PAC and DfT discuss HS2

In October, the Public Accounts Committee had an oral evidence session with Bernadette Kelly, Permanent Secretary at the Department for Transport, and Lucy Chadwick, Director General of the Department for Transport. There was a long discussion of HS2: including whether financial irregularities, such as had already happened with Simon Kirby over redundancy payments was ‘hypothetical’.

The transcript of the part of the session on HS2 is below, and can be watched on BBC Parliament here, with the section on HS2 the first substantive issue covered. The full transcript is available on the Parliament website.

Chair: Every director general has a bigger job than they did when I first started doing this. I am sure it makes you earn your money, doesn’t it? Anyway, Ms Chadwick is at the Department for Transport as well. We will move on to a progress update on High Speed 2.

Q8  Caroline Flint: Hi, and good afternoon. In our 2017 report, we drew out a couple of points of concern. One was the financial controls of HS2. Do you think that HS2 Ltd’s financial controls have improved, and how?

Bernadette Kelly: When I appeared before you with Mr Thurston, at that point we were looking specifically at the unauthorised redundancy scheme that HS2 Ltd had run. It was clear, and I was clear with the Committee at the time, that we were not satisfied that HS2 Ltd had appropriate controls in process to ensure that there was no repeat of such unauthorised schemes. Both I and Mr Thurston were very clear that such controls would be put in place, and they have now been. I am satisfied that those financial controls are in a much stronger position than they were, and I think that all of the actions—sorry, I had a list somewhere in my pack—that we committed to and that the Committee recommended have now been implemented. That is a matter relating to the internal financial controls within the company. What was not—and is still not—at question are the overall controls on the programme’s budget.

Q9     Caroline Flint: We will come to that.

Bernadette Kelly: I am sure you are going to come to that, but I just wanted to make clear that I think the conversation and the recommendations that HS2 Ltd and the Department have responded to were related to those specific elements of control framework.

Q10   Caroline Flint: Just before I come on to the overall project spend and how that is going, one aspect of our last report was the relationship between the Department and HS2 Ltd. I notice that in your letter to the Committee on the 23 October you say that both parties have looked at how they can have a more “honest and trust based relationship”. That is a quote straight from your letter. How has that manifested itself?

Bernadette Kelly: We have done two things. You always need two things to be in place in order for a relationship between a Department and a critical delivery partner, working at arm’s length, to be successful. First, you need the controls, the frameworks and the accountabilities to be crystal clear. I think I set out in my letter something of how we have revised the framework document and the development agreement so there can be no doubt what the company has authorisation to do on its own account and where it has to seek authorisation from HMG in order to act.

We have clarified and revised and updated all that, but I do think an ongoing relationship of trust is vital as well, and a lot of that is built through the senior management relationships we have with the company and the framework we have put around that. We now have a strengthened client board and we have a shareholder board. Those are specifically intended to ensure that the senior dialogue we have with both the executive and the chair is transparent and as open and honest as it needs to be for us to be confident of progress.

Q11   Caroline Flint: In terms of representation of the Department on those boards, who is the person from the Department who goes along to them?

Bernadette Kelly: For the client board, it will be my director general responsible for High Speed 2. That is Clive Maxwell. For the shareholder board, it is Clive Maxwell and I believe Nick Joyce as well, who heads up my shareholding team and is my director general for resources and strategy.

Q12   Caroline Flint: And they have the authority—and with that the clout—to speak for the Department and therefore have real conversations at both board levels to represent the views of the Department?

Bernadette Kelly: They certainly have the authority and the clout. Clearly, there is also a regular dialogue with Ministers and with the Secretary of State, and those are also a part of the regular meetings and conversations that happen with the leadership of HS2 Ltd.

Q13   Caroline Flint: Going to the overall project spend, the overall funding is, I think, £55.7 billion for all three phases.

Bernadette Kelly: Yes.

Q14   Caroline Flint: We are aware that in July this year the Department announced a delay till June 2019 of the notice to proceed for construction of phase 1, which is London to Birmingham. The Department has also confirmed a delay to the legislation for phase 2. That might suggest there are some issues here, but there have also been reports about underestimating, for example, the cost of land values in relation to the overall budget plan. How confident are you that the scheme is going to come in on budget?

Bernadette Kelly: There are a number of slightly separate points I might want to pick up there. Overall, we are very clear that we are determined that HS2 Ltd will bring this project in within the overall funding envelope of £55.7 billion, which you described. I would be very happy to walk through the controls and the systems and the oversight that we have in place to ensure that that is indeed delivered.

You referred to the notice to proceed delay. The notice to proceed is a very important point in the delivery of this project. It is a really major milestone for HS2 Ltd. There is a lot of work that needs to be done to ensure that we are fully ready to issue that notice to proceed, and there is a lot of work that HS2 Ltd needs to do as well to satisfy us in Government that we can issue that. It will be accompanied by a new full business case and affordability assessment. We still intend to do that in June 2019, but we thought it was extremely important that that work is done thoroughly and properly at this stage. It does not impact on the overall timetable for the delivery of the project, which has not changed.

The same is true of the timetable for the phase 2 hybrid Bill. Those are shifts to the timetable within the overall programme but do not affect the end dates that we have currently committed to.

Q15   Caroline Flint: I appreciate that you want to make sure a thorough job is done of assessing where they are, but are you worried that any of these delays could push up costs? Obviously, the investors and others in this might see more risk involved, and that in itself might have a negative uplift to the overall cost.

Bernadette Kelly: We are looking equally at schedule and cost all the time; you cannot look at one in isolation from the other. Actually, delays can also have the effect of reducing costs if they de-risk timetables, so when you look at a programme of this complexity and scale the interaction between schedule and cost is not always straightforward. I would say, though, that at the moment we are very committed to both maintaining the schedule and ensuring this project remains within the existing cost envelope. It is inevitable that in a project of this sort there will always be cost pressures, but it is the job of HS2 Ltd—

Q16   Chair: Of course you would say that, and I am not suggesting that you do not believe that. You have your two people on the board, but often problems happen with these projects and they come back to you with a begging bowl. How are you really going to keep a grip on that money?

Bernadette Kelly: It comes down to our whole framework of governance and oversight. In the first instance, we set a very clear total funding envelope for the project and we then charge HS2 Ltd to remain within that envelope. Of course, that includes a contingency, as you would expect for a project of this scale.

Q17   Chair: But where is the sanction if they do go over?

Bernadette Kelly: That is not an option that we are prepared to contemplate. What we are doing instead is focusing on the framework document, which governs the assurance of three lines of defence that the company has, including full independent assurance of its delivery of the programme and our own client board and shareholder boards being fully sighted on the programme, such that we can ensure that the necessary steps have been taken to bring the project in within the funding envelope.

Caroline Flint: I have another question but it is on HS3. I think Sir Geoffrey wants to come in on this.

Q18   Sir Geoffrey Clifton-Brown: On the timetable, Ms Kelly, as you know I sat on the HS2 phase 1 Committee for months and months, examining this in huge detail. The engineering projects that you have to do in Camden—widening the route at Paddington station, the tunnel connecting it to Old Oak Common, and works around the two stations—are some of the largest engineering projects in Europe. It seemed to me that, even without the delayed start, the timetable was already pretty tight, so I am not sure how you can sit there and be so confident that the finish timetable is still “on track”—excuse the pun.

Bernadette Kelly: I don’t disagree—this is an enormously complex project to deliver. You are absolutely right that the fact it is city centre to city centre—into a number of cities, of course—makes it uniquely complex and challenging project in its engineering. I very much agree with that broad assessment.

I do not accept that we are talking about a delay to the schedule at the moment. What we are doing is managing pivotal milestones and the right way to ensure the work is done at this early stage in the project as thoroughly as it can be, because in that way we set the project up better for success in the future.

It would probably be an unwise permanent secretary anywhere who offers complete guarantees about what might happen 10 years down the line. What I can tell you is that we are holding HS2 Ltd firmly to their cost envelope and the schedule we have set for the project.

Q19   Caroline Flint: I still cannot quite understand how delays do not lead to a risk to delivery. Secondly, presumably work is being done in advance of the notice to proceed, and that is incurring costs. So whatever the good reasons are, I am trying to understand how it does not enhance risk to delivery and increase cost.

Bernadette Kelly: What is happening is, within the overall programme, some milestones will move and fall in different times. That may not necessarily be critical for the overall delivery of the programme—or it may be that, in some cases, that is using up some of the contingency built into the schedule as well as the cost envelope. But at the moment I do not consider the decision to issue the notice to proceed in July 2019 carries significant risk for the end date of the project.

As far as work being done at the moment is concerned, you are absolutely right that work is going on. Anyone wandering around Euston will see evidence of early work, and similarly work is now under way in Birmingham to prepare for this. HS2 Ltd has set out the designs for the stations around Birmingham and Solihull. So work is going on. There is not a sort of moment of hiatus or pause while we do the work for the notice to proceed. There are a number of things that the company is getting on with and which it is authorised by the Department to do, including incurring costs in order to keep the overall project on time.

Q20   Caroline Flint: How much would you say HS3 or Northern Powerhouse Rail is a priority for the Department?

Bernadette Kelly: I think we have been clear that Northern Powerhouse Rail is something that the Government are absolutely committed to doing. I think it was in the Government’s manifesto. We have set out since the work that we are doing to support the development of Northern Powerhouse Rail.

Q21   Caroline Flint: This project is much more of an east-west connection of the north of England, including my own region, Yorkshire and the Humber, and the north-west and the north-east. Some say that it would be cheaper per mile, with less new track, and quicker to deliver than HS2. Is there any work going on the Department to compare cost and delivery, and also impact of HS3 against the second phase of HS2?

Bernadette Kelly: The work is going on at the moment to develop the full business case and the strategic case for Northern Powerhouse Rail and Transport for the North is working with partners in the north to do that. It is obviously a very significant way behind, in terms of its development, than HS2 at this point, but that work to really get a clear sense of the strategic case and the business case is under way as we speak.

For HS2, we have a BCR in the strategic business case of 2.3—that is £2.30 benefit for every £1 spend. That is the BCR we have for the project. What we are now trying to do, as I am sure the Committee is aware, is to ensure that HS2 is being delivered in a way that supports and enables the future development of Northern Powerhouse Rail. We have allocated £300 million to HS2 Ltd that is focused on future-proofing junctions and stations in a way that will make Northern Powerhouse Rail easier to deliver. It is increasingly becoming clear that we almost need to see these as a sort of staged series of choices for investment, rather than completely separate things.

Q22   Caroline Flint: But if the north of England said the HS3 east-west connections were of more importance to business and communities across the north than phase 2 of HS2, could you see either HS3 being given priority over that second phase or HS3 having to be delivered at the same time as HS2?

Bernadette Kelly: What the north of England is actually saying at the moment is that it fully supports HS2. I think it was the week before last—

Q23   Caroline Flint: They are also asking that HS3 should be delivered at the same time as HS2.

Bernadette Kelly: I think in terms of the development of the project that would be extraordinarily difficult, simply because it is some way back in terms of its strategic case, development, design and all the things that need to be done in order for Northern Powerhouse Rail ultimately to be delivered. The north has been very clear in its continued support for High Speed 2, because it sees it as a vital stepping stone in building regular connectivity—

Q24   Caroline Flint: But would you acknowledge that the plan that is coming from Transport for the North for HS3 is supported by businesses and councils across the north of England and that for the north to realise £100 billion-worth of investment, HS3 needs to come into play, and it cannot wait until HS2 is finished?

Bernadette Kelly: We are not putting the development of Northern Powerhouse Rail on hold until we have built HS2, including HS2b. We are developing the plan for Northern Powerhouse Rail with the north now in real time alongside the work now being done to build HS2.

Chair: Before I move on to Sir Geoffrey Clifton-Brown, I want to welcome warmly to the Committee the Speaker of the House of Representatives of Belize and the President of the Senate of Belize, who are here today to watch our work. I did not manage to meet them beforehand, but they are very welcome. I call Sir Geoffrey Clifton-Brown.

Q25   Sir Geoffrey Clifton-Brown: Ms Kelly, I apologise. I am trying to do two Committees at once this afternoon and I managed to miss the date anyway, so that was a complete waste of time.

I refer to the framework document, which you have drawn up as a sort of clarification of the Government’s rules between your Department and HS2. Ms Flint has already referred to this. Paragraph 3.1 states: “The Department for Transport and HS2 Ltd will have an open, honest, trust-based partnership supported by the principles set out in the Cabinet Office guidance.” How can we trust that when we know that the former CEO, Simon Kirby, sought the Department for Transport’s permission to pay enhanced redundancy payments? He was told quite clearly that he must not do it, but he went ahead and did it, wasting £1.76 million of taxpayers’ money. He is reported to have gone on to a highly paid job at Rolls-Royce, where he is paid three quarters of a million pounds. When an official blatantly disregards advice like that and misuses public money, how can we be sure that any words in a document like this actually mean anything?

Bernadette Kelly: I think you are referring to events that we have since addressed, both within the Department and within the company. Simon Kirby has of course left the company. I don’t think he did seek approval; he was told not to seek approval. My Department’s subsequent investigation into these events showed that he did not act on the clear signal he was given from the Department that we would not support any such approval being sought. Officials within the organisation then proceeded with the scheme none the less.

Chair: We know that. Sir Geoffrey is asking how we can be sure that the words in the document will actually make a difference.

Bernadette Kelly: How can we be sure? We have revised the framework document. HS2 Ltd has put in place a number of steps to strengthen its own internal controls, and it has put all of its staff through an induction training programme to make sure that they fully understand the importance of managing public money. We have a new chief executive, a new chair and a new senior team. We are working extremely closely with them to ensure that the systems are in place to ensure that everyone knows what is expected of them, and also so that we have the relationships of trust and transparency that we need to ensure that HS2 Ltd can successfully deliver this programme—that is an ongoing effort and something that we all have to work at.

Q26   Sir Geoffrey Clifton-Brown: I don’t doubt your sincere words. I just want to see what will happen in the future. Paragraph 8 says: “As Accounting Officer the Chief Executive”—which Simon Kirby was—“is personally responsible for safeguarding the public funds”. If the chief executive were to act similarly again, do you think your systems would actually stop it happening?

Bernadette Kelly: I am confident that the chief executive would not breach the control environment. I am absolutely confident that he knows what his responsibilities as an accounting officer are, and that he will observe them extremely seriously. Clearly, if there were to be a breach, suitable action would then be taken, but that is a wholly hypothetical situation. I really think that a lesson has been learned in this process.

Q27   Sir Geoffrey Clifton-Brown: I am not doubting your sincere words. If a similar event occurred again, what action would your Department take?

Bernadette Kelly: It would depend on what the event was and what the circumstances were.

Q28   Sir Geoffrey Clifton-Brown: A similar action to the sort that I am talking about, where the guidance laid down by your Department was breached and public funds were misused.

Bernadette Kelly: I can only comment on such a circumstance when I have the facts in front of me—it would depend on the severity and the circumstances.

Q29   Sir Geoffrey Clifton-Brown: Take the Kirby case—he got away scot-free. What action would be taken in future?

Bernadette Kelly: In those circumstances, we would look at what appropriate sanctions and disciplinary steps were needed in response to any breach. I really find it quite uncomfortable to be invited to speculate on what steps we would take in a situation that hasn’t arisen. We would look at it and we would use the sanctions and the disciplinary mechanisms within our control to ensure that any breach is dealt with appropriately.

Q30   Chair: Do you have enough sanctions to sack the chief executive?

Bernadette Kelly: Of course we do—absolutely.

Q31   Chair: It could be up to that level?

Bernadette Kelly: Of course. In the event, any holder of a senior public office can be dismissed if they have behaved in a way that justifies that.

Q32   Caroline Flint: Were they before? Was that sanction there when Simon Kirby was making this decision?

Bernadette Kelly: Look. We are going back over the facts of the last hearing. It was identified at the time that there were officials within the organisation who acted without authority. Those officials have left the organisation.

Q33   Caroline Flint: They weren’t sacked or disciplined?

Bernadette Kelly: One of them resigned and I believe that one of them—I would need to check the exact circumstances because it was a matter for the company—was dismissed. I think that Mr Thurston has previously informed the Committee about the steps that were taken in relation to individuals, but if you wish me to clarify those again, I would be happy to do so.

Q34   Sir Geoffrey Clifton-Brown: It is not hypothetical, because we know what Mr Kirby did. Do you think it is right that he should have got away scot-free when he wasted public funds in the way he did? He did not waste them inadvertently; it was completely advertent. He knew exactly what he was doing.

Bernadette Kelly: I am not sure that the second part of your statement is necessarily true, based on the facts as I understand them. Mr Kirby had resigned before this issue came to light.

Sir Geoffrey Clifton-Brown: He knew it was coming.

Bernadette Kelly: As you know, I took legal advice, which I shared with this Committee, on what further action it would be appropriate for the Department to take.

Q35   Chair: Thank you. We appreciate your sharing that because, as you can gather, the Committee feels very strongly about this. It was a lot of taxpayers’ money on a very expensive project that went into people’s individual pockets for no public gain at all.

Bernadette Kelly: I completely share the Committee’s unhappiness with the scheme. It should never have happened. It was an unacceptable breach of the control environment. I was very clear about that when I last sat in front of the Committee and I am very happy to be clear about it again.

Chair: We should just flag that the Committee is pursuing this with other sectors of Government where there are arm’s length bodies where interesting things happen—inappropriate, and sometimes financially inappropriate, things. We might be talking to you further about what lessons you have learned.

Bernadette Kelly: I am happy to do that.

Q36   Chair: But for today we have a lot to get through, so we will leave that there and move on to Crossrail.

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