Public Accounts Committee

Oral evidence: Accountability for taxpayers’ money,

HC 732

Monday 29 February 2016

Ordered by the House of Commons to be published on 29 February 2016

Watch the meeting: http://www.parliamentlive.tv/Event/Index/65d2a922-525b-4486-b1fe-f09759a1f840

Members present: Meg Hillier (Chair), Mr Richard Bacon, Deidre Brock, Chris Evans, Kevin Foster, Nigel Mills, David Mowat, Stephen Phillips, John Pugh, Karin Smyth

Amyas Morse, Comptroller and Auditor General, Adrian Jenner, Director of Parliamentary Relations, National Audit Office, and Keith Davis, Director, National Audit Office, were in attendance.

Witnesses: Sir Jeremy Heywood, Cabinet Secretary, Sir Nicholas Macpherson, Permanent Secretary, Her Majesty’s Treasury, and John Manzoni, Chief Executive of the Civil Service and Permanent Secretary, Cabinet Office, gave evidence.

Chair: Welcome to the Public Accounts Committee, on Monday 29 February 2016—it is not often I get to say that date. We are delighted to welcome Sir Nicholas Macpherson, who is Permanent Secretary at HM Treasury until the end of March. So, Sir Nick, this is your final outing in front of us. We would like to thank you for your support of the Committee over the years, and we look forward to your being particularly candid with us today as we discuss the topic. Thank you for what you have done for the civil service and for accountability for taxpayers’ money over your 11 years—is it?—at the Treasury. Yes. Time marches on.

              Sir Nicholas Macpherson: Thank you.

              Q1 Chair: I also welcome Sir Jeremy Heywood, Cabinet Secretary—head of Government—and John Manzoni, Chief Executive of the Civil Service and Permanent Secretary at the Cabinet Office.

              We are here today to discuss, primarily, “Accountability to Parliament for taxpayers’ money”, a Report that the NAO has done on an issue that has been a running concern for the Committee; our primary concern is to ensure that taxpayers’ money is spent effectively, and accountability to taxpayers is fundamental to that process. The NAO Report raises some serious concerns about how accounting officers are not prioritising their duties to safeguard taxpayers’ money because of the political pressures on them and how the incentives for accounting officers to safeguard value for money are weak, compared with those associated with the day-to-day job of satisfying Ministers.

              As politicians, we understand the desire of Ministers and politicians to get things done, but we know that there can be tensions; Kids Company is one recent example that threw that up. We also recognise that accountability has got more complex. Before you came in, we were discussing the issues around devolution, accountability and money being spread out much further, much more locally. Personally, I think that that is a good thing, but it raises difficult questions for the centre.

              We hope today to have an open discussion about how this is working and where there are issues, but before I go on to that fully I want to ask you, Sir Jeremy, to explain to us about the new arrangements at HMRC. For those who are not aware, there have been appointments to replace Lin Homer as Chief Executive. As we understand it, Jon Thompson from the Ministry of Defence will be first Permanent Secretary, accounting officer and chief executive of HMRC, and Edward Troup will be first Permanent Secretary and executive chair of HMRC, but with Jon Thompson reporting to him. Have I got that summary right?

              Sir Jeremy Heywood: Yes, that is exactly right.

              Q2 Chair: Can you tell me how exactly that will work, with the accounting officer junior to the person he is reporting to, for a start? That puzzles us a little.

              Sir Jeremy Heywood: Nick, why don’t you kick off first on that? Then I will come in.

              Sir Nicholas Macpherson: What you are asking is why did I appoint Jon Thompson as accounting officer. The answer is that Jon will be responsible for HMRC’s operations and transforming the organisation; in effect, he will spend the money. Edward Troup, as executive chairman, will be very concerned with the strategic policy/reputational leadership of HMRC, and in that role he will not spend a huge amount of money.

              There are precedents for this sort of arrangement. HMRC is a unique department. It is non-ministerial and since its inception there have been various different forms of governance. I wouldn’t claim that any of them is perfect; you just have to design it for the particular moment. For example, Lesley Strathie was accounting officer, working to the then chairman, Mike Clasper.

              Over time, I would expect Edward to move to a more non-executive role; I wouldn’t expect him to be working five days a week in this role indefinitely. So that is why Jon is the accounting officer.

              Q3 Chair: I will not replay all of our issues around HMRC’s performance, but one of them is about how the assessment is made of investigations and prosecutions for value for money, in relation to the very precise issue of pursuing tax rather than the day-to-day running of the phone service, which was an issue of concern too. How will we hold Edward Troup to account for that?

              Sir Nicholas Macpherson: You should feel extreme—

              Q4 Chair: We will certainly invite him here.

              Sir Nicholas Macpherson: You are highly entitled to summon Edward here, and I would fully expect you to summon him here, to explain what he is up to. The other point I would make is that because of Edward’s appointment, there are now issues about how the role of the tax assurance commissioner will work. We will announce the way forward on that in the reasonably near future, the better for you to understand precisely the decision-making processes.

              Q5 Chair: Just to be clear, he won’t be tax assurance commissioner?

              Sir Nicholas Macpherson: Yes. That’s right.

              Q6 Chair: So he will make decisions about the balance for the taxpayer as to whether or not, say, to prosecute or investigate. That will be a decision for Edward Troup alone, and not a matter for Jon Thompson—

              Sir Nicholas Macpherson: As I say, we will come forward with proposals on the tax assurance commissioner, and no doubt what this Committee has said over the years will inform decisions on that front. The reality is that both Jon and Edward are commissioners and if you look at the Act, it doesn’t actually distinguish between commissioners when it comes to collecting and managing taxes. All the commissioners are charged with that responsibility. Equally, however, we need to satisfy you that sensible arrangements are in place and as soon as we have agreed a way forward on the tax assurance commissioner, I am keen that this Committee should be informed.

              Q7 Chair: We will certainly want an early hearing, to work out how they manage their accountabilities and responsibilities between them.

              Sir Nicholas Macpherson: Good. I would encourage you to do that.

              Q8 Chair: I am sure that someone will be alerting them to that request.

              Sir Nick, before we move on from you, as I said earlier you are leaving the civil service after a long period of service, including a particularly long term as Permanent Secretary at the Treasury. Are you able to tell us yet who will succeed you, or when we will know that?

              Sir Nicholas Macpherson: My friend here—Sir Jeremy—is interviewing some of the candidates this week. You never know with Permanent Secretary appointments. They can often go into a black hole for many months. I rather hope that in this instance—

              Sir Jeremy Heywood: Not under this regime.

              Q9 Chair: I hope that Sir Jeremy Heywood can assure us that that isn’t the case for this particular role.

              Sir Nicholas Macpherson: I would be slightly disappointed if we got through next week without an announcement being made.

              Sir Jeremy Heywood: We are interviewing this week. Our recommendations will go to Ministers probably at the end of the week, and hopefully we will get a decision in the next week or two.

              Q10 Chair: Okay. So we need to press Ministers by the end of the week to make a decision.

              Sir Jeremy Heywood: I don’t really want to have a situation where Nick leaves the Treasury without a successor in place.

              Chair: On that note, let us agree. I am going to hand over to Karin Smyth, who is going to lead our questioning on the main subject today.

              Q11 Karin Smyth: As you will appreciate, this Report is different from some of the others, but it absolutely goes to the heart of what this Committee wants to do. I know that other people will want to chip in across the range of Government Departments. First, to all of you, we are interested in which accountability gaps worry you most.

              John Manzoni: We have a lot of rigour in this system around accountability. That is not to say that it isn’t an evolving picture. The world continues to move, so we have to continue to be aware of some of those evolutions. I am not sure they are gaps, so much as evolving complexities.

              From my perspective, clearly some of the functions, central initiatives and spend controls make accountability more complex; I can assure you that it is not something that Permanent Secretaries wave past. As one introduces central initiatives or cross-cutting themes, I spend a lot of my time talking to the Permanent Secretaries about who is accountable for what and how it changes the accountability. I have said in front of this Committee before that the primary accounting officer is always ultimately accountable for his or her outcome. Those are complexities, not gaps necessarily.

              Sir Jeremy Heywood: I would agree with that. It is difficult to point to particular gaps. The area where the Report is strongest, if I may say so, is on whether some of our processes need more vitality and more life breathed into them, or whether they are just box-ticking. I think that is an unfair characterisation, baldly put, but we could bring one or two of them, such as the accountability systems, to life more. We could perhaps have more annual processes, reviews and so on.

              I think we cover all the ground, although, as John says, it is a constantly evolving picture, so we are always catching up with new initiatives and so on and making sure the accountability arrangements are fit for purpose. Fundamentally, I think we cover the ground pretty comprehensively, but the issue is the intensity of effort that goes into each bit of it and how to make sure that remains fresh and never becomes a boring piece of routine that doesn’t serve any useful purpose any more. That is what we have got to keep asking ourselves and challenging ourselves about.

              Sir Nicholas Macpherson: I really enjoyed the Report—as I would expect for anything that Sir Amyas Morse is involved in. It made a number of points that, in one sense, people seem to have been making ever since I joined the civil service—namely, that government has become a lot more complex, the civil service is a lot more politicised and special advisers are a lot more powerful. It is axiomatic that comment is always in those directions, but it is not something that I really recognise.

              I am not sure that government is more complex. Successive Governments change the deck chairs—they centralise, decentralise, devolve and concentrate power—but the landscape is not hugely different from the landscape in, say, the middle to late Tony Blair period. I say that as a preface, because it is always tempting to think that it’s all terribly difficult, but I don’t think it need be.

              Picking up on the others’ points, do I lie in bed worrying about accountability? I worry a bit, because you have to worry when responsibilities are shifting and the deckchairs are being moved. You have to ensure that accountability doesn’t fall through the cracks, rather like money. So when things are being devolved it is worth focusing on those issues, working through where the money is going and who is ultimately accountable. I am perhaps a bit more optimistic than the National Audit Office that these things are broadly under control, but I fully recognise that we should never be complacent.

              Q12 Karin Smyth: You appreciate that we are concerned, particularly, about devolved funding and the cross-cutting themes that we have looked at—for example, we looked at care leavers. What do you think accounting officers need to do to improve their oversight? If we look at figure 12, on page 35, I think you have led quite nicely into that complexity. Talk us through what AOs can do to improve their oversight in what I think we think is this increasingly complex system.

              Sir Nicholas Macpherson: We had this review in the last Parliament, carried out by that very fine public servant Bob Kerslake, which was on how you marry accountability with devolution. He prepared a report on the back of which we have sought to prepare accountability statements—all accounting officers should understand how the system fits together. I think that has potentially been put into starker relief with the abolition of the Audit Commission, simply because in the old days the Audit Commission was in a position to review local services.

              Accounting officers have to be responsible and accountable for the system as a whole. I am in no doubt about that. If the system itself is not working or is leading to poor value for money, they should be in the firing line. For example, if you devolve accountability to 20,000-odd schools, the issue is how the accounting officer satisfies him or herself that those schools are providing value for money. More to the point, because Parliament is the ultimate guardian of the taxpayers’ money, how does the National Audit Office and this Committee satisfy themselves that value for money is taking place?

              I have always been of the view that in the modern era the NAO needs to drill down a bit and learn from individual failures, which might just reflect bad people, but might be a thing we need to understand where it is a reflection of the system failing. I find something persuasive in this Report. We introduced accountability statements about five years ago, and some have received more attention than others. Personally, I want to use the Report as a means to strengthen those statements to ensure that the Treasury plays a bigger role in challenging them and that we review them more regularly.

              Q13 Karin Smyth: To come back on that, the NAO has said that essentially those accountability statements are becoming a compliance exercise and that most Departments are not using them. Do you disagree with that statement?

              Sir Nicholas Macpherson: I think I do disagree with it to some degree. For example, Melanie Dawes, the accounting officer for the Department for Communities and Local Government, appears before this Committee quite often, and she has put a lot of thought and effort into reviewing her statement and seeking to understand how devolution to cities and so on is consistent with that statement and where it needs to change. That is a classic glass half-full thing; I am a bit more optimistic. I am keen that we harness the pressures, or the proposals, in this Report to improve the system.

              Q14 Karin Smyth: Sir Jeremy, would you want to comment on the compliance question?

              Sir Jeremy Heywood: If the question is, “What should accounting officers do better or differently?”, of all the things in the Report, I would probably highlight the area I feel most strong agreement on, which is the work on robust performance and cost data. If I have got one bugbear since becoming the head of the civil service a year and a bit ago, it is the quality of the performance data and cost data. I think it comes up in so many of your Reports and so many of the NAO’s Reports and we discuss it a lot around the civil service board table.

              If I was going to pick out just one that I think would make the biggest difference it is being more conscious of the importance of having not just clear objectives and so on as one of your other essentials but having proper data to underpin that, including costing data. The Treasury has just set up a new costings unit, so we are going to try to prove both the costings side of this and the performance side. John can talk to you about the single departmental plans, which I think are a way of getting the first of your essentials.

              So, as I think Nick said, we welcome the pressure. We like a lot of the recommendations in this Report—at least directionally, anyway—but the one I would personally put the most weight on of all would be the data.

              Q15 Mr Bacon: Sir Jeremy, on that point, the lack of good performance data and the lack of good cost data are among the hardiest of perennials. You guys have been running the civil service for many years and your predecessors before that. Those points, the ones you have just identified as being a bugbear, have been around since Methuselah. Why has the civil service as a system failed to produce good cost data and good performance data? That is your job.

              Sir Jeremy Heywood: I don’t know the answer to that question.

              Mr Bacon: You don’t know the answer.

              Sir Jeremy Heywood: I don’t know why we haven’t done as well as we should have done. I don’t.

              Q16 Mr Bacon: Do you think it is someone else’s job? Is it the Secretary of State’s job?

              Sir Jeremy Heywood: No, I think the civil service should take responsibility for this.

              Mr Bacon: So do I.

              Sir Jeremy Heywood: I think it is definitely something that we should do better in future.

                            Q17 Mr Bacon: A Secretary of State coming into a Department ought to be able to have, at his or her fingertips, supplied by the civil service, good performance data on the Department that he or she has just inherited responsibility for, and good cost data—yes?

              Sir Jeremy Heywood: I agree.

                            Q18 Mr Bacon: Why has it not happened for many, many years—not two or five years, but 20 or 30 years?

              Sir Jeremy Heywood: I don’t know.

                            Q19 Mr Bacon: You don’t know. Sir Nicholas, do you know?

              Sir Nicholas Macpherson: It is easy to think that somehow we have just been ignoring this; we have not.

              Q20 Mr Bacon: I did not say that. In fact, it has been talked about repeatedly, so it would be hard for you to have ignored it.

              Sir Nicholas Macpherson: Exactly. And over the years we have made a large number of efforts to improve our performance data. In some areas where successive Governments have remained very focused on a particular indicator, those indicators have become very well embedded. So, to use an example: three-month waiting times for an operation—that has been a target or a standard now for I think about 15 years and there is pretty good data on it. There is also pretty good data on waiting to be seen in A and E or by a GP. It is where objectives change and priorities change and priorities shift that it becomes more complicated.

              For example, dealing with a school: how many performance indicators is it sensible to ask a school to produce? There are trade-offs there, because as with local authorities under best value, you can rapidly end up with 415 indicators. So you tend to get the pendulum shifting that at one moment you are asking someone to produce lots of bits of information and then a new Government comes in—I really don’t want you to think that I am blaming it all on politicians because I think we must share responsibility—and says, “There’s too much bureaucracy. We are collecting the wrong information. We’re going to have some simple new system.” You introduce a simple new system but people are not very good at remaining focused, because inevitably new priorities arise.

              Q21 Chair: Sir Nicholas, you say that and we as a Committee are very alert when we make recommendations about data—I think we have done this in pretty much every Report we have produced this Parliament—that we do not overload the system with something that is impossible to collect. So in your view—

              Sir Nicholas Macpherson: I am not just being sycophantic, but I think this Committee probably has a more advanced understanding of what obstructs better public service delivery than the vast majority.

              Q22 Chair: I hope we do, but I would ask you, then, what are the three key areas that the civil service or the Government Department should be focusing on to make sure that data collection is better? As Richard Bacon said, it is not rocket science. It has been talked about for a long time and we have still not got there.

              Sir Nicholas Macpherson: Where I think you can and should challenge the civil service is that it really needs to understand the cost drivers behind particular programmes. There should, at least, be robust data underpinning those. We have made quite a lot of progress in areas where objectives have remained pretty constant. We have made less progress where we have flip-flopped on centralisation versus decentralisation. That is not an excuse. It is a good challenge and the Treasury is, at the moment, putting quite a lot of resources into getting a much better grip on costing more generally.

              Sir Jeremy Heywood: I echo what Nick said at the start. We have got much better over time on performance data. As Nick says, in areas where ministerial interest has remained constant over time on the same set of indicators, we now have pretty robust data. Different politicians, not unreasonably, want to focus on different things so that chops and changes a bit but, fundamentally, we are getting much better at performance data.

              We are not anywhere near as well developed on cost data and unit cost data. The Treasury has recently put more capacity into that, which is very welcome. The single departmental plans, which John might well want to comment on, will help us again in consolidating what the centre is asking for with what Departments are already producing for their own business purposes. Then we can concentrate on a smaller subset of data, which we can ensure is good enough for everybody’s purpose.

              Both the centre for performance management and the businesses themselves are running their own businesses. We are on the case. It is a perfectly good challenge but I would not want you to think that we are not doing anything about this and that it has not improved over time. It manifestly has.

              Q23 Mr Bacon: Mr Manzoni, you have spent most of your life in the private sector where good cost data and good performance data are critical for survival. It is also true that chief executives and senior directors of businesses come and go and that they have different priorities that change—some things become more or less important. Now that you have been inside the public service for a couple of years or more, what is your take on why we have been historically so bad on cost data and performance data?

              John Manzoni: I cannot comment on history but—and Jeremy just mentioned this—these single departmental plans bring together the outputs and the inputs. It is the judgment about how much output can be delivered with a certain amount of input that is key to performance, otherwise they are just wish lists. Those judgments cannot be made from the centre; they have to be made at the point of delivery because that is the only person who understands what it takes to deliver certain services outputs. I am not quite sure why those two things have not been brought together in the past, but this year they have been brought together.

              As I have said here before, I do not think that we will get them in one go but they will embed a set of judgments through the system that allow a much sharper understanding of performance distributed through the system. You cannot manage a massive, complex and distributed system like we have in Government from the centre, especially with a very small group of people in the centre. You have to find ways of distributing that. That awareness and understanding of performance of the delivery of a service and the performance of the meeting of certain milestones through the vehicle of the single departmental plans will be improved over time. We have to stick with them because I do not think they will get it first time around. But, as a very small example, even in the Cabinet Office we are now making judgments about which milestones can be met with a certain headcount within a certain budget, and that is a distributed process.

              I do not believe that data ought to flow directly from the front line into the centre. It needs to flow up the line to the Department, Board and Executive Committee. That is the muscle we need to strengthen here. This is more complex because in a business it basically starts with a P and L. I used to get monthly a P and L account. From the P and L, you would then drill down and start inquiries around all the aspects of performance that the P and L started to indicate were going off track. Here, we have costs, of course—we do not always have profit indicators, but we certainly have cost indicators—but we also have many, many other objective functions, and that is making it much more complex. It is a more complicated process here.

              Q24 Mr Bacon: The NAO is pointing out to me that financial management reform was launched two years ago and should have achieved a lot, but has moved slowly. I would point out that the financial management initiative started in 1982, which was 34 years ago. When you read it, most of it looks like motherhood and apple pie, yet here we are 34 years later, or two years later, and still a great deal remains to be achieved.

              John Manzoni: I have no idea about 34 years ago, but I can say that in the course of the last 12 months, I have been in various discussions with the Treasury: for instance, clarifying a common chart of accounts for certain cost things. That common chart of accounts can now in turn be fed into the basic core information systems that flow from the Department into the Treasury, and it is those core information systems that we will now start to use to measure the efficiency of the Government, how the resource allocations are going and all those sorts of thing. This takes a long time in any system. It certainly takes a long time in a system which has not had a common chart of accounts in the past.

              Sir Amyas Morse: I do not want to be ungracious about this, John, because I think you are doing a lot of good things, and you know I think that. But the Committee is also accustomed to hearing what I call “hockey stick speeches” about how everything good is starting now, or just a little bit in the future.

              Frankly, every fashionable change in data by a different manager has always involved most of the same stuff at its core. It hasn’t changed very much. If you really want good data at the core, you can get it pretty quickly. You just need to put some real determination behind it, get it moved up the agenda and start people making decisions based on objective evidence. We do not see all that many examples of that, frankly, so I think quite a lot more could be done by putting a lot of determination behind your efforts to move it forward against clear objectives. That is part of the plan as well, I believe, isn’t it? This is all quite achievable.

              Sir Nicholas Macpherson: I think it is quite achievable. I think you and Mr Bacon are being—it is easy to say that nothing has changed. Actually, a huge number of things have changed. Back in the 1980s when the financial management initiative started, we still had the Gladstonian accounting system, which had its merits; it was all in cash. The move to resource accounting and to whole of Government accounts has been a monumental exercise. As a result, we have a more comprehensive system of accounts in this country than in any country in the world. As a result of that, we have a far better understanding of how money is spent, and we now need to build on that.

              Again, I am not as pessimistic. I totally take your point about people saying, “This time it’s different.” I am not going to persuade you today that somehow we have solved all these problems, but I think we can. Another area where we have made huge progress is in-year forecasting and monthly financial information. When I joined the Treasury, quite frankly, in-year calculations of spending were utterly hopeless and ill-informed. We are in a much better place. Again, the co-operation between the Treasury and the National Audit Office has been very constructive in that space. So I accept the challenge you are making, but I think it is one we can rise to.

              Sir Jeremy Heywood: Let me just add to that. Nick and I are both old enough to have been around in the 1980s. There was no performance outcome data. In the public expenditure round in the 1980s, we never discussed outcomes at all. It was just never part of the conversation. So we have come an awfully long way, not just in the financial management ways that Nick described but in terms of focusing on what we are getting for our money. The performance data may not be perfect—it isn’t—but as Nick said earlier, in areas such as the NHS, crime data or the performance of the police force, schools and so on, at least we actually have the rudiments of a performance outcome system.

              The issue is putting that together with the cost information for individual new policies that bear on that. What is this particular policy going to add by way of performance improvement? That is what we have to focus on, not the outcomes of the whole system.

              Chair: That very much chimes with the aims of the Committee. I am going to bring Karin Smyth back in, but I think we will return to this subject later.

              Q25 Karin Smyth: We moved on, but the Report says in paragraph 2.4 on page 41 that the Government “has accepted that there is no clear link between the current budgeting system and achievement of results and outcomes”. Is your view that the departmental statements will resolve that problem?

              John Manzoni: The single departmental plans are matching, as I said, inputs and outputs. That’s actually quite an important move and will become increasingly important, because as you do a set of outputs with increasingly constrained inputs, you have to start making choices and flushing out what the priorities are.

              The only way of doing that is to be really clear. As a system, we are not always very good at calling priorities, but these plans are at the core of enabling our system, the civil service, to say, “That is a bust. We can’t actually do that extra ask, because there simply aren’t any resources to do it.” There will then be a debate about how efficient we’re being and all of that, but for that very reason the single departmental plans represent a very important move.

              Q26 Karin Smyth: All three of you have talked about the plans, but can we come back to the accountability system statements? Will you commit to ensuring that all Departments have accountability system statements?

              John Manzoni: I need to look to the Treasury for that.

              Sir Nicholas Macpherson: I see attractions in that proposal. Obviously, the ones with the most complex systems already have statements. The only reason I pause is that if you’re a Department with no agencies or very few agencies that is directly providing a service to the public—

              Q27 Chair: Which is DWP these days.

              Sir Nicholas Macpherson: DWP kind of comes to mind. I just wonder—

              Q28 Chair: Isn’t that the only Department?

              Sir Nicholas Macpherson: HMRC has the odd agency. They will have framework agreements with some of their agencies, and we could wrap those up in a statement. We just need to proportionate here. What I don’t want is to require every Department to produce a one-size-fits-all, 200-page statement, which really will begin to fall foul of Amyas’s criticisms, but I see this very much as a direction of travel. I am attracted to the idea and want the Treasury to be proactive in helping Departments get their heads around such issues, but then providing a bit of challenge. I would hope that the NAO would independently provide some challenge.

              Q29 Karin Smyth: We talked a little about the DCLG and the city deals were looked at in this particular Committee. How do you know what goes on at a local level?

              Sir Nicholas Macpherson: In the case of city deals and so on, I am pretty dependent on the accounting officer at the Department for Communities and Local Government, whom I would hope and expect to develop an accountability framework that enables you to know the answer. I think we have made good progress on that front, but from reading the PAC Report, we clearly need to go further in satisfying you that we have the information you need.

              Q30 Karin Smyth: How are you going to do that?

              Sir Nicholas Macpherson: First, with every new bit of devolution it is important to have a clear statement of where the accountabilities are and of how we are going to get the performance information necessary to satisfy Parliament that we are making progress. Sometimes that will sound difficult, and obviously where you are devolving new powers it is going to be a challenge, but the fact is that we have pretty good information about what goes on in, say, hospital trusts—increasingly, we are going to have good information about what the school system is delivering—so I think it can be done.

              Q31 Chair: Can I touch on the hospital trusts point before I come back to Karin? Obviously, we have done a recent inquiry, and the NAO has done one of the hardest-hitting Reports I have ever seen from the NAO, which is saying something, about the management of funding.

              It was evident to many people in the system, including finance directors and chief executives of trusts, that there was going to be a problem this year financially. You talk about good information from hospitals. The information was there, but two thirds of them, as of now, are still in deficit. If what you say is the case, the system is still not working and we still have everybody still in charge of the funding bodies and departments as before, so the accountability is questionable.

              Sir Nicholas Macpherson: Accountability is clear, in the sense that people have budgets and, ultimately, they have to live within them. If we have information that they are all overspending, it is providing precisely the information you need either to take corrective action or to admit defeat.

              Q32 Chair: Which does the Treasury do in this case? Will you be admitting defeat, or are you taking action?

              Sir Nicholas Macpherson: No, the Treasury never admits defeat. I remain optimistic that we can control spending in this space.

              Q33 Chair: In all seriousness, this was predictable. That is what worries us on this Committee.

              Sir Jeremy Heywood: On this one we have taken quite significant corrective action. We have significantly improved the control framework by introducing a new organisation called NHS Improvement, which has much more of a grip on the provider side than its predecessor bodies, as it were. Patrick Carter, Lord Carter, did a big review of the efficiency of the provider side. Action has been taken to curb the costs of agency staffing. A significant amount of corrective action has been taken precisely because the data told us that we were heading for a major problem.

              Sir Nicholas Macpherson: Exactly, whereas in the old days, back in the 1980s, we would not have had the data. What would have happened is that the overspend would emerge ex post. We have better monthly information now, and it allows us to take action.

              Q34 Chair: A bit late in the day.

              Sir Nicholas Macpherson: It may be late in the day, but we will see.

              Q35 Mr Bacon: Sir Jeremy, when you said NHS Improvement, were you referring to the new body that sits as an umbrella above Monitor and the Trust Development Authority?

              Sir Jeremy Heywood: Yes.

              Q36 Mr Bacon: Have you ever asked yourself why it was that these other bodies, Monitor and the Trust Development Authority, didn’t perform in the way you wanted them to perform so that they had the data available? That is what they were there for.

              Sir Jeremy Heywood: Yes, I have certainly asked myself that question, and the Department certainly has, too.

              Q37 Mr Bacon: What answer did you come up with?

              Sir Jeremy Heywood: It is still work in progress, because we are trying to deal with the issue in hand, as opposed to dealing with post-mortems. Fundamentally, among many other things, it didn’t have the people with the right financial management capability. It didn’t have that focus. In addition, there were issues such as the freedoms given to the foundation trusts. The culture that then developed in Monitor to make that decentralised model work was given more priority than financial control for a period of time. There was a whole panoply of—

              Q38 Chair: Was it not that they perhaps just didn’t have enough money in the first place? Was it not that the efficiency saving, as Simon Stevens indicated at a previous hearing, was too steep at 4% a year and that 2% is about the right figure? I may be slightly misquoting him.

              Sir Jeremy Heywood: Relative to other public services, the NHS has been pretty well resourced in the last few years, so I wouldn’t look to that.

              Sir Amyas Morse: I think it is fair when we are defining accountability. Accountability does not mean simply knowing how much cash or resource has been spent; it also has a value against a task requirement. In the case of health, as we heard in the previous hearing, very considerable burdens of care were being placed on trusts. Trust boards were having to make decisions between the risks they faced from CQC in terms of quality of care, and being held to account for that, and the risks they faced in overspending their budget. In large numbers they voted in favour of overspending their budget, by their actions. Now, I do think being provided with some means of reconciling requirements is part of good management, wouldn’t you say, rather than being left with unreconciled requirements—one of providing medical care and the other of complying with a budget?

              Sir Jeremy Heywood: Of course. As put, I have to agree with that, but I think Patrick Carter’s review shows perfectly well that most hospitals in Britain, or at least in England where he was focusing, are not at the efficient frontier.

              David Mowat: I have listened quite carefully to the two things that you have answered on that—first of all, health being well resourced vis-à-vis, I guess, other parts of Government, though not necessarily health in other countries: but when you have a system which has 80% of the components in it with an overrun, which is what has happened here with acute trusts, that implies there is a systematic issue. It does not imply there is individual management failure at various hospitals. So that is the situation that has arisen here.

              The question that arises—that situation having arisen—is where the accountability is for it. Accountability is about holding people to account, in the end, and that has got a whole set of things that I am not really hearing a great deal of clarity on, and I am just interested in that case: a systematic problem has arisen—not an individual one. Who is accountable to you? And by the way, as far as I am concerned, this Committee is a backstop. We are not the main source of accountability. That must be the management and the civil service. It must be that. Who is accountable for that systematic failure, since we are talking about the health service, that has occurred there, in your view—and what action should be taken?

              Sir Jeremy Heywood: Well, some combination of the Permanent Secretary at the Department of Health and the chief executive of the National Health Service have overall accountability for that system, because it was a system issue, precisely as you say. That is why action has been taken to change the regulatory arrangements by putting in place the NHS improvement and to take cross-cutting policy initiatives like the initiatives being taken against agency staffing costs and so on.

              Chair: We do not want to repeat all the things that Simon Stevens has said.

              Q39 David Mowat: If you take agency—I will just say this and we will move back: most of the overrun on agency is a volume overrun, not a rate overrun. There is a bit of a myth. It was very clear in our last hearing on all of this stuff. The volume overrun has occurred because the headcount analyses were just way off, and there was just a systematic failure. So actually that is an excuse. That is not accountability.

              Sir Jeremy Heywood: I have not seen that Report, so—

              David Mowat: All right, but what I am saying is agency is what people use: that is an excuse, not an accountability. That is a cultural point, because you can have a culture in which an excuse is just as good as getting where you should have got to, and if we have got that culture it is worrying, isn’t it?

              Sir Jeremy Heywood: No. I think the culture we have got is exactly right, which was to see this problem coming in the data and to take decisive action over the last year to try and change the direction of the trend. The meetings I have sat in with the Treasury, and with John and others, suggest that it was a price effect, not just a volume effect, when it came to agency; but I have not seen this Report that you are referring to, so we will just have to agree to differ on that one.

              Chair: That was a Report we previously considered.

              Q40 Karin Smyth: I think that is a helpful point to come back to, on the culture, because I have only been a member of the Committee for a few months, and it strikes me, when Permanent Secretaries have come before the Committee and we have talked about local issues in the NHS, and devolution and so on—actually the cultural gap between the centre and, now, what happens locally, is quite stark. The awareness is not always there, perhaps, of people’s experience and where people have come from.

              If we can come back to figure 12, Mr Manzoni, I think on my first question, when I asked what worries people, you talked about cross-cutting initiatives; but there are a number of other developments in figure 12—the creation of Government companies, for example—that I think it would be helpful to have a view on. We can talk about the devolution to local areas, devolution to Scotland and outsourced service deliveries; and this Committee has, again, looked at companies like Serco and G4S, and so on. None of you mentioned those as areas of real worries or concern, but I think they are. I wonder if you would like to revisit that.

              John Manzoni: Let me comment on one or two of them, on your figure 12. On outsourced service delivery as an example, we have had a lot of conversations in this Committee and elsewhere about how the focus of the Government has been too much on the act of procurement and not enough on either the market set-up or the management of that procurement, its having been procured. That is the whole commercial agenda, which is the biggest priority for the civil service, to rebuild commercial skills across the civil service. There is no question that when we do—and, by the way, when the civil service is getting smaller, because the demand for services is not getting smaller, the demand for services is rising—it means that we have to use the private sector increasingly. That is a pattern I can see going forward. So that puts a very high imperative on saying, “We’d better get smarter at the management of the interface between the public sector and the private sector.”

              There have been examples where, for whatever reason, we have not maintained the quality of our commercial capability inside the civil service, and that is our biggest single priority right now, to rebuild it quickly. So I believe that, in the management of outsourced service delivery, that is an absolute imperative because if we are not concentrating, you can bet the private sector won’t concentrate. We have to get that right, and there have been some high profile failures in those things and we have to stop that. That is some of that.

              On some of the other ones here, if you have a system that is going in steady state you can be really clear with accountability. Steady state—going in a straight line—you can be really clear with accountability. If you want to change the direction, you have two choices. You either temporarily change the accountability in order to change the direction, or you deploy capability into the existing direction, which has a different perspective to the existing direction and will change the accountability for you. Those are the only two choices, or you achieve some consensus.

              If you are in a black and white world, you’re either accountable or you’re not. If I’m accountable and I don’t feel like changing, I won’t change. If I’m not accountable, and if someone else is temporarily accountable, then they can change it to me, but that leads us into a world of complexity. For me, wherever we introduce cost-cutting initiatives that is much, much better, which is, of course, why the actions of the centre as it relates to the Departments is so, so important. It is much better to achieve a form of collaboration. It will be dictated by the level of convergence that we can achieve. It will be dictated by all sorts of things. It will be dictated by the validity of the arguments being made by the centre versus the Departments.

              All of those things will matter, but we have to achieve an environment in which, collectively, those people who want to change the direction have a conversation with those people who are accountable for the delivery of the business and reach agreement about the pace of that change. That is, of course, a natural tension in a system. By the way, we are in a state of change because the civil service is getting smaller and it needs fundamental transformation in order to get there. That is a state of significant change. That is why this is complicated. That is why the centre needs to have extraordinarily experienced people in it, because the judgments about the pace at which to drive that change are absolutely critical.

              You cannot change the direction of a system, but what you do not want to do is put accountability into the centre for a big piece of business delivery that is being delivered on the ground, because that would lead us into a world of trouble. We have to create those collaborations; that is why we are building functions in the centre that have to be full of very wise, very senior and very experienced people. It is only those people who can create that level of collaboration that can adjust the direction. In this case it is pretty profound. We are fundamentally changing many of the processes by which services are delivered—

              Chair: Mr Manzoni, I do not want to cut you off but I think that we have got the point. I know you are enthusiastic about it but I am going to hand back to Karin Smyth.

              Q41 Karin Smyth: Let’s go back to figure 5 on page 17, because that leads us into the expenditure and flows within Government. What you are talking about there is being in a steady state and then it becoming more complicated because the civil service is getting smaller, whereas both this figure and figure 12 show what different things are going on in different parts of the system.

              The areas of concern we have—people might want to jump in—are the NHS, education, private companies and the contracted-out areas. For example, on the NHS, we have organisations like NHS Property Services that are very powerful, centrally run bits of the system; the Department of Health may be the only shareholder. They may cause a great deal of upset locally, but they are run totally from the centre.

              John Manzoni: From the centre of the Department of Health?

              Q42 Karin Smyth: Yes. Is that an example of what you were saying about needing to have better control in the centre, or can they totally operate locally?

              John Manzoni: For instance, let’s take property. Because of the accountabilities, we have to change—we are doing this in the centre of Government as well. We are setting up a new property model for the centre of Government, such that the incentive structures for the accountable parties are aligned with what we need to do—in this case, to release large amounts of property. There is no point in trying to say, “You’ve got to sell the property.” If there is no financial incentive for you to do so, why would you? I think the property currently sits on our balance sheets as historic cost.

              We have to set up the incentive structures. Smart management of the property services company, for instance, would set up such incentive structures, which is what we are doing in the centre of Government, so that it is in the accounting officer’s interest—that is quite a complicated thing—to reduce their property portfolio and get into smaller property. That is the whole structure. That is how you effect fundamental change in this case without cutting right across the lines of accountability. That is part of the discussion going on around property across Government.

              Q43 John Pugh: I want to take you back to devolution for a second or two. Some devolution arrangements are what you might call constitutional arrangements, like Scottish devolution. Others are deals, negotiated in the dead of night by council leaders, Permanent Secretaries, Ministers and so on. Does that make a difference to the accountability? If, for example, things go wrong in Scotland, we may be fairly clear about where the responsibility of the Scottish Government lies and where the responsibility of the British Government lies, but if devo Manc screws up, is that because the Department has got something wrong or is it because locally they have got something wrong? Who would be accountable in that situation, if it failed to achieve its original objectives?

              Sir Jeremy Heywood: It is difficult to give a definitive answer to that.

              John Pugh: That is quite the issue, isn’t it?

              Sir Jeremy Heywood: It would rely on the circumstances, but you are right that we should look at each of these things differently. This Report does not really give much weight to the role of the Scottish people holding to account the Scottish Government, or local authority electors holding local authorities to account and so on. That is a very important accountability mechanism in all of this stuff, but it is taken as read in a way. City deals, on the other hand, are very much a negotiation between central Government and local government. As Nick said earlier, Melanie Dawes, as Permanent Secretary for the CLG is the accounting officer for that system as far as we are concerned. Each of these things is distinct and different.

              Q44 John Pugh: Can we accept the general premise that the line of accountability for city deals—devolved deals—is more muddy, if we can put it like that, than it would be if there was a genuine constitutional state settlement of some kind between local and central Government?

              Sir Jeremy Heywood: I would not say muddy; I would say complex.

              John Pugh: More complex. Okay.

              Q45 Deidre Brock: I was interested in the relationship with Parliament and Ministers, which is talked about quite extensively in the Report. To start with, I was interested in the whole concept of ministerial directions. I noted on page 26 that there were no ministerial directions in the last Parliament but that there have been eight already in this one. I wondered why that would be.

              Sir Nicholas Macpherson: First, there were some in the last Parliament. I think there were three.

              Q46 Deidre Brock: Some happened just before the election.

              Sir Nicholas Macpherson: Yes, some happened before the election.

              Q47 Deidre Brock: But there is quite a noticeable gap, isn’t there, where nothing occurs?

              Sir Nicholas Macpherson: It’s interesting. There was a watershed, in a funny sort of way. Governments on the whole do not like asking for too many directions. There can often be good reasons for making a direction, but I think the last Government sought for a long period to avoid this. Then it reached a point where its policy priorities were such that, for example, on funding the Hatfield Colliery Partnership, in January 2015—it obviously—I can’t imagine why—decided that that needed to be supported; the accounting officer took a different view. Once you have been through a direction, you suddenly realise that actually there is rather less mystique to all this than either party ever thought, and only limited opprobrium attaches to a Minister who gives a direction, so you are likely to get a few more of them. That would be my interpretation of why that happened.

              Sir Jeremy Heywood: I don’t have much to add to that, really. For whatever reason, during the coalition—certainly in the first few years, anyway—there was just a view on both sides of the coalition, or on each side alternatively, that we should try to avoid accounting officer directions. Plus, a big factor that is missing from the Report is the whole context. The context of the last six years has been one of extreme focus on austerity, on cutting costs, on reducing budgets, on securing better value for money. There is a whole theme running through this, which is that politicians don’t care about value for money or don’t care about economy. That is just not true. For much of this six-year period, Ministers have been driving civil servants to look for ways of reducing money, reducing costs, finding value for money and so on. That is a very important piece of context.

              Q48 Chair: I will bring in the Comptroller and Auditor General here.

              Sir Amyas Morse: That really isn’t a theme running through the Report, if you don’t mind my saying so. [Interruption.] No, that’s not a theme running through the Report.

              Sir Jeremy Heywood: That’s not my point—

              Sir Amyas Morse: We are just making the point that the dynamics have changed. That is not the same as saying we think politicians don’t care about value for money. We are simply saying that the dynamics between pressing policy forward and value for money in the hands of the AO have changed, and there is quite a lot of objective evidence to support that. Whether you agree with it or not, to just casually say we think that Ministers are anti-value for money—that’s just not what the Report says.

              Sir Jeremy Heywood: I agree with you in a sense. I am saying that the Report does not really set out the context in which the last six years of government have been operating, which is one in which we have been trying to find significant savings in public spending, significant reductions in costs and so on, so politicians have been supporting efforts to drive economies and have been very alert to value for money. On both sides of the coalition, when you are trying to argue about the priorities, if the Permanent Secretary is coming along and saying, “Actually, that particular project doesn’t look as though it’s going to offer value for money,” there might have been a more willing acceptance of that and therefore less need for an accounting officer direction, but this is a very imperfect indicator, as you know very well, of the extent to which Permanent Secretaries are raising value-for-money issues.

              Sir Nicholas Macpherson: Another point I would make is that in one sense you are implying that 2010 to 2014 was exceptional. It was, but so was 2008 to 2010, simply because of the extent of the financial crisis. The perfectly legitimate determination of the then Government to intervene to support economic activity, with novel and inevitably contentious interventions, created an environment where a lot more directions were sought and given. Actually, that took place in a perfectly good spirit—and sometimes the accounting officer is wrong; I am quite happy to say that. I sought an accounting officer direction on the asset protection scheme. It was something that actually the Government made a small profit on, and some of my concerns I don’t think were ever realised, so Alistair Darling was quite right to direct me—in fact, I slightly regret asking for a direction in that space. Circumstances change. My guess is that we are now in a far steadier state, because Governments evolve and at a point when they are very much in austerity mode you are less likely to encounter accounting officer issues. At the point that they start to use industrial policy as a way of supporting the coal industry, my guess is that value-for-money issues will arise more often.

              Q49 Deidre Brock: I have to disagree that the option is not a fairly dramatic one. Lord Butler—who was of course Cabinet Secretary some time prior to  you, Sir Jeremy—described it as being almost like the nuclear weapon. I noticed that a lot of these seemed to be on smaller value programmes, rather than when really big sums of taxpayers’ money are at risk. One of the things that we looked at recently was the Border Agency’s computer system mess. Many millions of pounds were spent, multiple spending decisions went wrong over many years and it is still not fixed, but no one seems to have raised it. It just is what it is. Why wouldn’t the AO have raised that particular case?

              Sir Jeremy Heywood: I would have to look into the deep circumstances of that specific case to comment on it, but I think it is true that, on the really big projects, on the whole if a Permanent Secretary goes to a Minister—it will be a long, drawn-out process, by the way, not just a single moment in time—and says, “We’ve got fundamental questions about the feasibility of this project or the value for money,” if it’s a very big, prestige project, that is much more likely to get resolved through discussion and stretching out the timetables or descoping than it is to culminate in an accounting officer direction.

              Q50 Chair: Isn’t it sometimes to do with the fact that if you have a project—I appreciate that even you, Sir Jeremy, may not know the details of every project in Government—that is a long-term one, with different milestones at different times, who has the overreach across the time period and the breadth of the project? Isn’t that an issue when it comes to accountability through a single accounting officer?

              John Manzoni: Many of the examples that were used in the Report, of course, are quite old. There is no question that we have made mistakes in these big projects, and there have been some quite big mistakes. By the way, there have been some quite big mistakes everywhere and not just in Government, as I have said before. People make mistakes and therefore it is not necessarily the correct conclusion to say, “Actually, because in hindsight this was a monumental mistake, somebody should have asked for a direction,” because, of course, looking forward it always looks rather different.

              There is a combination of factors in some of these examples that are given and indeed in these big projects: some of them are about our capability or our experience, which of course is why we are building the major project stuff and all the things going on to rebuild that capability, because the fact is that sometimes we wander into these big, complicated projects and we do not have the skills and the capability—nor, by the way, do the private sector partners who we employ to help us. Therefore, when you look back, you say, “Oh, that was a mess. Why did you let that happen?” and the answer is, “Well, because we didn’t know it was going to be like that when we were at the front end of it.” So I do not think it is always a lack of asking for a direction that, in retrospect, results in some of these projects happening. Therefore, all of our focus is on building capability, on building the major projects and on early interventions on all those things.

              Q51 Chair: I will bring in the Comptroller and Auditor General very briefly, if that’s all right.

              Sir Amyas Morse: You say, “No, we don’t think the answer to all that is seeking a direction,” which is why we think the Treasury’s idea of carrying out an assessment should be built on. It’s not a question of just saying: there should be one form of enhanced accountability; it should be seeking a direction. We think that you could have more forms of accountability that associate the accounting officer much more directly with the stage in the progress of a project, so there really isn’t a question as to whether they are involved in it or not. Sometimes in recent hearings on these projects we have found that the accounting officer seems to be quite a long way away from them, yet they involve huge amounts of money.

              Sir Nicholas Macpherson: I think this is an area where we have got better. I know it won’t appear that way to the Committee, because inevitably you just see this trail of misery, which is quite rightly the focus of the NAO’s attention, but it is striking that the Report cites quite ancient projects as ones that we should have sought directions on; they are not particularly recent projects. That doesn’t mean that all recent projects have gone well.

              This is an area where Whitehall really took note of what the NAO and this Committee were going on about some 15 years ago, when Peter Gershon came in and we had our first go at setting up a major projects group. In my experience, one of the reasons why there are not many directions on large projects is that if an accounting officer has a problem with the project, they are likely to surface it pretty quickly. It will then become an issue of contention and very quickly the project will be put in front of the Major Projects Group, now the Major Projects Authority, where experts—previously John, now Mr Meggs—will provide advice, both to the accounting officer and to Ministers, about how you can descope this project to get it back on track.

              It is striking that there have been a number of major projects that have really gone quite well. The Olympics come to mind, but Crossrail is not going at all badly—as a Treasury official, I am astonished that it has gone as well as it has, and very relieved indeed. So I think this is an area where we have learnt from some of the mistakes.

              Coming back to your point, Amyas, when you are announcing a new programme, the basic discipline of writing down as an accounting officer why you think this is the right thing to do, if only for posterity, is actually very useful. I don’t think you used the example in your original report on Eurostar, but when we came up to that sale—you quite rightly said there were risks attached to it—I went through the questions, “Is the sale at this point value for money? What are the risks to the Government?” a number of times. I wrote it all down and I am very happy for that to be looked at. As a matter of course, if you are embarking on a new programme, it is a vital discipline. The Treasury has gone out of its way to encourage accounting officers to use this technique.

              Where I paused on your recommendation was the extent to which you should keep coming back and writing another. I would worry if this became such a bureaucratic exercise that you were endlessly repeating it, but I think it is a useful tool. Again, coming back to how I am very keen that we harness the proposals in this Report, I am keen that we ensure this happens on a broader scale, and not just because a particular—

              Q52 Chair: We are going to come back to this, but I have to say, Sir Nicholas, that if you have written down every interesting decision that you have been involved with, after 31 years in the Treasury, we are certainly looking forward to buying your memoirs—if you are allowed to publish them.

              Sir Nicholas Macpherson: I am not allowed to write memoirs; the Cabinet Secretary won’t let me.

              Chair: Perhaps we could persuade him, because I think it would be very interesting and instructive to the taxpayer.

              Sir Nicholas Macpherson: I am happy to write a book with Mr Bacon on how to improve.

              Q53 Deidre Brock: So you are suggesting, Sir Nicholas, that all internal AO assessments, as were mentioned, should be done as a matter of course for large spending decisions.  

              Sir Nicholas Macpherson: My view is that if you about to announce a new programme such as Help to Buy, or you are about to sell Lloyds Bank, or you are doing something new, as a basic discipline the accounting officer should satisfy themselves on certain questions. Is this legal? Is it value for money? Are the right proprieties being observed?

              Q54 Deidre Brock: So that should be standard.

              Sir Nicholas Macpherson: It is pretty standard, but Amyas is making the point that maybe we should—

              John Manzoni: If you are the Major Projects Authority, you will thoroughly approve of this recommendation, because one of the areas that is the most difficult—Sir Nicholas has just talked about this; I have to use the proper titles—is financial decisions. But with some of the more complex projects—building things or the transformational things—the most difficult axis is the feasibility, of course. Part of the Major Projects Authority’s focus now is to try and say, “How do we get a clearer view of feasibility earlier?” I think that is a useful recommendation, so in that sense, I think this is fully supported.

              Sir Jeremy Heywood: Provided they are confidential. If you want these to be full and frank assessments, they have to be kept in a confidential space.

              Q55 Deidre Brock: Very quickly, I know that ministerial directions are obviously not encouraged—although they do seem to be on the increase recently—but could I ask what happens if a ministerial direction is requested but is not given? Does the AO then refuse the spending?

              Sir Nicholas Macpherson: On any decision there is a continuing dialogue between the accounting officer and the Secretary of State. A sensible Secretary of State is generally quite keen to ensure that his decisions are value for money, because it will come back and bite you if they are not. If he refuses to give you a direction, you just do not go ahead with the proposal that required a direction—it is as simple as that. The only basis on which you can go ahead is if you are given a direction. This is not in use very often, but it is a very good safety device. It goes back to 1880, when as a result of a scandal at the Dundrum criminal lunatic asylum outside Dublin, and thanks to the work of this Committee, the concept of the accounting officer direction came into being. For every sale up until this point—now, sadly, I do not think we will sell any more of RBS or Lloyds before I go—George Osborne, the Chancellor of the Exchequer, has asked me to assure him that the proposed sale is value for money. I think that is a good discipline and it reflects good management. You can make all sorts of criticisms of our bank holdings, but up until now all the sales have gone well.

              Q56 Deidre Brock: You mentioned instances when ministerial directions are requested, but not given. Could you tell me how often that then happens?

              Sir Nicholas Macpherson: You may get to the point where you write some shirty email to the Minister’s office saying, “If you are going to do that, I am going to insist on being directed,” and that will probably be the point where you may well be heading for a direction, but generally what happens is that policy preparation evolves. You have various discussions in which you say, “Look, if you do it this way, this will raise value-for-money issues and issues for me as an accounting officer, but if you do it in that way, that in my view is actually value for money.” In my experience, generally that is how things have played themselves out, and that is why there have been relatively few directions. If it turns out that the proposal was not value for money, then the accounting officer has got to explain him or herself.

              Q57 Deidre Brock: Moving on a little bit, I am interested in the relationship and where the Permanent Secretary or AO’s accountability lies. In the paper there is a bit of a disconnect between Parliament sometimes and Ministers—the Permanent Secretary is responsible to the Minister, but as AO is also accountable to Parliament. When does that responsibility mean that the AO has to bypass Parliament and Government and go straight to the public or the press? Sir Nicholas, you have some experience of this in 2014, in the independence referendum. Is there a whistleblower type of imperative, or not?

              Sir Nicholas Macpherson: I do not think that this is a whistleblowing issue, because actually it again reflects a sensible reform introduced back in about 2010: accounting officer directions get published. If they have not been published because of some NAO inquiry, automatically they have to be published by the time you publish your accounts. So this is not about whistleblowing; this becomes a matter of public record. My recollection is that when you seek a direction, I would automatically copy that letter to the Chair of this Committee and to the Comptroller and Auditor General. If it was during some financial crisis, we have special arrangements to ensure that that conversation takes place in a very confidential space—if, for example, it could result in the bank system collapsing—but otherwise this is very public and it is accountability in action. I think do think that that transparency is valuable.

              Q58 Chair: That is very interesting. Sir Jeremy has talked about the idea of his accounting officer assessments only taking place—you were very clear about this—if they can remain confidential. So where is the transparency in that, Sir Jeremy?

              Sir Jeremy Heywood: It would not be in that. You would not get the full benefit of the assessment if it was a public document.

              Q59 Chair: Don’t you think there is some halfway house—at the very least, to be unambitious—because the taxpayer and Parliament cannot see anything short of a ministerial direction? So you have business as usual or a ministerial direction, but nothing in between to improve that transparency.

              Sir Jeremy Heywood: I am happy to think creatively, but I don’t see how you can achieve what you are trying to achieve there, which is a dispassionate assessment by the officials as to whether something is feasible, cost-effective and value for money, and have a full and frank discussion of that if that is going to become a public document in one shape or another.

              Sir Nicholas Macpherson: Interestingly, when Sir Amyas did his Report on Eurostar, the NAO had access to my accounting officer assessment. In the event, the NAO chose not to highlight it in its Report on Eurostar, but it has mentioned it in this Report.

              Q60 Chair: Sir Jeremy, to row back for a minute, within your power you hold those accounting officers directly to account. You discuss their promotions with them and so on. You are responsible. How much do you take into account the decisions they have made, and would you look at NAO assessments, if they were in place, to make sure that they were doing their job properly in holding the system to account?

              Sir Jeremy Heywood: It is an important consideration. Frankly, the way it operates at the moment is that as part of each Permanent Secretary’s end of year and mid-year assessment, I get a report from this guy and this guy.

              Q61 Chair: To be clear, that is a report from the head of the Cabinet Office and from the Permanent Secretary at the Treasury.

              Sir Jeremy Heywood: Part of Nick’s assessment will be precisely their performance as an accounting officer. So if the Treasury spending team is seeing the assessments and seeing whether directions have been asked for and given, that forms a significant part of the Permanent Secretary to the Treasury’s input into the end of year process.

              Keith Davis: On a point of clarification on the sale of Eurostar, when we did the work, we were not aware that there had been an accounting officer assessment. We only found out subsequent to publication and the PAC hearing. It is perhaps indicative of the fact that these things are happening with such little visibility, so perhaps the halfway house is a good thing to aim for.

              Sir Nicholas Macpherson: There is nothing secret about this. The Treasury was not trying to withhold it. It must have been a mistake by the team in failing to draw it to your attention. I would have drawn it to your attention very happily indeed.

              Q62 Chair: Clearly, this will be on the list of questions from the NAO from now on. You have set a challenge.

              Sir Nicholas Macpherson: When you are doing Reports, it is a perfectly legitimate question, because what you want is to be satisfied that someone actually thought about this. If they then thought about it unintelligently, you should hold them to account. If bad things happen—an earthquake—

              Sir Amyas Morse: We will hold them to account without explaining what it was they thought unintelligently about.

              Chair: I think we are getting into a Kafkaesque discussion here.

              Q63 Deidre Brock: Sir Jeremy and Mr Manzoni, I want to return to the issue of where a Permanent Secretary’s responsibility lies. Is it appropriate or useful for the AO to bypass Parliament and Government and go straight to the public or press, and in what circumstances do you think that that is appropriate?

              Sir Jeremy Heywood: I am with Nick on this. I think that that would signal a complete relationship breakdown between the Permanent Secretary and the Secretary of State.

              Q64 Chair: So you would move the Permanent Secretary, or would they get sacked?

              Sir Jeremy Heywood: I don’t think it would ever come to that.

              Q65 Chair:               It has never come to that?

              Sir Jeremy Heywood: For a Permanent Secretary to feel that they are getting so little purchase with their Secretary of State that they have to go to the press—

              Q66 Chair: Let’s be clear. It is not unheard of that Permanent Secretaries have moved Departments or left the civil service because of relationship breakdown.

              Sir Jeremy Heywood: That is a different point altogether. If the relationship breaks down, we have a choice of options, as you would have in any large organisation. Do you try and make it work a bit longer to see if they can work through differences, or do you move someone on? That is a very different point. Maybe I misunderstood your question, but I don’t think I could ever condone a Permanent Secretary going to the press. If there has been a problem in convincing a Minister to stop a project that was not offering value for money, that would be a complete collapse of the system. The accounting officer direction is the route to that. If there is a fundamental disagreement about the value for money of any project, the accounting officer direction is the only route that I could possibly condone on that.

              Q67 Stephen Phillips: Doesn’t this give rise to a massive conflict of interest? Let us say the accounting officer says, “I want a ministerial direction,” and the Minister says, “No.” You referred to the relationship between the Permanent Secretary and the accounting officer on the one hand and the Secretary of State on the other. The Secretary of State has a load of clout in that relationship to try to apply pressure through what I think Sir Nick calls invisible or positive discussions between the Minister and the accounting officer as the policy develops. All the stick is on the side of the Secretary of State. He has the promotion prospects and the possibility of honours being held over the Permanent Secretary’s head. Isn’t the pressure on the Permanent Secretary just to roll over and say, “Okay, this is just about all right. I’ll sign it off without a ministerial direction”?

              Sir Nicholas Macpherson: Jeremy will answer this in a minute, but let me try to answer it first. I think that the incentives are generally pretty well aligned. Any Secretary of State who is any good is in the end not going to want to go down the route of pursuing policies that are manifestly bad value for money. I know that time horizons are short, but in the end it comes back to bite you. My experience of the successful politicians I have worked for is that they take these matters very seriously indeed.

              Another point is that this is inevitably quite a complex system. I am accountable to you, the Public Accounts Committee, for the value for money of my spending, but for all other matters I am accountable to the Secretary of State—in my case, the Chancellor. This is a complex, difficult relationship, but it is better than not being accountable to the PAC at all, which is the alternative. Yes, it is complicated and occasionally it can cause stress. As the guy who is responsible for this framework, I always regard it as my job to give maximum support to any accounting officer in this space. It can be quite a lonely existence, and it is really important that those individuals feel supported.

              Q68 Stephen Phillips: What you are really doing, Sir Nicholas, is highlighting that it seems to work okay. What I am concerned about is something slightly different, which is the conflict of interest or the potential conflict of interest.

              Sir Nicholas Macpherson: The reason why you have accounting officer directions is that occasionally there are conflicts, and this is a way of seeking to resolve them. Picking up on your point, it is then really important that the senior leadership of the civil service—Jeremy, myself and John—do not collude with sacking people just because they gave a Secretary of State a difficult message. In my experience, successive Cabinet Secretaries have behaved very sensibly and honourably in this space.

              Sir Jeremy Heywood: First, the issue hardly ever arises.

              Q69 Stephen Phillips: I’m sure that’s right. I am looking at the margins—at what could go wrong.

              Sir Jeremy Heywood: On the very, very rare occasions where you have a clash such as that, as Nick implies, the next thing that would happen is that the Permanent Secretary would undoubtedly come and talk to me and to Nick to seek further guidance and support; and no doubt, the Secretary of State would refer the matter to No. 10 as well. Then we would have a discussion properly with the Prime Minister, the Chancellor, myself and Nick, to work through what we think in the round.

              Q70 Stephen Phillips: Are you saying that you have had such discussions, or you would have them if the problem were there?

              Sir Jeremy Heywood: I can think of possibly one example in the past few years, but it wasn’t a particularly large example. Frankly, the promotion prospects of Permanent Secretaries—

              Chair: Can you tell us which one that was?

              Stephen Phillips: I don’t think I am going to ask that question.

              Sir Jeremy Heywood: Promotion prospects do not depend on what a Secretary of State thinks; they depend on what the Prime Minister and myself think. The honours system is an independent system.

              Q71 Stephen Phillips: There is another conflict there, isn’t there?

              Sir Jeremy Heywood: The areas you point out are just not relevant to that consideration. A much more important consideration is whether the Secretary of State is going to lose the support of the Treasury if they get a reputation for being prepared to override financial discipline. I come back to my context point: we have been in a period in which we have been trying to save money, reduce costs and cut out programmes that make no sense.

              Q72 Stephen Phillips: Because of the role of No. 10 that you have just highlighted, the alternative is that the Permanent Secretary is going to lose the confidence of No. 10. Does that give rise to a different conflict of interest, which might still be acute?

              Sir Jeremy Heywood: In the real world, there would be a proper discussion between myself, Nick, the Prime Minister and the Chancellor, or some combination of that group, to work through the issue, with everybody properly incentivised to find a way through that doesn’t require a complete clash.

              Q73 Stephen Phillips: All behind closed doors.

              Sir Jeremy Heywood: Yes, behind closed doors, as you would expect.

              Sir Nicholas Macpherson: But in the end, if there is a direction, it will be published. Jeremy makes a good point about the Treasury. Generally when you are in this situation, the proposed line of expenditure is novel and contentious, so it has to be approved by the Treasury, which ventilates the issue. There may be perfectly good political reasons why the Chancellor will side with the spending Secretary of State. I would argue that that is more likely to happen in the run-up to a general election, for perfectly understandable political reasons. It is important that these issues are ventilated within the system, but equally you really don’t want to be providing a public running commentary throughout discussions.

              Sir Jeremy Heywood: Just to be clear, if the Chancellor and the Prime Minister have decided that the accounting officer directions should be given because something is politically justifiable even if it is not value for money, my job at that point would be very much to make sure that the Permanent Secretary didn’t suffer any sort of consequences for doing their job properly, because that is what they would be doing. I have no pushback, politically, from that.

              Q74 Deidre Brock: Just a quick question for all three of you. How important do you consider an AO’s impartiality to be—both real and perceived? I am looking for two answers: first, how important is actual impartiality? Secondly, how important is perceived impartiality?

              Sir Jeremy Heywood: I am not sure that I really understand the question. Obviously competence and an ability to look dispassionately at the issues are extremely important to the job, and the perception of that is just as important as the substance of it. That is all part of what you’d expect from a competent Permanent Secretary.

              Q75 Deidre Brock: I suppose I am talking about political impartiality rather more than that. I appreciate what you have said, but—

              Sir Jeremy Heywood: There shouldn’t be a political judgment there. The judgment should be: is this value for money, and is it feasible? It is not a question of putting a political gloss on that. That might be a rationale for someone wanting to give a direction, but that is not the accounting officer’s job.

              John Manzoni: I am the same. For many of the things we have been talking about, when it comes down to financial outcomes, sometimes those are clearer; when it comes down to feasibility, it is more complex to understand what is required. Can we do this by this time? Those are complex judgments. This is all about the capability that we can bring to bear in any situation. By the way, that is why it doesn’t all rest with just one judgment. We bring lots of different perspectives to bear, and it is all about capability. As far as I am concerned, I don’t think politics comes into it.

              Q76 Deidre Brock: Indeed, one would hope not. Sir Nicholas?

              Sir Nicholas Macpherson: Certainly on value for money, I don’t think I am aware of impartiality ever being an issue.

              Q77 Deidre Brock: Okay. Regarding paragraph 1.25 on page 31 of the Report, I have a question about the ability of the Prime Minister to select Permanent Secretaries. What evidence do we have, if any, that that is changing the Government-civil service relationship? Could it? Is there a danger of that?

              Sir Jeremy Heywood: No, I don’t think so. I don’t think we have any evidence to that effect at all.

              Q78 Deidre Brock: Because it is quite new, isn’t it?

              Sir Jeremy Heywood: It is, yes. The crucial point, and the reason why I supported the change, is that the Prime Minister’s choice is from a series of candidates who are all judged to be above the appointable line by a panel that the Civil Service Commission is involved in, along with myself, John and sometimes Nick. People don’t get on the list to be chosen from unless everybody who has looked at it from an impartiality and competence perspective thinks that they are above the line.

              In a sense, I think we are doing little more than codifying best practice over many years. Traditionally, the Cabinet Secretary would talk to the Prime Minister and say, “Look, these are the potential candidates, taking into account this job that’s coming up next time,” and you’d try to fill the jobs in a sensible fashion from among the capable people who are capable of working for Governments of whatever political hue. I do not see any evidence at all, so far, that this has made any difference to anything, frankly.

              Q79 Deidre Brock: It’s been introduced only fairly recently, though.

              Sir Jeremy Heywood: It has.

              Q80 Deidre Brock: How do you monitor it?

              Sir Jeremy Heywood: I just discuss it with my senior colleagues and the First Civil Service Commissioner. I think our collective view is that it is working fine at the moment.

              Q81 Chair: It is difficult for us to challenge on that.

              Sir Jeremy Heywood: May I just make one point? Frankly, the suggestion that this is in any way leading to Permanent Secretaries being more willing to take political instruction is well wide of the mark. Having good relationships between senior Ministers and their Permanent Secretaries makes it more likely that civil servants will be prepared to give bold advice. I just don’t see the link in the analysis at all. Not only do I see no evidence that it is having any effect, but I don’t see the conceptual leap from this. The fact that the Prime Minister has chosen someone doesn’t mean that they are going to be less likely to be willing to stand up to him, at all. I don’t see that. I am happy to have a long discussion about it, but I don’t see any link between the two points.

              Chair: We’ll wait and see on that one.

              Q82 Stephen Phillips: Sir Jeremy, I want to come back to ministerial directions, and I am afraid that I want to come back to them in the context of the crossover between this Report and the letter that I am sure you think rather unfortunately has given rise to lots of stories on the front pages of the newspapers today. Just before I do so, when was the last time that the head of the home civil service wrote a letter to the home civil service that led to an urgent question in Parliament the next day?

              Sir Jeremy Heywood: I am afraid that I don’t have that immediately in my memory.

              Q83 Stephen Phillips: What I really want to get to is how ministerial directions and the relationship between Secretaries of State who are campaigning for this country to leave the European Union and their Permanent Secretaries are going to play out. You said, I think, in your letter that it is perfectly okay for civil servants to bypass Ministers who are campaigning contrary to the Government position. Is that right?

              Sir Jeremy Heywood: No, I have not used any such language. I am appearing before another Committee on this matter.

              Chair: Absolutely, we are not spending a long time on this, but as Mr Phillips has asked the question, if you could just answer his point.

              Sir Jeremy Heywood: Let me be very clear that what my letter does is put flesh on the bones of the Prime Minister’s own letter of 11 January, which set out very clearly that the Government would have a position on this subject. The Government having a position on it, it is the civil service’s constitutional duty to support that Government position. The unusual part of this is the fact that the Prime Minister is allowing several Ministers in the Cabinet and elsewhere to oppose that Government policy. All my letter does—

              Stephen Phillips: But what if an accounting officer—

              Sir Jeremy Heywood: I haven’t answered the question. What my letter does is to make it clear that civil servants will support the Government of the day’s policy position, as you would expect. On issues relating to the referendum itself, civil servants will not provide briefings and speech material to Ministers who want to argue against the Government’s position. In every other respect—in all EU business, the running their Government Departments and so on—they will get the full service that you would expect from the civil service. That is not bypassing anybody.

              Q84 Stephen Phillips: This is the question, because this is where this Report really comes in. I know that you are answering questions to our sister Committee tomorrow about this. What I am interested in is whether a situation could arise in which an accounting officer, a Permanent Secretary, needs, for example, to speak to the Secretary of State in DWP about something that requires money to be spent but is prevented from doing that because of the way in which you have interpreted what the civil service ought to be doing at the moment. Are there any circumstances in which that could happen or are you saying to this Committee, “No. In the context of wearing their hat as an accounting officer, they will still be obliged to give all information to their Secretary of State”?

              Sir Jeremy Heywood: I think I can confirm that, because I think the guidance that we set out in pursuance of the Prime Minister’s decision, which the Cabinet agreed, applies to briefing and speech-writing material on the in/out question. It doesn’t apply to the way that they run their Departments or even other European Union business.

              Q85 Chair: So, Council business and so on.

              Sir Jeremy Heywood: If a Minister who is campaigning against the Government’s policy is attending a European Council, they will get the full briefing in the normal way in line with the Prime Minister’s letter.

              Chair: I know that there was a reasonably lengthy urgent question in the House earlier and for anyone who is interested—I suspect that there are quite a lot—this is being discussed at the Public Administration and Constitutional Affairs Committee tomorrow. I think we have an answer in relation to this Report, but we will clearly be watching what happens at our sister Committee in relation to what we are discussing today. I am going to be very indulgent and let Richard Bacon have one question.

              Q86 Mr Bacon: Since it’s his last outing, it would be a shame not to ask Sir Nicholas whether he agrees with the former Governor of the Bank of England that the euro is doomed.

              Sir Nicholas Macpherson: Ooh, that’s a great question.

              Mr Bacon: Thank you.

              John Pugh: What’s the answer?

              Sir Nicholas Macpherson: It’s not looking as bad as it was—

              Chair: There’s a civil service comment.

              Sir Nicholas Macpherson: But they’re not out of the woods yet. That would be my answer. The basic problem with the euro was one that many people pointed out when it was set up. You really need a very, very strong convergence of conditions to sustain it. I am pretty clear that the Benelux countries, Germany, Austria, and France were pretty convergent when the euro came into existence, but I really do worry about some of the other countries, Greece in particular. Our Government’s position, which is obviously a very sensible one, is that if you want to make the eurozone work, it needs far greater integration. I just worry whether the German taxpayer ultimately is prepared to pay for that integration. I do not want to get into the detail of what my old friend Lord King said, but the eurozone has some way to go before it is a truly optimal single currency area.

              Q87 Chair: Sir Nicholas, I think we have heard from that answer why you have been a successful Permanent Secretary for 11 years, and we all learn lessons from that. I particularly want to ask you a couple of questions, because you will not be with us for much longer. That sounds more terminal than I meant it—you will be gardening or something in a month’s time.

              Sir Nicholas Macpherson: You can always ask me back.

              Mr Bacon: What a good idea!

              Q88 Chair: There we go. I think you are on permanent rota to the Public Accounts Committee, but apart from that you will not be at the Treasury any longer. You have been in government for a long time. I do not know whether you are willing to share with us your most difficult challenge as an accounting officer. I imagine it might be the financial crisis, but I wonder whether you can tell us what has been difficult.

              Sir Nicholas Macpherson:  I wouldn’t hesitate to say that it was the financial crisis. The sheer orders of magnitude—occasionally I did have to write out the equivalent of a cheque, and when you saw all the zeroes that were involved, it was utterly extraordinary. It was a really good example of how an accounting officer can work in tandem with a Chancellor who had high ambitions in terms of the extent of the intervention. When the civil service and the political system are at their best, they can do extraordinary things.

              I am one of the guilty men—we should never have got into the crisis in the first place—but when we got into the crisis, I think we did a pretty good job. It was a close run thing, however, and the amount of taxpayers’ money that we were putting on the line was huge. I should also say that I thought the NAO and the Public Accounts Committee did a very good job in holding us to account through that period. We were conscious that we would be held to account, so in this case we wrote everything down and shared everything with the NAO, but it was an exceptional experience that I hope no one else will have to deal with for some time to come.

              Q89 Chair: I think we would say “Amen” to that. I do not know whether you have a final comment for your colleagues—the accounting officers across Whitehall who you have worked with so closely—about how they could do their job better to take responsibility for taxpayers’ money and ensure that they are doing a better job of it.

              Sir Nicholas Macpherson: We have discussed quite a lot today how the system can be improved, and this is just one of those processes where you will never reach perfection. You are often having to trade off different objectives against one another. I have yet to see a better way of dealing with the issue of value for money than the accountability of the AO to Parliament through this Committee. I mentioned that it kicked in in 1880. It is also really important that the Permanent Secretary is the accounting officer, and that has been the case since 1920. Those are two features of the system that are seriously embedded and should last.

              The issue then is how we in a sense train and develop people so that when they become accounting officers, they are equipped to take sensible decisions and take the relevant advice. Here, I think a lot of the work that John Manzoni has been doing to improve civil service capacity is really important. You need to have people in these jobs who can step up to the plate and do those jobs effectively.

              Q90 Chair: Saying that, do you have thoughts about what deficit there has been over the years in that role, in terms of skills?

              Sir Nicholas Macpherson: Yes. You would not want to put someone like me in charge of DWP. I can run—

              Q91 Chair: That’s Sir Jeremy told, in case you were looking for another job offer.

              Sir Nicholas Macpherson: I can run a small strategic Department that deals with the economy and with money, but managing 100,000 people requires rather different skills from the ones that I have. My view is that you need to develop a range of people. Some will be very strong people operationally who can transform organisations and might have a strong understanding of digital transformation and so on. Equally, you will need other people in small policy-focused Departments who have the all-round intellectual grip to keep on top of systems. In other areas, you may want accountants. You need a diversity of skills, and the challenge for Jeremy and John is not only to develop those skills, but then to deploy them in the right place. The old view of the civil service that gifted amateurs could move seamlessly from running the Treasury to running HMRC, or vice versa, has gone. You need specialists who can bring real skills to the party.

              Q92Chair: You say that, but the Committee has had a fairly consistent view over the last three or four years that Permanent Secretaries should have major project experience before taking on that role.

              Sir Nicholas Macpherson indicated assent.

              Q93 You Chair: You are nodding. Do you agree with that as a general premise? Are we on the right track?

              Sir Nicholas Macpherson: We have put a lot of work into things like the Major—what is the academy called?

              Q94 Chair: The Major Projects Leadership Academy.

              Q95 Mr Bacon: So much so that you can remember its name without trying.

              Sir Nicholas Macpherson: I am getting into practice for forgetting all these things.

              Whenever I talk about this Committee to a former member who is now a very senior member of the Government, he always claims that accounting officers are at a massive advantage over the Committee, which never has enough understanding and that AOs get away with murder. My experience from my side of the fence and talking to other accounting officers is that they take this Committee incredibly seriously. I have been in many conversations over the years when policy is being developed about how to explain it to the PAC. If it cannot be explained to the PAC, you should not do it, and if you shouldn’t do it, you should ask for direction. It is those fundamental issues that are critical to the success of Government.

              Q96 Chair: You said some very nice things about some of our work, but do you have any thoughts about how Parliament, including the PAC, could be better at holding accounting officers to account?

              Sir Nicholas Macpherson: I quite like some of the direction the Committee has taken in looking at projects relatively early and looking occasionally at the landscape, stepping back and looking at the system as we are today. To critique individual projects effectively, I think you must go upstream and understand how the system fits together. I am in favour of that. Then you must come back to issues because only by looking at these things in a fairly end-to-end way can you really learn lessons.

              Very few of us have been around a very long time and it is quite important that there are enough people on this Committee, like yourself and Mr Bacon, who have seen policy announcements, projects starting and even projects finishing because that is when you start really drawing lessons. At the beginning, I remember that you invited Jonathan Stephens and colleagues many, many times on the Olympics, but it is only when you get to the very end that you can understand both whether the project was a success and whether the issues you identified early were addressed and made a difference.

              Q97 David Mowat: You just said something important: that accounting officers give a lot of thought to how they can explain to this Committee what they are doing and all that goes with that. I think that is quite an unsatisfactory position for them to have because they should be giving that thought to how they can explain it to their own line management. This Committee is a backstop and if you start thinking about it as more than a backstop, there is a management problem in how the civil service is conducting itself and holding people to account within it. There really is.

              Sir Nicholas Macpherson: I totally agree with that. I am not making the PAC the be-all and end-all, but it is a useful exercise. Of course it is far more important how you explain it. It is a perfectly legitimate criticism of the Treasury. If the Treasury is doing its job, these problems should not occur. We should be stopping things from happening earlier on.

              Q98 David Mowat: There should certainly be no question we think of that has not been thought of in the normal management process.

              Sir Nicholas Macpherson: Exactly. A really good question in any of these NAO reviews is “What was the Treasury doing?” In one sense, the Treasury is the biggest ally within Government of the NAO and PAC, but equally, we can often be part of the problem, so you have to hold us to account.

              Chair: Okay. Your successor is going to hear it. Thank you for that.

              Q99 John Pugh: When I read this excellent Report, I came across the phrase “four essentials of accountability”, and wondered what they might be. One of them, the second one, interested me: a “mechanism or forum to hold to account”. You have been very flattering about the PAC, but to be fair—I have been on it some time—most of the time we are firefighting, dealing episodically with certain aspects of the nation’s budget, and nothing very thorough takes place apart from that.

              You will be aware that the farce of Estimates Day is coming up quite soon, when billions of pounds in expenditure will be on the Order Paper and will be completely ignored by anybody who strives to speak during the Estimates Day debate. In fact, I am on record as having been ruled out of order for endeavouring to speak about the estimates—by Nigel Evans, I think it was, who was Deputy Speaker. I put it to you that our examination of the nation’s finances, apart from those areas that seem to be most problematic, is fairly poor in this place, and the forum you have is not adequate.

              Sir Nicholas Macpherson: Certainly the role of Congress in the United States in relation to the budget—

              Q100 John Pugh: It is much more rigorous.

              Sir Nicholas Macpherson: It is more rigorous. My sense is that to some degree, this reflects the balance between the Executive and the legislature in this country. The development of Select Committees from the late ’70s onwards, in my view, is a very good thing, but I am still really struck when I appear before my Committee on, say, the Treasury’s accounts, by how little of the discussion is really about the accounts and how the Treasury allocates resources. It is inevitably about that morning’s headline, or some wider important economic issue.

              Q101 John Pugh: I think that is largely true of most Select Committees.

              Sir Nicholas Macpherson: You could argue that that is because Select Committees are inadequately resourced. Your Committee is unusual in that you have the weight of the National Audit Office behind you, which is a serious and relatively well-funded institution—

              Q102 Chair: All right, you’ve got your jibe in.

              Sir Nicholas Macpherson: I’m sure Amyas would disagree.

              Q103 Chair: We are very happy for parliamentary scrutiny to be well funded.

              Sir Nicholas Macpherson: Exactly. But Select Committees do not have much resource. If you guys compare yourselves to your average Congressperson or Senator, you have much less resource. I guess what it comes back to is our constitution, the dominance of the Executive and the whipping system, which means that in the end, apart from on vital issues, which we discussed earlier, you will follow the party Whip and not cause too much trouble.

              Q104 John Pugh: I don’t want to put words in your mouth, but is it fair to say that what you are saying is that parliamentary scrutiny of the nation’s finances is not as good as it might be?

              Sir Nicholas Macpherson: Or, to put it another way—

              Chair: Old habits die hard.

              Sir Nicholas Macpherson —you rely excessively on the Treasury.

              Q105 Mr Bacon: That is a very good point for a question that I would like to raise with you. I had this discussion with Mr Tyrie some years ago when the Office for Budget Responsibility was set up. I just happened to have returned from Washington, where I visited the Congressional Budget Office with this Committee. Particularly in light of what you have just said, do you think there is scope and that it would be a good idea to have something along the lines of a parliamentary budget office which had the culture and standards of the Institute for Fiscal Studies or the House of Commons Library but which reported to Parliament and was funded by Parliament in the same way as the National Audit Office? In the words put to me in Washington, the Congressional Budget Office helps keep the Office of Management and Budget honest.

              Sir Nicholas Macpherson: You now get me into an area of policy on which I feel it would be inappropriate to comment.

              Mr Bacon: We’ll just have to wait for a month and then call you back.

              Q106 Chair: We look forward to having tea with you in a month’s time—or something stronger.

              I just wanted to cover a couple of quick points. Going back to the issue of acute trusts, Sir Jeremy—I know you might not be cited on the detail of everything—in 2010 a 4% efficiency target was set for acute trusts. Simon Stevens has acknowledged that that was steep and that “2% is about right”—I slightly misquote him, but that is what he says. In many trusts, it has been predictable for at least the past 18 months that the deficit issue was going to arise so why did the accounting officer not call it out, given that that was a problem? At the beginning we were talking about that and you said that it was identified so it was a success. I do not think that patients, or trusts, see that it was called out as a success and I hope that the Government do not. It should have been predictable and prevented in the first place, surely.

              Sir Jeremy Heywood: The pressures have been building—I am not the expert on this. Simon Stevens is clearly the right person to talk to about it, but my impression is that it is only really in the past 18 months or so that the financial pressures have really emerged as strongly as they have, and also the A&E and some of the waiting time targets were met for much of the Parliament, despite the pressures on the system. I think this is a problem that has come to the fore in the past period, rather than something that was foreseeable three or four years ago. I can only repeat what I said earlier. We have taken significant action to improve the system in the face of that emerging picture.

              Q107 Chair: But system change is going to have to take place very rapidly, if it is going to deliver the—

              Sir Jeremy Heywood: We have ended up implementing a lot of things quite quickly, even without legislation and so on. We are doing what we can to bring this under control.

              Q108 Chair: That is very much the party line. I don’t mean that in a party political way, but that is very much the line, Sir Jeremy. But we were very concerned and we will be producing our report on that shortly.

              Just coming back to some of the issues that Deidre Brock raised, about relationships, we see, increasingly, Ministers taking more of a semi-executive role. I have worked alongside Ministers who had Gantt charts—I think you probably know who I am talking about—who worked out and developed details of policy. Payment by results was something that Chris Grayling, the current Leader of the House, was involved in designing the detail of. Doesn’t that mean that the balance of accountability shifts a bit because the hands of a Minister are far more closely on a project—the delivery of it—than perhaps they were in the past?

              Sir Jeremy Heywood: I am not sure that there is such a trend and, if there is, I am not sure that it is a particularly bad thing—

              Q109 Chair: I am just saying that that is a fact.

              Sir Jeremy Heywood: But it doesn’t change the accounting officer’s responsibilities to this Committee, and more generally. It doesn’t change the way in which Nick or I or John would view a Permanent Secretary’s performance.

              The fact that some Ministers get more involved in implementation is probably a good thing overall. I have experienced that from the early Blair years onwards. Tony Blair as Prime Minister, and individual Cabinet Ministers, were very closely involved in monitoring performance—the Michael Barber Delivery Unit and so on put a very strong premium on Ministers being very engaged in the data, holding people to account and getting really stuck into whether performance was being delivered. I think that what we are seeing now is, in a sense, an extension of that, or another variation on that same theme. It has the following very big advantage: if Ministers are more involved in the practicalities of implementation, it helps us to design policy more effectively and more practically to start with. This complete separation between policy design and implementation is a very damaging thing.

              Q110 Chair: We certainly agree with you on that last point.

              Sir Jeremy Heywood: If Ministers are more involved in just how difficult it is to get stuff done, that will help us to design better policy to start with, and with more practical time—

              Q111 Mr Bacon: Can I have another bite? I have discussed this with Mr Manzoni but I would be interested to know what you think. This is not a party political point at all. I think it is generally the case that most Ministers, of most parties, going into government for the first time have relatively little understanding of the impact of political decisions on the management of large organisations. There is very good reason for that, because instead of learning how to run large organisations they have spent some of the best years of their life shoving leaflets through doors, and if they had not done that they would not be MPs and therefore they would not be Ministers.

              There is, therefore, a very good explanation for why they do not have that knowledge, but is there not a case, at a system-wide level, for trying to correct that obvious flaw—if it is a flaw—by doing something about it systematically, not occasionally, not when there is the occasional enthusiasm for a bit of ministerial training? Since the vast majority of Ministers, with some exceptions, are taken from the House of Commons, isn’t there a case for doing that at a system level on a calibrated and graded basis, of course, with all Members of Parliament, from the moment they become Members of Parliament onwards?

              Sir Jeremy Heywood: What sort of—

              Q112 Mr Bacon: Well it would save an awful lot of money, wouldn’t it? A lot of stupid decisions could have been prevented if MPs had known from a much earlier point just what the impacts of those decisions were, even before they got anywhere near a ministerial office.

              Sir Jeremy Heywood: I think that would be a good thing, to be honest, although it is striking quite how many of our current Ministers have run businesses—often relatively small businesses. Nevertheless quite a number of them have significant managerial experience, so I wouldn’t want to—

              Mr Bacon: It is the minority.

              Chair: You are more optimistic than I think we are. That is by design rather than accident, I suspect.

              Q113 Mr Bacon: What would be wrong with doing something about it at system level?

              Sir Jeremy Heywood: I don’t disagree with you at all. I think it is a very good idea.

              Q114 Chair: We will keep pursuing this as an issue that the PAC is interested in.

              One other point. Sir Nick, I think it was you who said earlier that the NAO should drill down; the NAO certainly does some of that but, since the audit arrangements changed, the National Audit Office is now covering, at a higher level, the work of the Audit Commission, so that that reduction in audit at local level is going to have an impact on accountability. To take academies, for example, and Committee concern about accountability there—it is a very big gap between the accountable civil servant in that case and the school and the accountable head teacher. Do you think there is a worry there for how the system will work? As you say, you can’t always know exactly everything that is going on.

              Sir Nicholas Macpherson: Coming back to Jeremy’s point about health, sometimes there are new institutions and regulators who can play a role in this space; but I do think, as far as audit is concerned, if you want to understand whether a system is working, occasionally it is worth looking in a degree of detail in individual institutions.

              The role of this Committee and the role of the NAO is to follow the pound, and in the end you have to satisfy yourself. It doesn’t mean you have to subject every last school to audit; but it is just worth looking at a few places on the ground just to make sure that what everybody says is happening is happening. That is just part of good audit practice. As I understand it, Amyas, you do that where you are concerned.

              Sir Amyas Morse: Yes, we get quite a lot; if you pay attention to the very large volume of social media and information from MPs you see recurring issues striking up, and when we see something like that we tend to look at it in detail.

              Karin Smyth: I want to make a final point on exactly that issue, actually, on my obsession with figure 12. I think that, in tracing the pound, what we haven’t really gone through in this hearing—perhaps the transcript will say differently—is some of these boxes in terms of delivery through autonomous bodies, the devolution agenda, the creation of Government companies and, indeed, the creation of companies even at a local level, which is something we have got going on in Bristol, whereby the local authority creates a private company which doesn’t seem to be as accountable or transparent as other parts of the system.

              We have talked a lot about the national level but we haven’t really followed that pound successfully, which is what this Report came out of, really, following the Localism Act 2011. You may disagree with that, but I think that would still be a concern for the Committee.

              Q115 Chair: Sir Jeremy, do you think there is a gap in Whitehall because of that disconnect?

              Sir Jeremy Heywood: I don’t think so, really. We have had Government-owned companies for many decades. They have got their own system of accountability through Companies House on top of the Government accountability structures.

              Q116 Karin Smyth: If I can just stop you; there are 66 new companies since 2010.

              Sir Jeremy Heywood: I don’t think they raise any new issues per se. That is one of the reasons why we favour these accountability systems.

              Q117 Stephen Phillips: The issue they raise, Sir Jeremy, is that it makes it more difficult for the accounting officer to be accountable, isn’t that right, because there is a disconnect; so the accounting officer can be accountable for the system which has been established, but not for the particular pound. That has been a growing problem in Government for decades, because of the proliferation of civil servants and what Government now does.

              I am not saying it is a new thing, but it seems to me—I am not going to speak for my colleagues, but I think probably to some of them as well—that the contracting out of public services in the way which is now taking place makes it more difficult for you and your colleagues as accounting officers to be accountable for anything other than the system. You are not really accountable for the pound any more.

              Sir Jeremy Heywood: For the system, as you say. That is why, I assume, the NAO is making recommendations on accountability systems and making sure there are real processes that engage accounting officers’ minds, so that they are not just ticking a box and so on. They do not raise new issues. There may be more of them than before, but it is not conceptually a problem we have not dealt with for many, many decades.

              The answer that the NAO is putting forward is one where we are essentially saying, “Yes, we’re happy to have another look at how we can make those processes more real.” Some accounting officers do take them very seriously. The first time they go through them and develop them, there is probably a front-of-mind consciousness, mapping out the whole system and so on, but we need to keep them fresh and make sure they don’t go stale and that they actually serve a useful purpose, with some proper challenge from the Treasury.

              Sir Nicholas Macpherson: On the contracting out, accounting officers are entirely responsible and accountable for the quality of the contract. That is something they are accountable for. If I choose to contract out my facilities management, I am in the frame if that is a dodgy, hopeless contract.

              Q118 Mr Bacon: But that’s not the answer one gets from Government. We had a case of this in Norwich, where Government contracted with Atos to have a disability assessment centre on the second floor, which meant that disabled people could not get up there. When you raised the point with the Department, they said, “Well, it’s a matter for the contractor. They’re supplying the assessment centre. They’ve got the lease for that building. It’s nothing do with us. There’s nothing to see here. Move on, please.” The only way one was able to raise it was by making a huge amount of political noise. The system didn’t want to know.

              Sir Nicholas Macpherson: I think it should. The other thing that is relevant is that we have made progress in getting more institutions and companies within the boundary of the public sector. Network Rail was a great triumph. Eventually, even the ONS followed the example of the NAO, and this is now unambiguously in the public sector boundary. I very much hope and expect, Amyas, that you are all over it.

              Sir Amyas Morse: We are.

              Sir Nicholas Macpherson: We have finally, thanks to you, got the Bank of England subject to VFM studies. The Royal household, in my time, has been brought inside the boundary. Getting the boundary right and what is public sector should be subject to NAO audit.

              Q119 Stephen Phillips: Only the BBC to go.

              Sir Nicholas Macpherson: From a Treasury perspective, at this stage, I am optimistic on that front. The Treasury may be overruled by some special interest group or other.

              Mr Bacon: It seems to have gone backwards.

              Chair: Let’s not get into the BBC issue.

              Sir Nicholas Macpherson: I’m told that it’s all right.

              Mr Bacon: Then it must be true.

              Q120 Chair: Sir Jeremy talked about accountability and private companies. This Committee has long had the view that private companies whose business is solely funded by the British taxpayer should be held far more accountable and be subject to freedom of information. Do you think that that is practical or something that the Government would consider?

              Sir Jeremy Heywood: I haven’t yet read the report of the Independent Commission on Freedom of Information, which may well have touched on that issue, so I had probably better reserve judgment until I have read it.

              Q121 Chair: Very diplomatic. If we have to make a video of how to do the Public Accounts Committee, we will have a couple of good examples of how to hold the civil service line under attack. We will let you off that one this time, but we will be pushing you on it when you come next time.

              I have one final question. I asked about the appointment of Sir Nicholas’s successor. There are about to be two other vacancies in Whitehall in Education and Defence, when Chris Wormald moves from Education to Health and Jon Thompson moves from Defence to HMRC. Can you tell us what the plan is? Do you have a named individual? When will we know who those new Permanent Secretaries will be?

              Sir Jeremy Heywood: We are in a competition for the DFE.

              Q122 Chair: Is that an external-facing one as well?

              Sir Jeremy Heywood: It is an external competition, yes. The MOD will probably make an internal appointment but we are not yet quite ready to finalise that.

              Q123 Chair: Okay. Will there be any vacancies at any of those Departments or will you be able to fill them before people leave?

              Sir Jeremy Heywood: I’m not sure yet. I hope so very much but I am not absolutely sure.

              Q124 Chair: They’re quite significant Departments to not have a head.

              Sir Jeremy Heywood: Absolutely. These things are very difficult. It is like a housing chain; it is tricky.

              Mr Bacon: That’s the bit that will come back to haunt you.

              Chair: This is an issue that we shall continually return to. It is a big passion of the Committee that we—and, critically, the taxpayer—are able to hold Government to account for the spending of taxpayers’ money. Thank you for coming along. I thank Sir Nicholas again for his final appearance. We can always have you back just before the end of March if you want to volunteer. We might call you back afterwards. Our transcript will be on the website, uncorrected, in the next couple of days. You will get a copy of that. We will produce our report probably after the recess because of the pace of our work.

              Oral evidence: Accountability for taxpayers’ money, HC732                            21