MEA Select Committee - Mike Proffitt - Hero or villain? (Part One)

During last week’s two public sessions, the Tynwald Select Committee, set up to investigate the £120m MEA loans scandal, was presented with two, widely contrasting, possible descriptions of the former MEA Chief Executive.

 

Former Capital Projects Co-ordinator, and current Department of Transport CEO, Ian Thompson described how the new Pulrose power station contract continued almost “seamlessly” after the collapse of Enron; and at a, claimed, saving of £7m-£9m. He put this down to Mr Proffitt being able to obtain ‘step-in’ rights; and the CPU had been so impressed they had tried, apparently unsuccessfully, to find out how he had achieved this coup.

 

Mr Thompson said the CPU had been keen to learn from the MEA’s experience; so that they could, perhaps, apply the same technique on other government contracts that got into difficulty.

 

He did, rather caustically, add that Enron’s financial status should perhaps have been better understood in the first place.

 

This ‘positive’ assessment contrasted dramatically to the more generally held view, of the 5 witnesses, including Mr Thompson, that Mr Proffitt had been un-cooperative and had deliberately with held vital financial information from Treasury officials.

 

Colin Kniveton, a former Financial Controller at the Treasury, now CEO at DAFF, was the first to give evidence on the Wednesday and took umbrage, at the suggestion of the former MEA Board, that the Treasury “knew or should have known” about the additional borrowing; and that if they didn’t, it raised questions of their competence.

 

He said he wished to make it clear, to the Committee, that he refuted any allegations of a cover-up in the Treasury; and said he would leave it up to the Committee to determine the question of competence.

 

Mr Kniveton explained that the MEA’s treatment of certain expenditure, in their accounts, albeit not unlawful, had prompted a change to the Audit Act; and that it had been identified, in Treasury, post the £185 bond, that unless the MEA’s income substantially increased they would soon be in financial difficulty. However, they had never contemplated that the MEA would go out and borrow more money.

 

He informed the Committee the scrutiny of the MEA’s expenditure perhaps wasn’t as thorough as departmental expenditure because it wasn’t tax funded. However, he said it was doubtful, from the figures supplied in the ‘quarterly’ returns, sent in to the Treasury, that any overspend would have been picked up. By the time the 2003/4 draft accounts were made available - it was too late to do anything.

 

In trying to exonerate Treasury officials, he told the Committee that he would expect the members of a statutory board to report on any overspend and that it was not something that should be left to the Treasury to judge.

 

In a response to questions from Committee member, Dudley Butt MLC, Mr Kniveton said that concerns had been raised about the lack of information from the MEA, and he was aware that this had been raised at a “high level”. He also knew that the MEA had taken the view they didn’t need to comply with the Treasury requests.

 

He said that Treasury could see that the MEA’s projects were progressing and, essentially, they were persuaded the projects were on budget; and so their fears were unfounded.

 

However, following a request for information, to support the lighting of the fibre optic cable, the true financial situation came to light.

 

In a final question the Committee Chairman, Speaker Steve Rodan, reminded Mr Kniveton that the former Board directors had asserted the Treasury knew or should have known about the level of spending, and that the bond may well need to be tapped, and inquired what his response was.

 

Mr Kniveton replied that neither they, nor KPMG or PKF, could find any evidence to support the MEA’s view. “We couldn’t understand how the MEA borrowed £120m without our knowledge”. He added that the suggestion that they should have been able to deduce, from the figures supplied by the MEA, that extra money was borrowed, was a different matter; “but I can’t agree that it would have been possible”.

 

John Cashen, the former Chief Financial Officer, was the next to be questioned; and, in his introduction, he stated that he had been responsible for liaising with the MEA in respect of finance.

 

He explained that in the mid 1990’s the government had given responsibility for energy policy to the MEA, and made the Board answerable to the DTI. He said that following the House of Keys’ election in 1996, the new Minister appointed a new Board, with no continuity of membership; and a short time later they started to refer to themselves as the ‘Company’ even though they were not.

 

He recounted that Mike Proffitt was appointed to the Board and he subsequently became CEO; which was unusual as the position normally went to someone with an electrical engineering background.  “Apparently he had been successful in running some hotels in the USA” Mr Cashen said slightly dismissively.

 

In 1996 the MEA had no major capital schemes in progress but by 2001 the DTI was pressing for urgent action and some “vague” figures of capital expenditure were produced.

 

The Minister, former Middle MHK, David North had been convinced, despite the provision of the cable, that the ‘lights would go out’ in 2003; not that this assertion was ever properly tested, said Mr Cashen.

 

He told the Committee that there was pressure to get to Tynwald, before the summer recess, and get approval for the bond (an oft used political ploy to get things rushed through without allowing time for proper scrutiny).

 

He pointed out that the MEA had reduced the electricity tariffs, so were considered “the good boys” and, in the eyes of some politicians, “they could do no wrong”.

 

He said that the £185m was borrowed in August 2001, just before he retired, and that was all he had to say on the matter.

 

Mr Rodan inquired about the £36m loan taken out by the Manx Cable Company in 1999; to which Mr Cashen said he had been aware of it but, as MCC operated under the Companies Act, there was no need, or record, of Treasury approval. He added, although he was aware of the loan, he hadn’t known the amount of the loan until now; which seems surprising.

 

Mr Butt pointed out that, on the same day as the bond was approved, a meeting minute recorded the concern of the Treasury that the MEA was not complying with capital procedures.

 

Mr Cashen said he was not at all happy or comfortable with the situation but the Committee had to remember – “the lights were going to go out!”

 

Mr Rodan asked if the Treasury had been concerned at the time about the MEA’s ability to service the debt they were proposing to take on.

 

Mr Cashen said that with an annual turnover of only £30m, and interest payments alone totalling £9m a year, of course they were concerned. However, the MEA had produced figures to show they would be making “millions” by trading electricity through the cable or from their proposed telecoms business.

 

He pointed out that new capital project procedure notes had been introduced in 1998/9 and that it had been intended for all parts of ‘government’, including the MEA, to comply with them. They even ran courses on them (and it is understood, by the Manx Herald, that the MEA’s Ashton Lewis attended a course) but they still had difficulty in persuading the MEA to comply. In fact 18 months later, he said, the MEA was still not complying.

 

Mr Rodan put to him that when the Treasury Minister had informed Tynwald the £185m was the limit, for the MEA’s borrowing, he did not really know if that was correct.

 

Mr Cashen replied that there is always an element of risk involved in capital projects and that 2-3% was not consider unusual. He recalled one project had been 30% over budget, which had resulted in a ‘big investigation’; but the MEA’s was 70% overspent!

 Mr Rodan also put to him that it was alleged the Treasury was aware the money was insufficient.

“Never!” exclaimed Mr Cashen.

 

Mr Rodan inquired if it had ever been suggested that the bond would be ‘tapped’ for more money; to which Mr Cashen replied that it had been a throwaway remark at a meeting with an investor in 2001. He explained that when he had replied yes, to a question about such a scenario, he had the figure of £5m in mind - not £120m.

 

When questioned about the Peel power station project, Mr Cashen replied that things had been better in Mr Kewley’s day.

 

Onchan MHK, David Quirk pressed the issue of political involvement, and whether any political pressure had been applied during the period in question.

 

“Yes”, said Mr Cashen, and repeated once again that “the lights were going to go out” and that was politically unacceptable; so the MEA’s projects had to be delivered.

 

“At the expense of riding roughshod over procedure” inquired Mr Rodan. “You had to put up with the MEA before the lights went out” he suggested.

 

That appears to have been more or less the reality of the situation, and Mr Cashen said only one Minister had expressed any caution; and that was former Glenfaba MHK, Walter Gilbey.

 

In starting to bring the Wednesday session to an end, Mr Rodan asked Mr Cashen if he thought the legislation was clear enough in respect of capital projects.

 

Mr Cashen was adamant that there was no doubt in his mind that financial regulations applied to ‘everyone’, although he conceded this had been later challenged. In response to a follow-up question, he said he couldn’t guarantee that all departments etc complied all the time; and if they did there would be no call for internal or external auditors. (Editor’s note: It could be wondered what use Auditors are if they are not proactive in seeking out irregular or illegal activity before it becomes too far gone to do anything about it.)

 

The final question went to Mr Butt who had noted Mr Cashen’s early comment about the lack of continuity on the Board.

 Mr Cashen acknowledged that the previous Board members had possessed some useful skills; but he thought it was always useful to maintain some continuity “to allow some knowledge of what had gone on before” he explained. However, his parting shot made it clear his view of the whole affair: “they bulldozed this thing through” he stated.