants should act. This case suggests that that substantial guidance was perhaps not enough to stop it from becoming a problem. Furthermore, I am aware that the Department has made it clear that it will review that guidance in the light of this case. What guidance is currently in place, and, more importantly, where can a public servant access easily the best-practice rules to handle a conflict such as this?

83. Mr David Thomson (Treasury Officer of Accounts): I agree with Mr Quinn; I do not believe that there is anything wrong with the guidance. It is based on fundamental principles that public servants should look for interests. However, just because an interest exists does not necessarily mean that it is prejudicial. If there is a conflict, they should either eliminate or manage it. The guidance has been in place for some time. We play around at its margins, but it is there.

84. Civil servants look to the code of ethics, the Nolan principles and the Northern Ireland Civil Service handbook. For public bodies, we recently re-issued the model code of practice for board members, and there is a guide for Departments and public bodies. All those documents contain guidance on conflicts of interest.

85. The guides are principle based, and the principles are clear. It is impossible to have a rule for every situation, and I would resist trying to develop rules for every situation. I would like to keep it principle based, and that is what has been done. People must apply the current principles. We conducted a review, and we believe that the guidance does not need changed.

86. Mr Hamilton: Perhaps awareness and training, rather than guidance, is the key?

87. Mr D Thomson: Over the past two or three years the training standard has increased. For example, as Mr Quinn mentioned, people on public bodies must complete corporate governance training, of which conflict of interest is a key element.

88. Mr Hilditch: My questions are primarily for Mr Clarke. Paragraph 17 of the Audit Office report outlines the fact that you told the Department that the change to the agency agreement did not have a material impact on the tendering exercise. You also said that:

“There was no additional benefit to either party”.

However, the agent’s legal advisers instructed the owners of Travel Solutions — the successful bidder — that under no circumstances could he proceed with the sale agreement. The legal adviser was seriously concerned about liability and grant-clawback issues, and it is clear that the successful bidder considered those to be material issues when he proposed switching to the agency agreement.

89. Paragraph 18 outlines that the internal audit concluded that that was a significant change that should have been approved by your board. Why did you not consider your position more carefully and seek the view of your board?

90. Mr A Clarke: I will briefly set the context. We appointed consultants to conduct a tender process. We received three bids, which, in due course, Ms Thomson assessed. At that stage, we deemed two of the bids not to be viable, leaving one viable bid. In August of that year, the preferred bidder felt that he was unable to proceed with the sale on the basis of legal advice regarding, for example, clawback of grants and staff liabilities. At that stage, we decided to proceed on the basis of the agency agreement. However, we accept fully — as outlined in the report — that we should have sought board approval.

91. Mr Hilditch: The Northern Ireland Audit Office outlines the key terms of the agency agreement in appendix C of the report. The agent paid the Northern Ireland Tourist Board £3,000 and received £25,000 of marketing support in return. At the last minute, the agent offloaded the liabilities to the public sector. That seems like a good deal for the private-sector agent.

92. Why did you not realise that the combination of the director of industry development’s belated disclosure of the friendship and the late change in the scope of the proposal placed the Northern Ireland Tourist Board in a potentially difficult position with the unsuccessful bidders?

93. Mr A Clarke: It was historically a loss-making business and, therefore, not a particularly attractive proposition. As Kathryn Thomson said, in 2001 we had tried to divest ourselves of the business, but there was no interest. As the Committee will be aware from the consultant’s report, which is detailed in the Audit Office report, without the interest it may have been necessary to facilitate a transfer. Having assessed the bids, we specified to the three bidders what they were required to do to secure a sale. We also clarified what we would do to support them in that process, for example, with marketing support over the first three years.

94. The marketing support that we offered the bidders was considerably less than we had been providing to the company previously, thereby representing a saving to the public purse. At that stage, we were anxious to preserve the benefits to the rural cottage owners, and we were mindful that the selected deal must meet the objective of the more than 100 rural cottage owners, as well as provide the mechanism to secure the sale of the 11 leased cottages for which we were responsible. I am sorry; will you repeat the second part of the question?

95. Mr Hilditch: Were you surprised that the unsuccessful bidders made an issue of it?

96. Mr A Clarke: I do not think that the unsuccessful bidders made an issue of how we conducted the sale. The internal audit service conducted a review of our process, and the report shows that it was reasonably content with that.

97. The complaint that was made in December 2006 was not about how we handled the sale; it was about the conflict with Holidaymatters.com.

98. Mr Hilditch: The original plan had been to transfer the leasehold cottages to the Tourist Board and then sell the company. In the end, only the sale and marketing activities were transferred, which was for five years only. What happens at the end of the five-year agency agreement?

99. Ms K Thomson: As we outlined, the reason that we entered into the agency agreement was to protect rural tourism and to establish a sales and marketing function. At the end of five years we would hope that there will not be market failure; we will not be looking to secure that. Therefore, the market will support it itself, and we will only be looking for a vehicle to market our 11 cottages, provided that we still hold them at that stage. We will be market testing to try to find a mechanism to do that.

100. The Deputy Chairperson: Are any other private-sector bodies in that line of work? Why did a public-sector body get into the marketing?

101. Ms K Thomson: When the company was set up, there was no other central sales or marketing desk to market the cottages or to make the sales. We operated a booking desk. When we went to market to test, there still was no such body in Northern Ireland carrying out such work.

102. The Deputy Chairperson: Do any exist now?

103. Ms K Thomson: Obviously, Cottages in Ireland is operating that desk now through the agency agreement that we had with it from Rural Cottage Holidays.

104. Mr Lunn: Some aspects of my question may have been covered already. Mr Clarke, following the disclosure of the involvement of the director’s wife with the agency arrangement, you, the chairperson of the Tourist Board, and the chairperson of the Tourist Board’s audit committee appointed consultants who reported back to you in March. That report appears to have been copied to that small group of people but not to the Department. Why not?

105. Mr A Clarke: To repeat what I said, the disclosure was made in November 2005. At that time, we took legal advice about the disclosure, and we also took advice from human resources. As I said earlier, there were changing circumstances at that time. I then discussed the issue with the chairperson of the Tourist Board’s audit committee, and, subsequently, with both the chairperson of the Tourist Board and the chairperson of the audit committee. That was after advice from the internal audit service.

106. That was when we commissioned the consultants to carry out an independent investigation. We received the report of that investigation in March 2006, and we completed an action programme based on the report. The report was given to the chairperson of the audit committee and was copied to myself and the chairperson of the Tourist Board.

107. We recognise, and we have acknowledged, that we should have sent a copy of the report to the Tourist Board’s audit committee at a much earlier juncture. Had we done so, given that the Audit Office, the internal audit service and the Department’s tourism policy branch are represented on the audit committee, the Department would have been aware of the issue at a much earlier juncture.

108. Mr Lunn: Apparently, the consultant’s report recommended that that report should be brought to the attention of the Department.

109. Mr A Clarke: It did; that is correct.

110. Mr Lunn: Was that not sufficient prompting for you to inform the Department?

111. Mr A Clarke: The consultants recommended that in order to conclude the report, the director had to answer certain questions. Having taken legal advice, we could not ask him those questions until his return to work in May. I met him within a couple of weeks of his return and put those questions to him. He responded in July 2006. On the basis of his response, I compiled a wrap-up report for the chairperson of the audit committee. That report outlined that we had implemented by way of an action plan which was recommended in the consultant’s report. Paragraphs 52 and 59 of the Audit Office report show that we recognise that we should have informed the audit committee at a much earlier juncture.

112. Mr Lunn: Mr Quinn, paragraph 22 of the Audit Office report states that chairperson of the Tourist Board’s audit committee “made a reference” to the investigation at a meeting of the Department’s audit committee in April 2006. I am not sure what that phrase may mean, but, presumably, it means that the issue was raised in open session and as a matter of record. Would that reference not have alerted you to follow the matter up?

113. Mr Quinn: We have racked our brains about that point. Our best recollection is that the chairperson mentioned it, in general terms, as a potential conflict of interest matter that was being managed. Paragraph 30 of the report demonstrates conclusively that the actual and perceived conflicts relating to the November 2005 disclosure were being managed fully.

114. For some reason, which we cannot understand, the reference that the chairperson of the NITB audit committee made was not in the minutes. I am vexed about that. However, the Department would have expected the conflict of interest issue to be picked up in the quarterly assurance statements of the end of June and/or the end of September. The mitigation that I allow myself is that paragraph 30 demonstrates that the conflict was being managed comprehensively.

115. Mr Lunn: Paragraphs 51 to 54 of the Audit Office report note that the Department was advised of the conflict of interest issue in January 2006. However, that was done through a telephone call. Do you know who telephoned whom, and at what level that telephone call was made?

116. Mr Quinn: Yes. The issue was reported orally at grade-five level in the Department, but no record of it was made. I think that we were waiting for the Tourist Board to follow that telephone call with some form of written confirmation.

117. Mr Lunn: You might have expected written confirmation, or at least a further alert, in the assurance statements that you refer to, the next of which would have been published in June 2006. However, the matter was not mentioned in that assurance report. Perhaps it took until December 2006 before the telephone call came to light.

118. Mr Quinn: In fairness to the Tourist Board, at a meeting of the departmental audit committee in April 2006, the chairperson of the board’s audit committee made a general reference to a conflict of interest matter that was being managed. Therefore, it is not the case that there was radio silence from the Tourist Board between January 2006 and a much later date. The Tourist Board at least took the trouble to mention the matter at that meeting. The best way to deal with it formally would have been to refer to it as an ongoing investigation in the end of June 2006 quarterly assurance statement. NITB acknowledges that in the report.

119. Mr Lunn: I do not know what an assurance statement is; presumably, it is a quarterly check. Does it take the form of questions from the Department to the Tourist Board, or do you have licence to say to Mr Clarke that he can say whatever he wants in the statement? What is the procedure for completing those statements?

120. Mr Quinn: Quarterly assurance statements are based on a comprehensive checklist of issues that we address with deputy secretaries in the Department and chief executives of NDPBs. There is a section that invites the signatory to draw my attention to any significant issues of a governance or financial control nature that emerge.

121. Mr Lunn: That is what I was hoping you would say. At what point in that process would the matter have become sufficiently significant for your attention to be drawn to it formally? There was a telephone call at a low level, and the issue was also raised at a meeting. Although it was not recorded in the minutes, there seems to be a recollection that it was mentioned. Therefore, of what use are those assurance statements are if they are not going to be properly completed?

122. Mr Quinn: That is a fair point. It is important that such issues are captured in the quarterly assurance statements. However, the assurance statement was a very new arrangement at that time and was, in fact, the first of its kind. It was initiated in early 2006, as a response to the PAC and Audit Office reports into EBT. If this issue were to crystallise today, it would be captured in an assurance statement.

123. Mr Lunn: As you have said, previous PAC reports have touched on a culture of secrecy, if I may use those words, in the NDPBs for which your and other Departments are responsible. We have been down this road before — the former LEDU failed to notify your Department of a major fraud in the past.

124. The report that we are discussing today manages to give the impression that a secrecy culture remains in the Tourist Board. Do you agree?

125. Mr Quinn: With respect, I do not agree, for a couple of reasons. There are shortcomings in the recording and reporting of some matters, and those are acknowledged in the body of the Audit Office report. However, in fairness to the Tourist Board, it told us about the matter in January 2006, and the chairperson of the audit committee referred in general terms to the issues at our April 2006 audit committee meeting. Therefore, although I do not believe that there was a culture of secrecy, I accept that there were shortcomings in the formal recording and reporting.

126. However, those shortcomings did not indicate a lack of action over the management of the actual or perceived conflicts. Paragraph 30 of the report demonstrates to my satisfaction that the November 2005 declaration, and the conflict that it implied, was managed fully.

127. Mr Lunn: Both Mr Thomson and you accept that staff in the Department and in the NDPBs are highly aware of their responsibilities. However, Mr Thomson said that he would prefer if guidance were principle rather than rule based. I completely agree, and that is fine, but these issues keep recurring. For example, the Committee has recently considered similar matters in relation to the Northern Ireland Events Company.

128. Are you satisfied that enough is being done to change the culture, attitude and behaviour in the NDPBs for which you are responsible?

129. Mr Quinn: Generally, I am. I again refer you to paragraph 4 of the report, which reflects not my view, but that of the Audit Office, that the Tourist Board’s procedures, practices and performance in these matters have improved substantially since 2002.

130. I do not like to speak for other people, but the Audit Office representative made a point of telling DETI’s departmental audit committee last month that the range and weight of matters that were raised in the management letter for the Northern Ireland Tourist Board are less extensive and less serious than they have been in the past. Therefore, there are observable indicators of an improvement in governance and financial control. That improvement applies generally.

131. The Emerging Business Trust report illustrates an example. That report revealed a range of issues that were substantially more serious than this Audit Office report. The investigation was prompted by conflict of interest issues that were identified by a member of staff in Invest NI. Therefore, there is a high general level of awareness of such matters.

132. Mr Lunn: Thank you. It is nice to talk to people who were in place at the time, rather than their successors.

133. Mr McLaughlin: Paragraph 7 of the Comptroller and Auditor General’s report notes some of the general guidance that is available to handle conflicts of interest. The Deputy Chairperson has pointed out that your Minister received a complaint from one of the unsuccessful bidders and that a Tourist Board director was dismissed for gross misconduct. Mr Pentland clearly made mistakes, but do you accept that the Tourist Board also made mistakes in handling the matter?

134. Mr Quinn: Yes. The principal shortcoming that is acknowledged in paragraph 50 of the report, namely, that the director should have been removed from all contact with issues to do with Rural Cottage Holidays as soon as he made the declaration in February 2005.

135. In mitigation, however, the chief executive put the finance director in charge of the assessment and recommendation, which ensured that someone entirely free of conflict undertook the assessment and made the recommendation. As a result, I believe that the final decision was valid and free of conflict or undue influence.

136. Mr McLaughlin: Is there not a dispute about the reasons and facts surrounding the planning of that action?

137. Mr Quinn: I can make an observation about that. One would not routinely expect a finance director to carry out the assessment and make a recommendation on such a matter. One would expect those duties to fall to the director of industry development. One can draw a clear inference that the chief executive made a deliberate decision to move the responsibility and control for the assessment and recommendation to a finance director who was free of conflict.

138. Mr McLaughlin: As regards the guidance that is available — and we accept that mistakes were made — what is the Department’s view on what happens when mistakes are made or when the guidance is not followed properly? Were any sanctions applied?

139. Mr Quinn: Other than to the director?

140. Mr McLaughlin: Yes.

141. Mr Quinn: No. I will give an overview. Mistakes were made. Paragraph 50 acknowledges the most significant of the errors. The remainder of the shortcomings relate to recording and reporting, and those are important in themselves. However, to go to the substance of the matter, the February 2005 disclosure was managed by putting the finance director in charge of assessment and recommendation. As regards the November 2005 disclosure, paragraph 30 demonstrates that that disclosure, and the conflict that it implied, was comprehensively managed. As regards the December 2006 disclosure, the report shows that that conflict was comprehensively and effectively managed.

142. We must consider the issues in proportion. By and large, as regards fundamentals, the Tourist Board got most of it right. However, it quite rightly acknowledges in several places in the report that there were shortcomings in how those were handled.

143. Mr McLaughlin: I will come back to that matter.

144. Mr Clarke, paragraph 10 of the report shows that you informed the Comptroller and Auditor General that the former director of industry development told you that one of the bidders for Rural Cottage Holidays was known to him as a friend. You said that that happened “in or around February 2005”. Again, we have a conflict, in that the former director of industry development said that both you and the then director of corporate services were informed in October 2004. Everyone accepts that a note of the disclosure and the discussions should have been made at the time, and that would have avoided any misrepresentation or misunderstanding. Why did you decide not to make a note of your discussions with the director?

145. Mr A Clarke: Clearly, I should have, and I acknowledge that in the report. I should have put the matter in writing, and I regret that I did not do that at the time. As regards the disclosure being in 2004-05, certainly it is my recollection that it was in February 2005. On publication of the Audit Office report, I spoke to the former director of corporate services, who left the NITB at the end of October. He had no knowledge of the recollection. I understand that the Department has spoken to him independently — with the same result.

146. As paragraph 10 outlines, the tenders were received on 18 November 2004, and were presented by consultants at that time. No conflict was registered at that meeting by the director. Indeed, the director of corporate services had already left the NITB when the consultants received the tenders on 9 November.

147. Mr McLaughlin: If we leave aside the dispute about the date of disclosure for the purposes of examining your responsibility for the governance — and I respect and appreciate your candour in admitting that it should have been handled differently — does that not raise a serious issue in that you missed the significance of the information that was imparted and, in accepting that you made a mistake, does that not then reflect on the appropriateness of the response?

148. Mr A Clarke: May I draw your attention to paragraph 13? The director told me that that person was known to him as a friend. At that stage, the tenders had already been received by the consultants — they had already been presented to the Rural Cottage Holidays Ltd board. The work that we undertook during that time was mainly to do with the 11 leased cottages and getting those 11 leases back to the Tourist Board to enable the sale of Rural Cottages Holidays Ltd to proceed.

149. I carried out an assessment. As Mr Thomson has already outlined, not all personal conflicts are prejudicial, and my judgement at that time was that the work that the director was undertaking on the 11 leased cottages was not prejudicial to the public interest. The public interest, at that stage, was in saving money to the public purse getting Rural Cottage Holidays Ltd into a saleable condition. It was also in making sure that the wider needs of Rural Cottage Holidays Ltd were met. I fully accept that, in the context of subsequent disclosures, he should have been removed from the process at that time to avoid any perception that a conflict existed.

150. Mr McLaughlin: I am looking at this with the benefit of hindsight, and I accept all the comments that have been made; indeed, I have had to resort to using them in my own case on more than one occasion. Paragraph 12 of the report discusses how you told the Department that you investigated the nature of the relationship and concluded that there was no conflict. Can you detail how it was investigated?

151. Mr A Clarke: I spoke to the director when he raised it with me and he said that one of the bidders was a friend. That person was reasonably well known in the travel trade in Northern Ireland. My assessment of the situation was to put Kathryn, who was the finance director at that time, in charge of the assessment bid thereby removing the director from that process. His responsibility over that period was to conclude the return of the 11 leases to the NITB. A state-of-play report was submitted to the board in April 2005 stating the position at that time. The report stated that consultants had been approached and that three bids were on the table and that the board was asked to agree to proceed to sale. Kathryn undertook that process following the board approval to proceed to sale.

152. Mr McLaughlin: I am more interested in the gap between the two dates that we have been given and whether there was an unnecessary delay in responding. I am keen to know whether, if you investigated it, you thought it necessary to keep a record of that investigation and of when it happened. I am also anxious to know whether you thought it necessary to talk to the so-called friend of the director.

153. Mr A Clarke: On the latter point, I did not see it as necessary to speak to the friend. I spoke to the director, I assessed the relationship as a friendship, and I removed the director from the assessment process. I recognise fully that, to avoid any perception of conflict, the director should have been taken off all activity at that time. I did not keep, but should have kept, a record of that discussion.

154. Mr McLaughlin: That does seem in my mind to underline the fact that you did not recognise the significance of a potential conflict.

155. Mr A Clarke: I recognised the conflict as a friendship at that stage. Much later in the process, in November of that year, the conflict was escalated because of the existence of a business relationship through the director’s wife and the possibility of personal gain. However, when I carried out my assessment in February 2005, I obviously did not know that.

156. Mr McLaughlin: Taking lessons from that — and you seem to be fairly candid about the need to do so — I presume you would accept that, if a similar kind of reference were made to you now, you would respond differently.

157. Mr A Clarke: Yes, absolutely. I acknowledge that fully in paragraph 50 of the report, which states that it would have been much better, from a perception point of view, to have removed him from the process in February 2005.

158. Mr McLaughlin: Mr Thomson, the Audit Office has identified 11 lessons that could be learned as a result of the review and the handling of the issue. Do you accept — and agree — with those 11 lessons?

159. Mr D Thomson: In general principles, yes, but in detailed operation, I confess that I would have reservations about the application of a couple of the lessons.

160. Mr McLaughlin: Can you help us with that?

161. Mr D Thomson: First, there is a reference in the report to using and applying the guidance from the Commissioner of Public Appointments as a general application. I have a reservation about that because, although the principles of a conflict of interest are fine, that guidance from her is specifically concerned with the appointment process. The guidance refers to what an appointment panel should do when appointing someone. I do not think that one can readily apply that to general situations. For instance, this discussion does not concern appointments. Therefore, I am nervous about agreeing that lesson in principle.

162. Paragraph 57 of the report recommends that:

“Public bodies should disclose reports by third parties which deal with or raise issues of propriety to their sponsoring Department and the NIAO, in line with current practice for Internal Audit reports.”

163. I am not sure whether I totally agree with that. If a Department considers it necessary to involve a third party to investigate an issue, that suggests that there is something fundamental to be examined. However, accounting officers in particular must be able to examine issues in confidence. I am not sure whether an issue should be referred automatically to the Audit Office every time that an accounting officer seeks guidance from a consultancy. However, if a significant issue arises, it should be passed to the audit committee once it has been assessed. The Audit Office would pick up the issue at that point. That is not a considered view, but I am happy to consider the issue properly in due course.

164. Mr McLaughlin: It would be helpful to get a response to both those points, as the Committee will be drafting a report after this session. We may discuss those recommendations, and it may help those who are involved in governance if we can draw lessons from the recommendations and ensure that that information is shared across the sector.

165. Ms Purvis: Thank you for your patience. Paragraph 21 of the report states that shortly after the agency agreement was signed, you met with the director of industry development, who was on sick leave. He told you that his wife worked for the agent and that he was a friend of the agent, which you had known from at least the beginning of 2005. In my opinion, it was as plain as day that a conflict of interest existed. Why did you need discussions with private-sector legal advisers and reports from private-sector consultants to tell you that, at the very least, there was a perceived conflict of interest?

166. Mr A Clarke: The director was on sick leave at that time. When the disclosure was made, I immediately took internal human resources advice from the Tourist Board, and I also took legal advice on the matter. We then drafted a letter to the director asking questions about the fact that his wife was working for one of the bidders. At that stage, he had not told me what position she held in the company. During November and December 2005, circumstances relating to the director changed — that is mentioned in the report. On that basis, I took advice from the departmental internal audit service and from our solicitors. I then met the chairperson of the Tourist Board and the chairperson of the audit committee and discussed the issue with them.

167. In January 2006, we made the decision to conduct an independent investigation. It was not as though we failed to take action — quite the reverse, in fact. Between November and December 2005, there were simply changes in circumstances relating to the director that led us to that conclusion.

168. Ms Purvis: In February 2005, when you appointed the finance director, whom you say was free of conflict, your instinct was that the director of industry development was not free of conflict. Surely that would have heightened the risk of conflict from that point on where dealings with the director of industry development were concerned.

169. Mr A Clarke: The director of finance started in January, and the decision at that stage — I am sorry, could you repeat the question so that I know that I am clear about it?

170. Ms Purvis: You said that in February 2005, you assessed that there was no personal conflict with the friendship that the director of industry development had with the agent. Is that correct?

171. Mr A Clarke: No. My assessment was that, although a personal relationship existed, it was not prejudicial to the public interest.

172. Ms Purvis: Despite that, did you then appoint a finance director?

173. Mr A Clarke: Yes.

174. Ms Purvis: Obviously, therefore, your instinct was that there was a potential conflict of interest. I say that because you said that you appointed the finance director, who was free of conflict, therefore, the inference is that there was a potential for conflict. Did your actions not heighten the risk for an actual conflict in the dealings with the director of industry development?

175. Mr A Clarke: Well it did; however, I suppose at that stage, that I had no knowledge that the director’s wife had any connection whatever with one of the bidders. The report makes it clear that she worked in a heating and plumbing business and had nothing to do with our sector.

176. Ms Purvis: I understand that, but surely, when the director of industry development made you aware that his wife was working for the agent, alarm bells should have been ringing.

177. Mr A Clarke: In November 2005, at the time of the second disclosure, the alarm bells were ringing.

178. Ms Purvis: To recap, by early November 2005, you were aware not only of the friendship between the director and the agent, but also that the director’s wife worked for the agent. Paragraph 23 of the report notes that, in March 2006, the consultants finally reported that:

“any reasonable observer could have perceived a conflict of interest in (the Director of Industry Development’s) position.”

However, although you just said that there was a heightened risk, in paragraph 31 of the same report, you concluded:

“that there was no actual conflict of interest”.

179. Mr A Clarke: Returning to the first disclosure, which was made in February 2005, when we discovered that a friendship existed, I saw a conflict of interest. However, I judged that conflict not to be prejudicial to the public interest. Nevertheless, I acted by putting Kathryn Thomson in charge of the assessment process.

180. In November 2005, the revelation that the director’s wife was working for the company created the perception not only of a business linkage, but also of the potential for personal gain. That was the stage at which we considered the possibility of both a perceived and actual conflict. The investigation took place at that stage.

181. Mr Quinn: If I might intervene, it is worth reminding ourselves that, from August 2005 until May 2006, the director was on extended sick leave. Therefore, at the material time when the second declaration was made in November 2005, he was taking no part in the affairs of the Tourist Board or Rural Cottage Holidays Ltd.

182. By consulting the departmental internal audit service and by commissioning an independent examination, I contend that the Tourist Board acted prudently and, referring again to paragraph 30, when it came to it, those actual and perceived conflicts of interest were managed effectively.

183. Ms Purvis: Following the finance director’s appointment, did you ask the director for industry development not to have any involvement in discussions, or to attend any senior management meetings, about the contract agreement?

184. Mr A Clarke: No. At that stage, Kathryn Thomson assumed responsibility for the assessment, and the report makes it clear that a senior management team meeting and a board meeting occurred at which we should have declared the conflict and acted in conjunction with the February 2005 declaration.

185. Ms Purvis: In appendix E, paragraph 48, the former director of industry development’s response is damning about the poor quality of training that was provided for him. He claimed that it involved little more than circulating procedures manuals and policy communications. Given that you knew of his private-sector background and close connections to the travel trade and that the Northern Ireland business community is small and interconnected, and considering the additional risks that that brings, why, from day one, did you not ensure that he was provided with effective training in public-sector standards?

186. Mr A Clarke: I would argue that he was given training. Anyone coming in — certainly at a senior level — is given induction to their area of work, and that happened for the director. We also provide regular annual training on our financial procedures manual to all staff. Bearing in mind, as part of the recruitment process, finance and administration management was a key role of the job, and he claimed to have had experience in administering processes and procedures in the private sector. Given that he had joined from the private sector, the Department also offered him a mentor with a senior executive in Invest Northern Ireland at that stage. He was also provided with public accountability training by NITB, as are all members of our senior team. He also received training on specific areas such as economic appraisal and project management, he was provided with leadership training, as were all the senior team, and he was offered coaching support when he returned from sick leave. Therefore, there was an extensive programme of support.

187. As I said earlier, all our directors attend our audit committee. The Public Accounts Committee report of 2002 recommended that the director of marketing attend our audit committee, and we insist on all our directors attending our audit committee. I draw your attention to paragraph 4 of the report, which recognises that there have been considerable improvements in our corporate governance. That is because we provide extensive training and support to our staff.

188. Ms Purvis: Could you provide the Committee with the training record of the former director?

189. Mr Quinn, presumably many people with business backgrounds are appointed to Invest NI and the Tourist Board. How proactive is your Department in the design and delivery of induction training and guidance on public-sector ethics? Do you take the lead role on that, or do you leave it to NDPBs?

190. Mr Quinn: By and large, we leave it to the NDPBs. Their needs and requirements vary from one business setting to another. We have interlocking sets of mechanisms and processes that put corporate governance and financial control very much on the radar of all of our senior staff, both in the Department and the NDPBs. For instance, I checked, and I found that about 100 DETI and NDBP staff have received corporate governance training of one kind or another over the past couple of years.

191. It is worth making a separate point alongside that. As Ms Purvis said, many people in our organisations have a professional background. All the people who, for instance, are qualified accountants or qualified company secretaries are fully exposed to issues of corporate governance and financial control by virtue of their professional training and development. The reason that I pointed to the Emerging Business Trust example is because it was a member of the corporate finance group in Invest Northern Ireland who spotted the problem.

192. Ms Purvis: How do you ensure that the training is delivered? Do you keep a track, or it is left to the body to ensure that it is delivered?

193. Mr Quinn: We do not monitor it routinely.

194. The Deputy Chairperson: I have a couple of questions to ask about appendix A. I know that £1·56 million of public funding went into Rural Cottage Holidays Ltd, and there is still a loss of about £20,000 a year. Some of the reasons for that were connected to the nature of the original contract. I note that the cottage owners had to put in between 10% and 20% of the value of the renovations. Could you provide the Committee with information on exactly how much money they had to put in? Nevertheless, the owners retained 85% of the earnings, bearing in mind that there would have been no earnings from derelict properties. I was shocked to see that there was not an exclusive nature to the deal and that they could bypass and let the cottages directly, meaning that there would be no income during the peak periods.

195. Ms K Thomson: May I clarify the arrangement with the 11 cottages? Given that the NITB owns the leases on the 11 cottages at the moment, it retains all the income that they generate.

196. The owners of those cottages pay toward original capital renovation, and we hold the leases for 21 years. Rural Cottage Holidays Ltd is currently responsible for the maintenance of the cottages, but we collect the income that is generated. The lease arrangements are such that at the end of the leases, the cottages are returned to their owners. There is a profit-sharing arrangement for the cottage owners, but given that the company has not made a profit, there has been no profit-sharing.

197. Mr A Clarke: Kathryn is clarifying that there is a different arrangement for the 11 leased cottages than for the 100-plus cottages in Rural Cottage Holidays.

198. The Deputy Chairperson: If we go back to the original arrangement, appendix A of the report states that cottage owners:

“tended to hold peak times for their own sale.”

Is that still the case?

199. Ms K Thomson: Yes, that is my understanding. We have our 11 cottages on an exclusive deal with cottages in Ireland.

200. The Deputy Chairperson: Does that refer to people holding the 11 cottages for their own sale?

201. Ms K Thomson: No, the 11 cottages are held exclusively for our sale. We hold an exclusive contract for their sales and marketing.

202. The Deputy Chairperson: I have a better understanding now. I am surprised to learn that peak sales were not being passed through the system. Obviously, no income would be generated during that peak time. Subsequently, the second contract had all the liabilities and possible drawbacks removed. That was a major change to the contract, and I am surprised that that was not recognised. What sort of business acumen does the Department have if it does not recognise that those are very significant changes to the terms of the tender that was issued? Can I ask that question? Who will answer that?

203. Ms K Thomson: There were a number of issues. NITB were struggling at the time to provide continuity of service for the sales and marketing function. The staff who had been involved in that area had left due to the uncertainty around the company, and we were really struggling to provide a service. As a direct result, both the brand and the reputation were deteriorating, as was the attractiveness of the proposition. The company had already market tested twice, as I have alluded to, and there was a low level of interest due to the low value of the brand and the poor trading history of the company.

204. That position had deteriorated further, and we were trying to balance all that against protecting the public interest. In this case, that was twofold. First, to minimise the cost to the taxpayer by divesting ourselves of unprofitable activities. Secondly, and more importantly, to protect the interests of the rural tourism providers — to protect their income stream. We could do that only by putting a suitable marketing and sales function in place as quickly as possible. That function was not only to provide the service that we had been providing, but was to provide an enhanced service.

205. Mr Quinn: Is it not the case that the contingent liabilities turned out to be a deal-breaker in August 2005? If it did break the deal, the accumulating losses in Rural Cottage Holidays Ltd would be left to the taxpayer. That was the practical dilemma that the Tourist Board faced at that time.

206. The Deputy Chairperson: Thank you for your evidence today; it has been helpful. I am sorry, Mr Lunn.

207. Mr Lunn: I would like to ask Mr Clarke for a point of clarification. Mr Clarke discussed with the former director in February 2005 the extent of his friendship. That conversation enlightened him about the position of the director’s wife with Travel Solutions. When did she take up that position? Was she already in place when that discussion was held with the director?

208. Mr A Clarke: No, I think that she took up the position in October 2005, and he made the declaration to me in November 2005. Kathryn may be able to clarify that.

209. The Deputy Chairperson: This is a case where conflicts of interest have not been well handled, and it is disappointing that lessons have not been learned from other incidents. In my opening remarks, I stated that the proper management of conflict is not rocket science. Officials must realise that the public service cannot be used to pursue private interests. The most senior people in public bodies — those with responsibility — must wake up and police this issue. It is unacceptable to brush conflicts of interest under the carpet and then to pretend that they did not exist.

210. This case shows what happens when public bodies fail to manage conflicts of interest from an early stage. Not only was the reputation of the body damaged, it had very serious consequences for the official in question.

211. Over time, cases such as this chip away at the public’s trust in good governance and the use of public funding. From what the Committee heard today, there seems to be a question over the use of public money. It seems that public bodies find it easier to lock themselves into deals that do not provide value for money, but they then cannot get out of those deals easily. Officials need to find ways out of what effectively are continuing losses to the taxpayer, and to ensure that lessons are learned about exit strategies and the sharing of risks and rewards.

212. Today’s session highlighted clearly that lessons need to be learned about how public officials handle conflicts of interest. Officials who are faced with a conflict of interest — regardless of how harmless it may appear — would benefit from more accessible rules and more processes to follow. I hope that the report spells out some of those lessons.

213. Those lessons are not just for the Tourist Board to learn — they are for all public bodies and the public sector generally. The Committee will examine Mr Thomson’s Department to ensure that those rules are implemented there.

214. Some members who had questions were not present today. If you are content, the Committee will forward those questions to you for written answers. Thank you for your attendance today. I hope that those lessons will be learned for the future.

Appendix 3

Correspondence

Chairperson’s letter of 2 May 2008

Public Accounts Committee
Parliament Buildings
Room 371
Stormont Estate
BELFAST
BT4 3XX

Tel: (028) 9052 1208
Fax: (028) 9052 0366
Email: jim.beatty@niassembly.gov.uk

Date: 2 May 2008

Mr Stephen Quinn
Accounting Officer
Department of Enterprise, Trade and Investment
Netherleigh
Massey Avenue
Belfast
BT4 2JP

Dear Stephen

Re: Public Accounts Committee Evidence Session 1 May 2008

Further to the evidence session at the Public Accounts Committee yesterday, which you attended, please provide the following additional information which you agreed to provide in writing after the meeting:

1. In paragraph 13, it is stated that the Department told the Audit Office that the friendship was assessed in line with guidance obtained from a presentation given by an accountancy body which suggested that not all personal interests are likely to harm the ability to judge the public interest. What is your view of this and what official guidance is issued by your Department or DFP?

2. Appendix E outlines areas of disagreement between the Director of Industry Development and the views of the Department and NITB as expressed in the report. Paragraph 56 of the NIAO report states that “the Department told us that NITB has full written records of all other disclosures, meetings and actions and that this was not a systemic failure”. This is disputed by the former Director of Industry Development in paragraph 10 of Appendix E. In addition footnote 3 on page 7 of the Audit Office’s report notes that the former Human Resources Director disputes what is noted at paragraph 29. She told the Department she had no recollection of providing the confirmation that there was no case for disciplinary action. Please provide an explanation of these discrepancies.

3. The Audit Office report states at paragraph 57 that it is normal practice for public bodies to disclose internal audit reports to the Department and the Audit Office. It appears that the consultant’s report was not disclosed to the Board or Audit Committee, even in closed session. Please comment on how these actions comply with good governance arrangements?

4. In paragraph 58, the NIAO report notes that the NITB Audit Committee was not informed of the conflict because, to have put this sensitive matter on the public record, would have risked reputational damage and negative press coverage.

Are the issues of reputational damage and negative press coverage not good reasons to involve the Audit Committee?

5. In response to members’ questions you agreed to provide the following information in writing:

(a) What criteria were used to select the 11 cottages, given the conflict of interest that the NIAO report highlighted, and please provide information on any connection between the owners of those 11 cottages and any official or member of the NITB.

(b) How much has been spent on the 11 cottages since 1993 in renovation costs, maintenance costs, and administrative support?

(c) Please provide the training record of the former Director of Industry Development.

I should be grateful for a response by 16 May 2008.

Yours sincerely
Signed

Patricia Casey

Clerk

Public Accounts Committee

Correspondence of 21 May 2008
from Stephen Quinn

From The Permanent Secretary
Stephen Quinn

Netherleigh
Massey Avenue
BELFAST BT4 2JP
Telephone: (028) 9052 9441
Facsimile: (028) 9052 9545
Email: stephen.quinn@detini.gov.uk
janice.davison@detini.gov.uk

Your reference:
Our reference: PSDETI 191/08

Mr Jim Beattie
Clerk to the Public Accounts Committee
Parliament Buildings
Room 371
Stormont Estate
BELFAST

21 May 2008

Dear Jim

Re: Public Accounts Committee Evidence Session 1 May 2008

Patricia Casey’s letter of 2 May refers. This response follows the ordering of points in her letter.

1. I agree with the proposition that not all personal interests are likely to harm the ability to judge the public interest. The risk to the ability to judge the public interest depends on the nature of the personal interest declared and on context. That view was also expressed, in response to Mr Hamilton during the evidence session, by the Treasury Officer of Accounts. It is, of course, common practice for Board members to declare an interest at the start of meetings. However it is, of course, also essential to exercise careful judgement in assessing how the public interest should be protected. The general approach is that actual, potential or perceived conflicts of interest should be identified and declared; that, if possible, they should be managed; and that, if it is not possible to manage a conflict, it should be avoided.

In this specific case, as I indicated in my evidence, I agree with the acknowledgement made by the NITB at paragraph 50 of the NIAO report, that it would have been better if the Director of Industry Development had been excluded from all contact with the tender process as soon as he disclosed his friendship with the owner of Travel Solutions/Cottages in Ireland. This would have avoided any perception of a conflict of interest arising. As stated in the evidence session, the substance of the February 2005 disclosure was managed by putting the Finance Director, who was free of conflict, in charge of the assessment and subsequent recommendation, thus enabling a valid decision.

You asked for details of official guidance issued on conflicts of interest. Guidance on conflicts of interest is contained in the NICS Code of Ethics and in the NICS Staff Handbook. Both of these are addressed to civil servants and both are issued by the Department of Finance and Personnel.

There are also references to the need to avoid conflicts of interest in guidance available to the wider public sector, including Government Accounting and in a range of HMT documents. Relevant extracts from the NICS Code of Ethics and Staff Handbook are included in Annex A, which also contains relevant extracts from the NITB Staff Code of Conduct. Similar guidance is available to staff in DETI’s other NDPBs. The Department’s Finance Director reminded DETI staff of the guidance in a minute dated 23 May 2007, attached at Annex B.

As indicated in evidence, both I and the Treasury Officer of Accounts regard the guidance as accessible, robust and serviceable.

2. Appendix E of the NIAO report contains the Director of Industry Development’s comments on the report. Your letter refers to the Director of Industry Development’s comments on paragraph 10, which relates to the initial disclosure of a friendship with the owner of Travel Solutions. Paragraph 56 of the report contains an acknowledgement by NITB that a contemporaneous written record of that disclosure was not kept. It goes on to say that NITB has full written records of all other [my emphasis] disclosures etc. We do not read the former Director of Industry Development’s comments on paragraph 10 as disputing this.

The Director of Industry Development does, however, contend that he disclosed this friendship in October 2004; first to NITB’s then Director of Corporate Services (who left the organisation on 29 October 2004) and then jointly to the Chief Executive and the then Director of Corporate Services. NITB has reviewed the Chief Executive’s diary for October 2004. There is no record of a meeting between the Chief Executive, the Director of Corporate Services and the Director of Industry Development. Further, as the Chief Executive stated in his evidence to the Committee, he spoke to the former Director of Corporate Services following publication of the NIAO report. I am advised that the former Director of Corporate Services informed the Chief Executive that he had no recollection of a disclosure being made by the Director of Industry Development. This was confirmed in a separate telephone conversation between a DETI official and the former Director of Corporate Services. Finally, as stated at paragraph 10 of the NIAO report, and reiterated by the Chief Executive in his evidence to the Committee, the tenders were presented to the RCH Ltd Board on 18 November 2004. No conflict of interest was registered by the Director of Industry Development at that meeting and, indeed, the Director of Corporate Services had already left NITB by 9 November 2004, the date that the consultants received the written bids.

The NITB Accounting Officer’s recollection continues to be that the disclosure was made in or around February 2005 and, therefore, the events and meetings that occurred between October 2004 and January 2005, referred to by the Director of Industry Development in his comments on paragraph 10, predate that disclosure.

The former Director of Industry Development’s comments on paragraphs 19 & 20 are also relevant in this context. As indicated in evidence, the minutes of NITB Senior Management Team meetings from October 2004 to the date of the Director’s dismissal in January 2007 were reviewed. No references were found to the Director of Industry Development raising the question of whether it was appropriate for him to be present during RCH discussions. I make the observations that the former Director of Industrial Development could have challenged those minutes; and that, if he had done so, he would have been expected to refer to this in his comments on the NIAO report.

Paragraph 29 of the NIAO report contains an extract from a note of a meeting between the NITB Chief Executive and the Chair of the NITB Audit Committee. The note states, inter alia, that “the Human Resources Director had confirmed there was no case for disciplinary action.” Footnote 3 on page 7 of the NIAO report contains a comment by the former Director of Personnel in NITB that she had no recollection of providing the confirmation. The NITB Chief Executive’s recollection is that this issue was discussed with the then Director of Human Resources who advised him orally that there was no case for disciplinary action, on the basis that the Director of Industry Development had disclosed his friendship and NITB procedure at the time did not require this to be in writing. I am not in a position to explain why the former Director of Human Resources is unable to recollect providing this advice, although the elapse of time may be a factor. However, I make the observation that the inclusion of this reference in an NITB file note indicates, at the very least, a very high probability that a discussion with the then HR Director took place and reached this conclusion, and that it was reported to the NITB Audit Committee Chair on 25 July 2006.

3. Paragraph 57 of the NIAO report refers to the normal practice followed by departments of disclosing internal audit reports to the Audit Office. DETI and its NDPBs comply fully with this practice.

You have asked for my comments on whether the non disclosure of the consultant’s report to the Board or Audit Committee represented good governance. It was acknowledged, at paragraphs 57, 58 and 59 of the NIAO report, and during the evidence session, that the consultant’s report should have been brought to the attention of NITB’s Audit Committee (on which DETI and NIAO are represented) at an earlier juncture. This would also have resulted in the matter being brought to the attention of the full NITB Board, which gets Audit Committee minutes as a matter of routine. The Department agrees fully with that acknowledgement.

4. Paragraph 58 of the NIAO report reflects NITB’s response to a question posed by the Department, asking why the conflict and investigations had not been raised with the NITB Audit Committee. It is appropriate to set NITB’s actions in the context of an ongoing investigation which had not yet determined whether an actual, as opposed to a perceived, conflict of interest existed. In addition, there were a number of outstanding disciplinary and performance issues relating to the Director of Industry Development. The Chair of the Audit Committee sought to balance the desirability of bringing issues concerning propriety to the attention of the Audit Committee against the risk that wider discussion could leave NITB open to a charge that it was seeking to damage the Director of Industry Development’s reputation, thereby potentially exposing NITB to a claim for constructive dismissal.

However, notwithstanding the context in which decisions were made, I consider that the matter should have been brought to the attention of the Audit Committee in a closed session. This was acknowledged in paragraphs 58 and 59 of the NIAO report. The Chief Executive also acknowledged, during the evidence session, that the matter should have been referred to the entire Audit Committee. This would have been better both in terms of the substantive issues and in terms of managing the risk of reputational damage.

I make the additional observation that ways and means can be found to achieve the necessary balance between transparency and fairness in such matters. By way of example, a paper was tabled recently for the information and consideration of the DETI Audit Committee. It was discussed and then, because of its legal sensitivities, recovered.

5. Paragraph 5 of your letter provides details of information that I agreed to provide after the evidence session. The three pieces of information specified are attached at Annexes C to E. In addition, the Committee asked for details of occupancy rates of the eleven leased cottages. This was not referred to in your letter, but is provided at Annex F.

6. I hope the Committee finds this information helpful. Please do not hesitate to contact me if you require any additional information.

Cc: David Thomson
Alan Clarke NITB
Kathryn Thomson NITB
David Sterling
Noel Cornick
Trevor Cooper
Terry Coyne

Yours sincerely

Stephen Quinn

Annex A

Northern Ireland Civil Service (Nics) Guidance on Conflicts of Interest Involving Staff

NICS Code of Ethics

1. The Northern Ireland Civil Service Code of Ethics requires Civil Servants to carry out their role with dedication and a commitment to the Civil Service and its core values: integrity; honesty; objectivity and impartiality.

NICS Staff Handbook

2. The Northern Ireland Civil Service Staff Handbook which is available to all Civil Servants contains a number of references to conflicts of interest in Chapter 1 of the Conduct and Discipline Section. These are:

1.1 (g) Members of the NICS must not ‘misuse their official position, or information acquired in the course of their official duties, to further their private interests or those of others. Conflicts of interest may arise from financial interests and more broadly from official dealings with, or decisions in respect of, individuals who share private interests (for example, freemasonry, membership of societies, clubs or other organizations and family). Where a conflict of interest arises, Civil Servants must declare the interest to their Establishment/Personnel Division so that a decision can be made on the best way to proceed.

1.5.2 (d) No remunerative private work of the following description may be undertaken ….work of a nature conflicting with the officer’s duty to his/her employing Department or the Government generally or as a member of the Civil Service.

Handling of Contracts

1.13.1 No Government Contract may be let to Civil Servants in a contracting Department, or to any partnership of which they are members (apart from a corporation in which they are shareholders), or to any company of which they are directors (except as nominees of the Government), unless they have fully disclosed their interest in the contract and the Head of Department has given permission for the letting of the contract to proceed.

1.13.2 No Civil Servant may accept a directorship (except as nominee of the Government or with the express permission of the Head of Department) in any company holding a contract with that Department.

1.13.3 Civil Servants who become officially involved in any matter concerning a business organization or transaction in which they have any interest must at once fully disclose their interest to the Head of Department, who shall, if possible, arrange for some other officer to deal with the matter. Similar considerations of potential conflict of interest will be relevant when a Civil Servant proposes to sell goods to a Government Department.

Shareholdings

1.21.1 Where a Civil Servant’s shareholding in a company might raise a question of possible conflict with the interests of the officer’s employing Department, or might appear to be inconsistent with the officer’s position as a Government servant, the officer should consult his/her Establishment/Personnel Officer about the desirability of acquiring or retaining it. Responsibility for deciding the appropriate action in cases of this kind rests with the Head of Department, but the Department of Finance and Personnel will be consulted whenever it is proposed to allow the retention of a shareholding which amounts to one-third or more of the issued share capital.

Northern Ireland Tourist Board (Nitb) Guidance on Conflicts of Interest Involving Staff

NITB Staff Handbook

Code of Conduct

2.1 …There is a clear obligation on all employees to communicate, in writing, to their line manager and to the Director responsible for HR matters, any potential or actual conflict situations including the prospect of taking up additional paid or unpaid work outside of their NITB employment prior to taking on the additional role.

2.2 In summary all employees have a duty to …not misuse their official position or information acquired in the course of their official duties to further their private interests or those of others.

Conflict of Interest

2.8 As set out in paragraph 2.1, NITB employees should abide by the rules adopted by NITB in relation to private interest and possible conflict with public duty; the disclosure of official information; and political activities. They should not misuse their official position or information acquired in their official duties to further their private interests or those of others.

2.9 Key members of employees, such as the Directors, Managers and employees working with clients and on programme contracts etc, should ensure that any potential conflicts of interest are identified at an early stage, written reports are maintained and that appropriate action is taken to resolve them.

2.10 During your employment you are required to devote all of your business hours to the proper performance of your duties. You are not permitted, without the consent of the Director holding responsibility for delivery of HR Services to undertake additional paid or unpaid employment (full-time or part-time) outside of the NITB, carryout professional work on your own account or accept any directorship or other public or outside appointment.

2.11 Approval should be sought from the Director responsible for HR matters. Full details of the additional paid or unpaid work must be given in writing through your Director seeking approval of such additional work. Consent will not be unreasonably withheld and will only be given where the NITB is satisfied that the outside interest or employment will not conflict in anyway with the interests of the organisation. If consent is not granted, it is a condition of your continued employment that you do not take up the additional work or in cases where you had already commenced prior to seeking approval you must cease such activity immediately. Failure to do so may result in summary dismissal. If there is any doubt whether a conflict of interest issue has arisen, please consult the HR Department.

Annex B

FROM: Noel Lavery
DATE: 23 May 2007
TO: All Staff

Conflicts of Interest

Introduction

1. The Northern Ireland Civil Service Code of Ethics requires Civil Servants to carry out their role with dedication and a commitment to the Civil Service and its core values: integrity, honesty, objectivity and impartiality.

2. Conflicts of interest call into question adherence to the core values. For this reason it is essential that situations which may give rise to a potential conflict of interest are identified at an early stage and appropriate action is taken to manage them.

Guidance on Conflicts of Interest

3. The following guidelines have been extracted from the Northern Ireland Civil Service Staff Handbook and are cross referred to the handbook which is available on the Infonet under Staffroom – Staff Handbook. They must be followed in all aspects of an official’s duties including the assessment of proposals, the evaluation of tenders, and the allocation of funds or other resources:

• Staff members must not misuse their official position or information acquired in the course of their official duties, to further their private interests, or those of others. (paragraph 1.1.1g)
• Staff should ensure that any possible conflicts of interest are identified at an early stage and, where a conflict of interest arises, Civil Servants must declare the interest to the Personnel Division so that a decision can be made on the best way to proceed. (paragraph 1.1.1g)
• No remunerative private work may be undertaken where this would conflict with the officer’s duty to his/her employing department or the Government generally. (paragraph 1.5.2d)
• No Civil Servant may accept a directorship (except as a nominee of the Government or with the express permission of the Head of Department) in any company holding a contract with that Department. Civil Servants who become officially involved in any matter concerning a business organization or transaction in which they have an interest must at once fully disclose their interest to the Head of Department, who shall, if possible, arrange for some other officer to deal with the matter. (paragraphs 1.13.2 and 1.13.3)
• Civil Servants who are office-holders in, or members of, an organization which has dealings with the Government Departments in which they are employed should consider carefully whether there is any possibility that their connection with the organization may appear to conflict with their duty to be impartial in all their dealings as a Civil Servant. (paragraph 1.6.1)
• Officers who are in any doubt about their position should consult their Establishment/Personnel Officer who will advise them on what action, if any, they should take. (paragraph 1.6.2)

4. Further detailed guidance on potential Conflicts of Interest and the required conduct of Civil Servants in relation to these can be found in the Conduct Section of the NICS Staff Handbook.

Conclusion

5. Finally, it should be emphasised that this guidance is designed to protect both individual members of staff and the Department in general. As the guidance cannot cover every eventuality, the advice of Personnel Division should be sought in any case where an Officer is in any doubt about their position.

Noel Lavery

Principal Establishment and Finance Officer

Annex C

Criteria Used to Select the 11 Cottages

The criteria involved in this scheme were:

• The building should be located near the owner’s home in a scenic setting with a range of holiday activities available in the area. It should be easily accessible by car with adjacent space for parking;
• The building should be in reasonable condition, and capable of conversion at economic cost. Access to main water, electricity and telephone is an advantage but not essential;
• The owner’s family should have an interest in looking after both the unit and the guests;

NITB are not aware of any connection between the 11 cottage owners and any NITB officials or Board Members.

Annex D

Annex E

Training Undertaken by Philip Pentland 10 June 2003 - 24 January 2007

Name	Course	Date
Philip Pentland	Mentoring with Leslie Ross, InvestNI	Circa 2003
	Induction Training	Friday, December 12, 2003
	Market Segmentation	Friday, March 19, 2004
	Dimensions Seminar	Monday, May 24, 2004
	Future of Public Administration 3	Tuesday, June 29, 2004
	Economic Appraisal Training	Tuesday, August 03, 2004
	Telephone Training	Thursday, September 23, 2004
	Section 75 Equality Screening Training	Wednesday, December 15, 2004
	Unit Away Day	Wednesday, February 09, 2005
	Public Accountability for Senior Managers	Thursday, May 19, 2005
	The Future of Public Admin 4	Monday, June 06, 2005
	Team Workshop	Wednesday, June 07, 2006
	Shaping the Future of Public Services	Tuesday, October 03, 2006
	Coaching & Mentoring 4 x 2 hour sessions	Autumn 2006

1. Future of Public Admin 5 and 6 training was offered but PP was absent when it took place.

2. SMT Development Programme training was offered but PP but was absent when it took place.

3. Managers 360 training was offered but PP was absent during the initial setup.

Annex F

Occupancy Rates for 11 Cottages

The occupancy rates for the 11 leased cottages owned by RCH Ltd for the last 5 years are as follows:

Year	Average Occupancy Rate
2003/04	24%
2004/05	30%
2005/06	24%
2006/07	24%
2007/08	35%

The following should be noted:

• The calculations are based on 365 days per annum availability and do not take account of any non-availability due to maintenance work.
• The 2007/08 figures relate to tourism lettings only – there were 2 long term lettings in this period (one for 3 months and the other for 9 months of the year).

Appendix 4

List of Witnesses Who
Gave Oral Evidence
to the Committee

1. Mr Stephen Quinn CB, Accounting Officer, Department of Enterprise, Trade and Investment.

2. Mr Alan Clarke, Chief Executive, Northern Ireland Tourist Board.

3. Ms Kathryn Thomson, Chief Operating Officer, Northern Ireland Tourist Board.

4. Mr David Thomson, Treasury Officer of Accounts, Department of Finance and Personnel.

5. Mr Kieran Donnelly, Deputy Comptroller and Auditor General, Northern Ireland Audit Office.