Official Report (Hansard)

Session: 2011/2012

Date: 28 September 2011

Public Accounts

NIAO Report: 'Reducing Water Pollution from Agricultural Sources: The Farm Nutrient Management Scheme'

The Chairperson:

You do have concerns, and you do have to get the best value and the best price. There is no doubt about that. We would not expect anything less. You were going to employ someone to take you through it. You were the lead person. Could you not have made a quick phone call to the Planning Service to ask whether there was a chance, given that BMAP had closed for further correspondence or information two and a half years earlier?

Mr Lavery:

I attempted to do that in early October. As I said, the advice that we were given was that the BMAP process had some time to run. Our misapprehension was that we took out of that that it had some time to run and that objections could still be made. We are not very familiar with that process. It turned out that it meant that the BMAP process was still dealing with objections lodged prior to 2005.

Mr Dallat:

I will go back to give some balance to the record from earlier.

Mr Lavery, you quoted this Committee as supporting the disposal of surplus assets. I was surprised at that remark, and I need to get on record that this Committee has stood very much against the corruption of green belt areas. For example, we put an enormous amount of energy into the Knock Golf Club case. Were someone to read the record in 100 years’ time, I would not want this Committee to be depicted as promoting the desecration of green belts. We will leave that at that.

I suggest that it is a most important site, in its present form.

Mr Dallat:

OK. Let us discuss the LPS letter to the Department of Agriculture and Rural Development of 1 August 2007 regarding the potential for the redesignation of all or part of the Crossnacreevy site. You were told then that you should

“secure the services of a specialist planning consultant”

— bless us — but you did not bother doing anything about that until 10 December 2007. Is that not more evidence of a laissez-faire approach to a scheme that, at the end of the day, was designed to do nothing more than get you £79 million for a project for which you did not have the money, and it did not matter whether that money came out of education, health or wherever else?

Mr Lavery:

There are two points there. First, on the appointment of the planning consultant, it is not that we did nothing. A working group, including members from Land and Property Services, our financial management branch and the Agri-Food and Biosciences Institute sponsor branch met monthly throughout that period to progress the issues surrounding Crossnacreevy.

The issues were not straightforward because we had to look at how we would relocate grassland trials. We also had the emerging issue of the tenants of Houston Road, as four people have homes on the land. We also had issues with researching the leases for the land and buildings.

In line with best practice, we engaged Central Procurement Directorate (CPD) on 10 December 2007 to guide us through the tendering process for the use of external consultants, and, subsequent to that, we were able to appoint the most economically advantageous tenderer.

Mr Dallat:

In view of what happened — the disastrous development process and the coming into existence of the organisation called the National Asset Management Agency (NAMA) — would you have done this differently if you had to do it again, or would you still line up with all the madcap people who put crazy valuations on property that were never realistic?

Mr Lavery:

There are lessons for us to learn here about trying to value land and buildings for a purpose other than their current use; about the protracted nature of disposal; and about the expertise needed in managing a disposal. That expertise does not consist simply of asking within government for advice from Land and Property Services on value; rather, it has to reach into the private sector. We have learnt those lessons. We would approach those things with a greater state of knowledge.

Mr Dallat:

We have to accept that you were successful — you got £79 million. Are you happy that all the tanks, and so on, were built to the proper specification and will stand up to all the scrutiny? Can you answer all the questions that are being about them?

Mr Lavery:

I have a difficulty in seeing that the Department made DFP aware of all the details before the decision was made, because, if that is the case, there is evidence of a willingness to mislead. I am being careful with my words, because I want to be sure that all the facts are on the table this afternoon. I want to be sure that DFP was made aware, right from the outset, of the difficulties in achieving the figure that was put on the piece of land so that, ultimately, it could set spend in that Department. We dealt with it recently in the Excess Votes issue, and, at this stage, I will not go into the nutrient scheme that it funded at this stage. However, I want to tease out the detail and the choreography of events.

Our correspondence gives some indication that DFP was not aware at the time of your concerns. You did not feed directly to DFP that there was a difficulty in achieving the magical £200 million valuation. In the letter, the Department said that it would not exceed the requirement that the Department needed to deliver the programme. Therefore, ultimately, it would be looking for some moneys back. Therefore, the £200 million was nowhere near what it required for the programme. That is stated at paragraph 11 in a letter dated 1 June 2007 directly from your Department. It states:

“At this stage, we would want to keep open some of the issues raised by this solution”.

The letter also states:

“In certain circumstances, therefore the anticipated receipt would greatly exceed the requirements of the Department”.

Therefore, you had already made that judgement and were spinning that story to DFP, which, in turn, was presenting your case to allow you to get the additional money. I want to know exactly when you let DFP know. I do not want to go any further at this stage, but I want a straight answer on that, Mr Lavery.

Mr Lavery:

We corresponded with DFP on two occasions to make it aware of what was happening. First, my letter of 2 January 2008 stated that there were emerging difficulties and that there appeared to be no opportunity for us to lodge objections in the draft Belfast metropolitan area plan.

Secondly, in the June monitoring round after the Budget was agreed, DFP asked all Departments for their views on the realisation of the capital receipts that were against them. We indicated at that time that we did not believe that we would be able to bring in a capital receipt of £200 million. The fact that it was a year 3 issue meant that that was left standing against the Department until year 3. However, that is when DFP was definitively aware of the difficulty.

Mr Frew:

I hear what you say about making DFP aware on 2 January 2008. In the letter, you went into BMAP in some detail. However, at no time in that letter do you make DFP aware of the lowering in the valuation from £200 million to £10 million, a valuation that you received from Land and Property Services on 1 August 2007. From what I hear — I could be wrong — DFP did not know that information at that point. Given that, in the letter, you went into so much detail on the BMAP issue and the fact that there would be no opportunity to seek to have the property rezoned under the draft BMAP, do you not think that it would have been better to have raised with DFP the fact that the valuation had gone down from £200 million to £10 million? That valuation was not pie in the sky but came from Land and Property Services. Why was that not raised with DFP so that it could make a difference to the Budget?

In this Committee on 15 June 2011, I asked Mr Pengelly:

“Are there any other areas throughout the Budget process from that day to now where that has occurred again?”

In his answer, he said:

“The Department immediately commissioned a formal valuation from LPS. Due to the complexity of the issue and the unique nature of the site, that process was not concluded until, I think, March 2008. In the meantime, the Budget process was concluded, and, for the necessity of the Budget process, our indicative figure was used.”

That indicative figure was £200 million, so there was opportunity from 1 August 2007 until the Budget process began to tell DFP, “The valuation is not £200 million, guys; it is £10 million. Land and Property Services is telling us that.”

The fact that that information was not forthcoming had a major effect on the Budget process. Will you respond to that?

Mr Lavery:

Mr Lavery:

The implication was that the receipt might not come in. I can understand why members believe that the £10 million valuation should have been disclosed, and I can see a strong argument for doing so. However, the issue that I raised was the increasing possibility that a receipt would not come in. It was not that the site might not be worth £200 million, but that we might not achieve a receipt.

The Chairperson:

You were trying to give DFP a heads-up. It is strange that you did not give DFP that information when you had it, you did not show it the letter from LPS, and you did not take it to the Committee until two days after the Executive had made their decision.

Mr Byrne:

We are all looking at the same period in the second half of 2007 and in early 2008. Obviously, in the second half of 2007, it was common knowledge in DARD that the valuation of the land was, in reality, about £10 million for agricultural purposes. That valuation was confirmed in the letter of 1 August 2007 from LPS to Carol Hetherington, which stated categorically that the land was within the green belt. If that was the case, why was a planning consultant hired at all, or was that done to provide a fig leaf to cover what had been a gross exaggeration of the land’s notional value?

Mr Lavery:

With respect, the land was not worth £10 million for agricultural purposes, and had it been valued as agricultural land, it might have been worth £1 million. As a research station with four houses and in its current condition, the land was valued at between £2 million and £6 million, which was subsequently borne out in March 2008. It was never worth £10 million for agricultural purposes. The valuation of £10 million was based on the site being placed on the open market with vacant possession, and with the possibility of a developer taking on the job of getting a change of use for residential or other development.

On 2 January 2008, I was not disclosing the letter of 1 August 2007, which was some time in the past. Rather, I disclosed the advice of John Cummins, the divisional planning manager, of 18 December 2007. In that correspondence, he stated that the land was in the green belt, was covered by BMAP and that there were difficulties in the path of getting development approval for it. That is what I was disclosing. I was saying that difficulties were emerging. As I said, the considered advice of 18 December 2007 stated, for instance, that the Planning Service would take account of BMAP. It did not state that planning approval would never be given; it just said that it would take account. It is a more nuanced position, which I reflected to the Department of Finance and Personnel by saying that there were difficulties that might mean that we would not bring in a capital receipt.

The position was uncertain, and DFP took that into account moving forward. The Budget included a £200 million capital receipt against the Department. I had to deal with that position and did so by accelerating our work on the estate management plan. We shifted to try to get all our assets on a comprehensive database and to create an estate management strategy, the draft of which is out for consultation until 7 November 2011. That strategy will allow us to do our level best to bring in capital receipts that will arise from making our estate more efficient.

Mr Byrne:

Do you accept the fact that the £10 million was also an exaggerated figure because the land was being valued beyond agricultural use? How much did the planning consultants cost?

Mr Lavery:

In correspondence dated 4 July, we disclosed a figure of some £2,600. It was not a vast sum.

Mr Byrne:

When DARD provided the Committee with a copy of the LPS letter to the Department of 6 March 2008, the three appendices relating to the planning position were not attached. Why not? Were they deliberately withheld?

Mr Lavery:

Never. Since they strengthen my hand, I wish that they had been attached in the first instance. We were happy to attach them when the Committee Clerk brought the omission to our attention.

Mr Copeland:

I will rewind a bit, Gerry. You repeatedly referred to the hope valuation. I would go so far as to suggest that, in some respects, hope and desperation are close cousins. Was the possible option of selling the land subject to planning permission being achieved considered? That took place in substantial tracts in greater Belfast.

You also said that the site, as it was, was not in vacant possession, which would have precluded its sale at the £10 million valuation. Do you know of any restrictive covenants that are in place on that land? I think that I am right in saying that there is more than one piece of head title. In other words, there might have been a number of complications. I think that the title is resident in two head rents. I am really trying to understand how serious the Department was in the operation on which it had embarked. Was it, perhaps, an exercise in dotting the i’s and crossing the t’s? Do you have any knowledge of the money that the Department eventually received? In the absence of a receipt, you got what, in some respects, might be called bail-out money. Where did that come from, and what other Department suffered as a consequence?

Mr Lavery:

I have not seen any particular consideration of land being sold subject to planning approval being achieved. I am not aware that we followed through on that idea. The issue of whether we were serious is linked to that, which is why I had to pursue the issues to a conclusion and had to take advice transparently from the private sector.

If that had been a viable option, I would have expected our planning consultant to present us with that option in order to achieve greater value. I do not think that that is in there, and I assume, therefore, that our professional advice was deficient or that he made a judgement that by 14 February 2008, when he submitted his advice, that was not an option.

Mr Copeland:

You raised the issue of the nature of the planning consultant. You said “our” planning consultant. Is that the planning consultant from the private sector?

Mr Lavery:

Yes, the planning consultant whom we employed.

Mr Copeland:

How was he selected?

Mr Lavery:

We engaged the Central Procurement Directorate. It guided us through the tendering process for the use of external consultants. It was decided that the estimated contract value of about £2,500 was so low that a secondary tendering exercise would not be required. The commission was awarded to the most economically advantageous tenderer. That turned out to be, as the Committee knows, DTZ, the Paul Hogarth company. We followed best procurement advice.

Earlier, a comment was made that there was a worry that the capital might not be realised in the three-year period. The issue is not whether the money was realised because, if the asset was worth the money, it would still be carried forward on a balance. The issue is whether the asset was worth the money. Whether it was realised or not, it had a value that could have been put down and used as a lever to draw money. The point is not whether the asset was sold but that we were told that it was worth a certain amount of money, which it was not worth. I caution against using the argument that the Department was unable to sell it, because many banks have lent money to people who own property that they have been unable to sell, and they have done so on a commercial basis. As a Government, we would have had a similar approach. We would have drawn the money towards it and said that it was still worth that amount, irrespective of whether there was a write-down in the property market.

Yes, I understand that. We are asking questions now in hindsight, and it is sometimes very difficult to put the position in context with the day-to-day pressures at a certain time. I will turn to the minutes of evidence from the Committee’s hearing on 15 June 2011. In response to a question from me on the day, you stated:

“A proper valuation, for a purpose other than we held the land, was going to take time, and so it proved. We only got the final, proper valuation from Land and Property Services in March 2008.”

Apart from the actual valuation, what was the difference in format between the information that you received in March 2008 and the information that you received on 1 August 2007? I ask that because, at the previous evidence session, you were able to tell us very quickly that, after the pressurised time placed on you to get a first valuation, you then submitted the £200 million valuation. You went on to tell us about the pressures that quickly materialised with the Planning Service, and I recall that you went into detail in that evidence session. However, at no time during that session did you mention that you had received other information about the £10 million valuation on 1 August 2007.

I will ask a serious question that, I feel, has to be asked and answered: could your response to the Committee on that day in June be interpreted as grossly misleading or, at least, a case of withholding information from us? You did not mention the £10 million valuation that you received from LPS on 1 August 2007 at all.

Mr Lavery:

Let us be clear about one thing: we are all on the same side in this room, and we are all looking for improvement in managing public money. I welcome an adversarial challenge as much as anyone, and it is frequently the best way to find out what exactly has gone on.

I will call you at the end, then. I call Paul and then Michael. I will let both of you ask your questions before they are answered.

Mr Frew:

You said that you felt that you did not need to employ the mind of DFP for every decision. You felt that your Department had to take decisions itself. In the previous evidence session, I raised the point that it was DFP’s view that the figure of £200 million was:

“important and in the final analysis the persuasive point”.

I must keep harping back to that. You answered:

In the timeline from June 2007, we had the June monitoring round, the autumn monitoring round and the Budget preparations through to the eventual definitive evaluation. We had references in correspondence by very senior Civil Service officials to the benefits and persuasive influence of the £200 million, which clearly represented more than the bid from the Department to be able to conduct the farm nutrient management scheme, and a net receipt to the Executive. In that same timeline, there was an indication from LPS that the hope value was around £10 million. You eventually got a figure that was, at best, half of that and, at worst, 25% of that valuation. During those critical discussions about the overall financial issues and the negotiation between Departments or the bids, counter-bids and competition among Departments for additional support, did you find it necessary to indicate that the £200 million was a wholly unreliable figure? Bear in mind the fact that a £10 million evaluation was the hope value, and I doubt whether it fitted the category of being even a hopeful estimate.

However, you were looking for much more than that, and in fact you got much more than that. Therefore, the £10 million valuation, let alone the actual final valuation, was in no way supportive of the quantum that you were seeking — namely, £79 million. Does that not indicate that people who should have been asking questions of you were for some reason not asking them or that you, as the senior finance director, had a responsibility to share that information, given that if you got money that was not going to be realised from the disposal of assets, another Department was not going to get it?

Mr Lavery:

Mr Brennan, you and I keep meeting each other in our different roles. When DARD put forward the sale of Crossnacreevy as a potential £200 million receipt, was DFP supply aware that the Belfast metropolitan area plan had been closed since 2005?

Mr Brennan:

No. From 12 June 2007 until 2 January 2008, DFP supply had a series of engagements at official level. There were also bilateral engagements at ministerial level. That issue was not flagged up. We first became aware of the planning issue on 2 January 2008.

Mr McLaughlin:

People will be amazed at that, given that DFP supply is at the core of financial planning and management. At that time, we were in the middle of a discussion about such assets, central to which was how to maximise their potential. I would have thought that every parcel of land being considered would have come with a ticket that stated “possible”, “not possible”, blah, blah, blah.

No. I am not going to say that there are not things that we could not have done better or more transparently. I have already conceded several points. However, I genuinely do not think that the Department took some covert, malign or irregular action. For example, before we received the letter that referred to the disposal of Crossnacreevy as the most persuasive point, we both met and wrote to Land and Property Services specifically to ask it to embark on valuation.

We were committed to the disposal of the asset and were proceeding down that road as quickly as we could. Obtaining a hope value was part of that process and part of our commitment. We behaved with integrity. We may well have misjudged the likelihood of the land ever commanding residential planning approval in its entirety. We may well have misjudged the apparent weight that should have been attached to the £10 million valuation. However, we behaved with integrity in trying to bring this to a conclusion and get best value for the asset.

Mr Copeland:

Thank you for your perseverance, Gerry. You will be glad to hear that it is Michael’s turn now.

Stephen Peover’s letter to the Committee of 21 September 2011 stated that the Department of Finance and Personnel’s

“Central Finance Group (CFG) can find no record”

Forgive me for this last point, but DFP’s letter of 12 June 2007 referred to the potential £200 million capital receipt as “an important and”

— and, as I have said —

“in the final analysis the persuasive point”.

Given that the £200 million valuation was completely unfounded, as it turned out, do you feel that it would be too strong to say that DARD got the additional capital cover under a degree of false pretences?

Mr Brennan:

I do not think that we can say that. Looking specifically at the £79 million that was needed in 2008-09, I think that DARD would have got that money regardless of whether it put the Crossnacreevy receipt on the table.

Mr Copeland:

DARD would absolutely have to have had it; otherwise there might not have been money to pay wages. The Department effectively would have run out of money. Is that not correct?

Mr Brennan:

In the following year, yes.

Mr Byrne:

I have listened to Mr Lavery and Mr Brennan over the past hour. The sum of their proposition is that this overvaluation led to a very exciting capital investment project in DARD. It almost seems that that is being advocated as a desirable way of operating. Is that right?

It goes back to the June 2007 correspondence between the then DARD accounting officer and the then DFP accounting officer. We had formal correspondence then. The DARD accounting officer said that, based on an informal valuation, there was an expectation that the site could generate well in excess of £200 million, I think his words were. I will quote from that letter, dated 1 June 2007:

“an initial, informal valuation suggests that with planning permission for the whole site, it would command in excess of £200m”.

That was a formal piece of correspondence from the accounting officer. We considered that to be legitimate, and we engaged with our Minister. Our accounting officer responded to the Minister of Finance and Personnel, who accepted that we move forward on the basis that that land disposal would be factored into the Budget.

The 2 January 2008 correspondence has been well rehearsed here. It did not fundamentally change the assumption. There was no figure work in that correspondence. It did not say that £200 million was not attainable or reference the £10 million figure that had come from LPS in the interim. As Mr Brennan said, there was a further exchange in mid January at ministerial level. Again, nothing in that correspondence at ministerial level suggested that £200 million was not achievable or that that valuation should be replaced with a £10 million valuation. The £200 million valuation was then put to the Executive, and I think that it was a matter of public record at that time that the Budget was agreed unanimously by the Executive.

The Chairperson:

The letters that you talk about are from June 2007. The letter that I was talking about, which I mention because of its implications, was written in January 2008, which is some six months after.

Mr Pengelly:

It is six months later, but, it certainly highlights that there were emerging difficulties. However, the letter did not say that £200 million was not achievable. It did not reference a different valuation or that the Department was seeking to substitute the £200 million valuation. It also specifically mentions various difficulties and that the Department sought an independent second opinion on the advice.

No. I do not accept that we were prolonging the process to achieve an outcome. In a sense, we achieved the outcome that we needed — it was over. Once the 12 June 2007 letter arrived, we had approval to spend up to £79 million. More importantly, we had approval to commit. Therefore, our inspectors went to farms, and we continued to approve tanks. As a result, we incurred debts. It is as simple as that.

I think that we have. We have learnt a lot about how to approach a major capital asset and how to seek advice. We have learnt a lot about the constraints on disposing of an asset, and we carry that forward with us. It is a joy of my life that I occasionally get to talk to the young people who come into the Civil Service, and, in the past week, I brought in a young fast-track graduate. The recommendations of this Committee are very important and are taken very seriously by all of us. It will be of concern, particularly for younger people who have careers in front of them, if we end up driving out the measurement and the management of risk. I want to put that on the table as something to bear in mind.

Frankly, it would have been possible in June 2007 for the Department and Ministers to say that they have their processes and that there is nothing that they can do. They could have told the agriculture industry to deal with its own slurry problems and to destock because it is the polluter. We did not do that. We took a risk and, in retrospect, aspects of that risk have not worked out for us. If we were to end up driving out the management of risk as a concept and issue for young people coming into the Department, I would be genuinely disappointed.

The Chairperson:

On a number of occasions, we said that we support Departments taking a risk, as long as it is a well-calculated risk. We are not averse to that, but it has to be well managed.

Mr Girvan:

I appreciate that this has been quite a long session. Various pressure points were brought on a Department or the Executive to bring about funding of the farm nutrient management scheme as it was presented. To deal with that, Northern Ireland spent 1,000%, or 10 times, more than the amount spent in England and Wales to deliver the same scheme.

According to the reports that I have read, there is no statistical evidence of where the scheme was targeted to identify areas with a problem. It was run as a lottery, in that those who submitted their grant application had an opportunity to have a shout at it. Major lessons must be learned about that process, because it was not necessarily targeted in the proper way.

I appreciate the fact that the Department of Finance and Personnel will have had no knowledge of the threat of £50 million of infraction charges. It will have accepted that infraction proceedings could have been taken against Northern Ireland should it did not meet certain targets. What indication was there that Northern Ireland’s waterways were ever going to exceed an acceptable level of nitrate pollution? I can see that a lot of pressure was brought to bear on the Executive to spend the money to save paying out £50 million. Anyone would decide to spend money to make a saving in the future, but the business case had to be 10 times better than the one that was presented for England, where £13 million was spent, whereas we spent £150 million. That is my key point.

Mr Pengelly:

There are two very different issues there: the issue of funding the scheme and the issue of Crossnacreevy. Between 2007 and 2009, as Gerry mentioned, the business case and economic appraisal for the scheme were the subject of much dialogue and scrutiny by DFP with DARD. On the reference to the word “persuasive” in the DFP accounting officer letter, Gerry talked about an innovative approach. My take on that, without have spoken to the accounting officer, is that the persuasive element was the fact that this was an allocation in June 2007, several months ahead of a strategic Budget process being undertaken by the Executive. Therefore, it gave the Agriculture Department certainty that that money would be available. The alternative was to wait for a budget process that may not conclude until December or January.

Interestingly, at that stage, our colleagues on the Strategic Investment Board were charged with developing capital plans for further years. They had developed a range of scenarios to look at the capital allocations for 2008-09 onwards. Every single one of their scenarios included that funding for the farm nutrient management scheme. Therefore, at no point in any scenario was that money not available. The persuasive element was the Finance Minister being prepared to confirm in June 2007 the certainty of the allocation. Colleagues in the Department could get on with processing the applications so that there was no pause. To have tried to restart it several months later would have caused difficulty.

The Chairperson:

Has DFP learned any lessons?

Mr Pengelly:

The key and most strategically important lesson has been the establishment of the central asset management unit, which the Executive have endorsed. Of fundamental importance is the capital asset realisation task force, which was referred to and is quite a mouthful. The subtlety is “asset realisation”. The emphasis was on selling assets. Now the emphasis is on the asset management unit.

Gerry made the point about looking at sites such as Crossnacreevy, which we might not want to sell, and asking whether we are driving out best value. Could we use a site for an alternative purpose? It is also about making sure that any consideration of disposals is done centrally so that we do not have a situation in which Department A sells a piece of land to a developer only for Department B to seek to buy it back a couple of years later with some hefty profits for the developer. That is the key point.

The other point about the management of Crossnacreevy is that we need to be careful about the difference between the financial accounting and an accurate reporting of transactions that happened in the past and budgeting techniques that are two or three years in the future. The nature of the beast is that there is a reliance on estimates and forecasts and, as Michael mentioned, managing a portfolio of risk. I am comfortable that we got that bit right. We gave back £6 million to the Treasury. Last year, Northern Ireland’s capital underspend was 0·5%, when the UK average was 2·9%. We got that right. The Executive, to their credit, did that very well.

The Chairperson:

Thank you, Richard. You will be glad to hear that there are no further questions. You are free to go. We hope that we do not have to bring you back again. If some of that information had been provided in the previous evidence session, we would not have been back here today. That is unfortunate. We want as much information as possible, especially from senior civil servants, when they come to our inquiry. That is very important. We do not want to have to revisit issues, and not having to do so would save your time and ours. On that note, thank you very much.