Manx Herald Isle of Man: A tale of corruption, liars and overspends – Proffitt’s evidence to MEA Select Committee

A tale of corruption, liars and overspends – Proffitt’s evidence to MEA
Select Committee
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Herald Editor on 23 May, 2009 07:17:00
 
The long awaited appearance by Mike Proffitt, the former Chief Executive of the
Manx Electricity Authority (MEA), before the Tynwald Select Committee,
investigating the ‘loans scandal’, was perhaps not as ‘explosive’ as may
have been expected; but it still managed to provoke a few comments which are
bound to cause a stir in some quarters.
The hearing, on Friday (22nd May), was one of the better attended for quite some
time - and even generated some wider media interest – and lasted for nearly 3
hours.
Mr Proffitt read from a lengthy and detailed statement, which took the best part
of an hour, rebutting swathes of evidence delivered by previous witnesses; some
of which he described as “a complete and utter lie”.
He commenced by describing how he had been appointed to the Board of the MEA, in
January 1997, as the member with significant financial experience; and that
David North – the then Dept. of Trade & Industry Minister – had explained a
more commercially orientated Board, than in the past, was now required.
The Board had inherited a plan to provide the Island’s electricity through 2
undersea cables, but this had been politically unacceptable; so a new plan was
devised based on one cable and on-Island generation.
This plan had three stages, with the final two involving the building of a new
power station and bringing natural gas to the Island. Three options were under
consideration for the supply of the gas, but it was a forth option that finally
went ahead.
However, having taken over as acting CEO, in January 2000, it became apparent
that the projected figures for electricity demand for 2014 were going to be
reached in 2002, so urgent action was needed. The Board decided the 3 Stages
needed to be brought considerably further forward, and COMIN approved of this
action.
He explained there was a commercial risk with the undersea cable, as no cable
that length had been attempted before, so in order to protect the MEA and the
government, a subsidiary company, Manx Cable Company (MCC), was incorporated.
This was owned 50/50 with the National Grid, which made sense, he said, as the
MEA has no statutory rights in the UK where the cable has one end. It was later
decided it was in the MEA’s interest to buy-out the National Grid’s holding.
A loan of £35m was borrowed from HSBC to fund the laying of the cable and he
pointed out the assets and liabilities of MCC had, initially, been included as
footnotes in the accounts but were then brought onto the MEA consolidated
balance sheet.
There was no suggestion Treasury had consented for this loan, and he recalled
how John Cashen – the former Chief Financial Officer at the Treasury – had
said, in evidence, a private company could borrow from whomever they wanted and
operated under the Companies Acts. This was apparently also the view, at that
time, of the Attorney General.
So when the loans of £50m & £70m were taken out, with Barclays, the same
process was followed; and all of these matters had been reported on in the PKF
report of July 2005.
He recounted that, in January 1999, the only query had been did a DTI
‘direction’ extend to the Board of MCC; but, as it happened, when a request
was made, in January 2000, for MCC’s accounts to be laid before Tynwald he had
readily agreed to the request.
So, he stated, contrary to the evidence of Treasury Minister, Allan Bell he had
from the “absolute outset” co-operated with requests for information; and
had gained the approval of the MCC and National Grid for his action.
As for the longstanding issue with the ‘Capital Procedure Notes’ (CPN) he
now knew, from the evidence he had seen, the AG had advised, in 1997, among
other things, Treasury could amend, revoke or suspend the use of the CPN.
He emphatically stated that the MEA had “at no time complied with the CPN” -
and Ian Thompson (Capital Projects Unit) had known that – and instead they had
followed their own procedures based on best industry standards.
He said nobody had suggested these were inadequate, and added Treasury always
knew and recognised the MEA couldn’t strictly apply the CPN. In fact within
three days of his appointment he had met with Ian Thompson, who agreed this; and
had even written a letter to thank him.
Apparently there had been a “complete impasse” over the Peel Power Station
project so it had been agreed reporting would be on a “fundamental basis”.
This would then satisfy the commercial aspects of the MEA’s projects, avoid
interference in the management of the MEA; as otherwise, if the MEA had to
comply with CPN, they would be unable to meet their contractual obligations and
put them in default.
He said he had been surprised the MEA didn’t have any sub committees and so
Audit, Remuneration and H&S committees were formed; and he was appointed to the
Audit Committee (although he was later replaced by Terry MacKay when he became
CEO).
Initially an external contractor was conducting some of the work but it was
decided to appoint Paul Dewar as ‘Head of Internal Audit’; and he reported
to the CEO, but ultimately to the Chairman of the Audit Committee.
He stated he had “unrestricted access” to the records etc, in order to
fulfil his duties, and produced monthly reports.
He went on to say if he had tried to stop Mr Dewar doing his job he would have
reported this to Mr MacKay who would have told the Board; thus Mr Dewar’s
“evidence is untrue”, he declared.
He pointed out it had been agreed an evaluation of the project would be
undertaken, at the end of it, by professional consultants; and MCC was audited
independently by KPMG. Therefore, the insinuations were “utterly
ridiculous”.
Moving on to the £185m bond, he claimed the figures which had been used to
arrive at this figure had been indicative figures only; and had included £80m
for the power station.
However, that was purely the building of the new station and did not include the
demolition of the old station, ancillary costs, such as the control room; and
the unforeseen disposal costs when they discovered oil contaminated soil on the
site.
Neither had they expected to build the gas pipeline pressure reduction station
which added £19m to the figures; but it wasn’t as though the DTI and Treasury
didn’t know these things.
They were involved in the largest capital project ever undertaken on the IOM and
there were bound to be changes.
He acknowledged that initially, in April 2000, the figure of £100m was
suggested to the DTI and Treasury, but this figure eventually rose to £176m by
May 2001. The final, higher, figure of £185m resulted from the request to
include costs for a wind farm; but he wished to emphasize this was not a budget
but the best indicative costs at the time.
Although, it was accepted some of the anticipated costs were more certain than
others, such as the build cost for the power station, it was made clear the
figures appraised by Deloitte & Touche were indicative; and he said the DTI and
Treasury had never suggested they should be audited.
He also said it was important to note clause 12 allowed the bond to be
‘tapped’ if required; and the ability to tap the bond was considered a very
attractive reason for going down that route.
Clive Wilcox (Director of Corporate Services) and Ashton Lewis (Director of
Capital Projects and Network Services) reported monthly to the Board, and more
frequently on an informal basis, so the suggestion of Alex Downie (former DTI
Minister), insufficient or inadequate information was provided to the Board, is
“utterly untrue”.
Information packs were supplied to Board members, along with regular up dates on
progress, and this was confirmed by the PKF report in paragraph 11.3, he stated;
and no one had ever suggested they had not been given the necessary information.
He recalled Treasury had been invited to attend a review meeting in May 2001,
but nobody attended; and that it was “inconceivable”, if Treasury had any
serious concern regarding the non-compliance, by the MEA, with CPN, they would
have given the go ahead to sign the Nepco contract, to build the power station,
in July 2001.
He explained he had a meeting with Mr Thompson and they had agreed on a
“pragmatic way forward”, and Mr Thompson had later apologised for an
unfortunately phrased later sent, in August 2001, to the MEA.
He went on to say it had been agreed the MEA would supply Treasury with reports
based on the PB Power reports - which he admitted did not contain all the
information supplied in the packs to Board members – and he claimed Mr
Thompson had accepted this but still wanted to hold a meeting; and this happened
in September 2001.
At the meeting he said he had been put under pressure to supply the management
reports, but he had resisted this as Treasury were not managing the project; and
in any case they had access to Clive Wilcox if they needed any assistance.
He claimed he walked away from the meeting thinking the CPN issued had been
resolved along with an agreed reporting procedure.
He pointed out a contemporaneous written record confirmed that the reports
supplied to the CPU were satisfactory; and so it was not now open to Treasury to
assert a contrary opinion.
He said, when informed what figures were being supplied, on a “headline
basis”, he had instructed for some additional information to be included; and
that nobody from Treasury had complained directly to him they were not getting
it.
Therefore, “I refute the claim of Treasury” they were not being supplied
with any financial information, he exclaimed.
He pointed out quarterly financial reports were being prepared and submitted and
these included all the expenditure incurred during that period. An issue was
being made about certain figures not being included in a report, but one figure,
of £54m, was included in the annual accounts, as it related to historical
figures, and a further £36m didn’t come in until after the report was issued.
Mr Proffitt said these issues were dealt with in section 4 of the PKF report,
all the figures were included in the annual reports, and that the PKF report
clearly shows expenditure of £226m was reported to Treasury.
He was pretty scathing of Mr Bell claiming it was only when a cumulative
analysis was conducted - by Colin Kniveton, who he had described as “highly
trained officer” - in November 2004, it revealed, for the first time, the
extent of the expenditure. “I do not accept these statements given the PKF
report”, stated Mr Proffitt.
He went on to pour further scorn on the Treasury officials’ evidence and
stated they were well aware of the spending; and that the PKF report “shows by
their own admission no reconciliations were undertaken”. The figures were
“obvious”, he said, and they would have known spending already exceeded the
indicative £185m.
He explained a reporting matrix had been developed for use by the MEA, and noted
an email from Clive McGreal (Treasury Internal Audit) to Mary Williams (then
Chief Financial Officer) in June 2002 had advised her not to get too bogged down
in the detail; and further correspondence confirmed Mrs Williams had knowledge
of this matrix.
Therefore, it had come as a “complete bolt out of the blue” when Treasury,
suddenly, decided it had no option but to issue a direction, stating the MEA had
to comply with all financial regulations.
In his view no attempt was made to continue with dialogue and with no warning
this “bombshell landed on his desk”.
He pointed out Ken Bawden (the former CEO of the DTI) had said in evidence the
direction had been issued without any consultation with other government
officials; so Mr Bell’s evidence, it had been issued with the benefit of legal
advice from the AG, was clearly untrue.
He said that in all aspects it had been the wrong thing to do, but it had been
issued “irrespective of the consequences”, and was “unreasonable and
irrational”.
He had consulted with the Board and it had been concluded it was out with
administrative law: ultra vires to attempt to force the MEA into a position so
they couldn’t function in accordance with the Electricity Act.
It was resolved that a meeting would be arranged with Treasury and he called
Mary Williams.
His recollection of the telephone conversation was somewhat at odds with her
version.
He recalled saying it was a shocking way to deal with the issue and they should
continue along the way of the matrix; but she dismissed this suggestion saying,
no, you have been issued with a Treasury ‘directive’ “you must obey it”;
and “it is not for you to question a Treasury direction”.
Turning around a comment made by Mrs Williams, he stated that in all his 31
years as a professional officer he had “not been barked at like that
before”.
He said it was not him who had been doing the shouting and he had been the one
who had tried to be conciliatory; but his offers were rejected.
He believed the direction to have been “vexatious, insulting and unlawful”.
A meeting was then held with Donald Gelling to see if a way forward could be
agreed; and sometime later he also met with the AG to seek his assistance.
He and the Board had felt the matter incredibly seriously, he personally
considering it tantamount to constructive dismissal; and, he added, if the
government had decided they no longer wanted his services, all they needed to
have done was to have said so.
As it was, the AG said the direction was flawed legally; and it was no way to
proceed.
At the end of March 2002, Mr Bell wrote to the MEA saying it had all been a
“misunderstanding” and offered to retract the correspondence and reopen
dialogue; something Mrs Williams had “point blank” refused to do.
He said the agreement was to be confirmed by Mrs Williams but she delayed
writing for some considerable time.
At this point Mr Proffitt broke from delivering his statement and referred to
the fact that a considerable number of documents, which he obviously considered
relevant, appeared to be missing from the ‘reference papers’, produced by
the Committee for witnesses and the public; and offered them copies.
He went on to say probably the last thing she did, before taking up the position
as Chief Secretary, was write to him in October 2002; saying if the
correspondence was returned it could be destroyed.
He said he and Mr McCallion were surprised by this as it did not form part of
the agreement that had been made; and in any case they would not entertain it.
He pointed out Mrs Williams had said he had demanded it be destroyed, yet Allan
Bell had suggested the idea may have come from Mr Gelling; but in his mind both
were untrue and that Mrs William’s letter seemed to indicate where the idea
really came from.
Furthermore, contrary to her evidence, she didn’t call him; and her claim she
never saw the matrix was also untrue as one of her letters referred to it.
As for the issue of compliance with CPN if they had wanted to pursue the issue
of obtaining information correctly they had the power under section 8; but they
never did.
When Mark Shimmin took over from Mrs Williams he said he contacted him to
progress the CPN issue - adding the Committee has the information to confirm it
- and the continuing development of the matrix.
He explained they were looking at a possible granting of a formal derogation and
it was arranged, when they met with Mr Shimmin, they would hold quarterly
meetings.
It was recorded, after the second meeting, attended by Charles Fargher, it was
thought they had fostered a good liaison between the parties and the
relationship was good; but the Committee didn’t seem to have this evidence
included in their ‘reference papers’.
However, the next few meetings were all cancelled by Mr Shimmin, he said, and he
never came back to rearrange new ones; nor did he, or anyone else at Treasury,
attempt to progress the matter.
Referring back to Mr Bell’s evidence, that he had been the one that had
“blocked” meetings, he stated this was also “untrue as the documents you
have shows”.
He put it to the Committee that when Alan Teare (CPU) had requested some
information, and contrary to what had been suggested, he had agreed to provide
an update of the power station. He said evidence of this was contained in a
handwritten note, made by a Treasury official, on a document he came across -
which he claimed he had not seen before - when going through the papers to
prepare for his evidence.
He reiterated that, at the time, no complaints or comments were reaching him
about the lack of information; and reminded the Committee it was Treasury who
did not attend the meetings, and so it was their evidence that was incorrect.
He stated the monthly management figures, for March 2004, shows the final cost
of the power station to be £80m + £11m staffing costs, net of the JP Morgan
case; i.e. the total spend was £91m. The figures, he said, given to the DTI and
Treasury, were the same as the figures given to Corporate Services and the
Board.
Following a one-to-one meeting held between Mr McCallion and Mr Bell, Mr
McCallion had prepared a briefing note for the Board, and item 1 recorded the
“excellent relationship”, the “enthusiasm” and particularly mentioned
the good relations between Colin Kniveton and the MEA. So how could the Treasury
now try to paint a different picture about the relationship?
It is “totally untrue as these documents show”, he declared; we were being
“congratulated”.
Moving on, he said he was mystified by Mr Downie’s evidence about his
resignation. He said there were two main reasons why he left, the first being he
had achieved what he had set out to do with the completed projects; and he had
noted the lack of support, within government, for progressing other gas
projects.
However, it was the second reason Mr Proffitt gave which, coming from him, will
probably rub certain Tynwald members up the wrong way.
He claimed he was totally “disillusioned by the corrupt practices in
government”; and continued to assert that former Chief Minister Richard
Corkill and Mrs Williams had tried to persuade the MEA to by Mansat. It was
“worthless”, he stated, and went on to add that “conflicts of interest”,
involving the government and Manx Telecom, are acting as a barrier to
infrastructure development in the IOM.
He acknowledged that this latter matter is not directly related to the subject
currently being investigated by the Committee but still believed it sufficiently
relevant to their remit to mention it.
Both David North and Richard Corkill alluded to a scandal involving the telecoms
aspect of the MEA’s proposals, and it is clear to the Manx Herald that a
thorough investigation is required to establish exactly what these witnesses are
insinuating.
He then drew his statement to a close and a further report will follow on the
Q&A part of his evidence.