Oral evidence: Civil Service Effectiveness, HC 497

Oral evidence, 15 January 2018.

Witnesses

Sir Jeremy Heywood, John Manzoni and Rupert McNeil.

Chair

I welcome our three witnesses to this public evidence session on civil service effectiveness. Could I ask each of you to identify yourselves for the record, please?

Sir Jeremy Heywood

Jeremy Heywood, Cabinet Secretary.

John Manzoni

John Manzoni, Permanent Secretary to the Cabinet Office and Chief Executive of the civil service.

Rupert McNeil

Rupert McNeil, Government Chief People Officer.

Chair

Thank you very much for being with us on what I imagine is an even busier day than usual. Indeed, the collapse of Carillion has already been the subject of discussion of this Committee, both informally last week and today. I am able to inform you at first hand that we are going to conduct a new inquiry on sourcing public services: lessons to be learned from the collapse of Carillion. This will go wider than just Carillion and look at some of the issues that we will want to revisit from our 2014 report on public procurement and indeed our report on IT and Government from 2012, also drawing on our scrutiny of the collapse of Kids Company in terms of the relationship between Whitehall Departments and non-public sector providers of services, though this is on a very much grander scale than that particular controversy. In the light of that, I hope you will be happy to answer one or two questions about Carillion, though I do appreciate that the Minister for the Cabinet Office is shortly to make a statement. I am not asking you to pre-empt anything that he would say, out of respect to him, but maybe you could help us with one or two more general questions. How do the Government judge the overall exposure to particular companies across the public sector as a whole? Individual Departments or even Whitehall on its own would not naturally, from its own architecture, gather that intelligence about its overall exposure to risk.

Sir Jeremy Heywood

John, do you want to kick off on that?

John Manzoni

Yes. As you know, we have put in place, or are putting in place—and have started for a year or two now—a functional structure across Government, one function of which is the commercial function. The commercial function’s role is basically to oversee the relationship between the public and the private sector. In this instance, we have over the last year or two identified between 30 and 35 companies that are the biggest suppliers to Government. I am talking about central Government now. Across Whitehall we have identified 30 to 35 companies that are what we call strategic suppliers. We have dedicated teams focused on those so that we are over time beginning to understand much more about the totality of the business across Government. In this case, had we had this situation a couple of years ago, I think the outcome would have been significantly different and probably significantly worse for the public sector than it is today. By the way, that does include, in a broad sense, the Department of Health and hospital trusts as well. In this case, we can identify the contracts that this particular company has. For the local authorities it is a bit more difficult. We are beginning to understand how we might choose to do that, but that is a distributed activity and that is a bit more difficult.

Chair

How dependent are you upon the Crown commercial officer with regard to that company?

John Manzoni

There are two things. Do you mean the Crown commercial representative?

Chair

Yes.

John Manzoni

We have 22 of them across the system. These are part-time roles. They are more senior part-time strategic roles. We have underneath them about 20 of the 35 so far, but we have dedicated teams focused on the 30 strategic suppliers. In fact, the horsepower is coming from the full-time teams, headed by a strategic partnership manager, whereas the Crown rep is a part-time, more senior role. This is a programme that has been going on for two or three years now, I think, and has led to this deep, more strategic and more lasting programme of full-time focus on these.

Chair

For how long was Carillion without a Crown rep?

John Manzoni

The Crown rep rotated off Carillion in about summertime this year.

Chair

So there has not been one during this period?

John Manzoni

No, there has not been. I have to say that, in fact, as I have said, the horsepower around Carillion has been provided by the in situ full-time team, headed by the strategic partnership manager, who has played a blinding role in this particular circumstance.

Paul Flynn

Blinding in what sense?

John Manzoni

Very good.

Paul Flynn

Not that he had his eyes covered?

John Manzoni

No. It was a she. She has done a really good job over the course of the last several months.

Chair

How easy is it for a Department to say to a company, “We have decided you are looking a bit high risk at the moment. We do not want you to bid for this contract,” without being accused of discrimination against a company?

John Manzoni

As you know, we cannot do that under European procurement rules. We have to be completely open and clear under our procurement rules, but we do have continuous dialogue. We are getting better and better. I am not saying it is a finished job, but we are getting better and better. We have a lot of dialogue with all of these strategic suppliers and they do a lot of business with procurement.

Chair

Why can’t you say to a company, “Look, you have all these broker circulars who have been short-selling against you in the markets. You have issued profit warnings. We think you should take a holiday from bidding for Government contracts for a bit because you are looking a bit high risk”? Do you mean the Government cannot do that?

John Manzoni

Because it is against the law, Chairman.

Chair

How are the public meant to understand that you are mitigating risk when you have to let them bid and then award them contracts even if you do not want to?

John Manzoni

We never award contracts that we do not want to. We have a full evaluation process. There is never a contract awarded that we do not want to award—otherwise we would not award it.

Chair

I think you understand what I am asking here. I do not think I am getting an answer.

John Manzoni

Let me see if I can understand it. Try again.

Chair

If you cannot exclude them from bidding and they produce the best bid, then presumably you feel legally bound to award them the contract.

John Manzoni

We have a full evaluation process of all the bids, which includes a range of factors, financial health—

Chair

You could block them at the last minute?

John Manzoni

If they do not meet our conditions, then of course we can score them lower on certain things. We do a full review of all the conditions of any company as we award these bids.

Chair

I am going to leave it there. I will bring you in in a second, Cheryl.

Mr David Jones

The Government have been very quick to issue assurances that employees will continue to be paid and that services will continue to be delivered. In fact, the Minister for the Cabinet Office, David Lidington, said the message to workers is, “Come into work today. There is important work to be done. We, that is the Government, will pay you.” Has any assessment been carried out as to how much these assurances may cost the taxpayer?

John Manzoni

In broad-brush terms, yes. Perhaps I can explain the way that this has happened. This is a highly unusual situation, in some senses managed to the state that we are in today via us and our conversations with the company and with the official receiver. It is very unusual for a company of this scale to go straight into liquidation with the receiver. Usually they go into administration. That is a far more random process; it is a far more brutal set of activities. What we have done is put this to the official receiver with the instruction to maintain the continuity of public services. That is quite a deliberate act. From the moment this happened there were communications throughout the system, exactly as you say, to all of the employees that are showing up across the public sector to say, “Please carry on coming to work because you will be paid.” The cost of that of course is no greater than the provision of the service in the normal course. The bulk of the activity that for the moment we could, if you like, focus on the official receiver and understand is the cost of the services that are being provided every day. That will carry on. There may or may not be some additional cost as a result, for instance, of the administrative team that we have had to put in underneath the official receiver, which again we put in place in the company some weeks ago in order to prepare for this situation—contingency. There will be some administrative cost to that, but it is too early to understand the total cost. The bulk of the cost of this activity is of course the cost of the provision of public services, which would have happened anyway.

Mr David Jones

Carillion has a large number of subcontractors. Do the assurances given extend to those subcontractors and to the employees of those subcontractors?

John Manzoni

To the extent that there are subcontractors providing the public services, the message has been, “Please maintain stability. The bills will continue to be paid.” I am not going to say that there may be some individual in some small subcontractor somewhere down the supply chain who gets nervous about something and chooses not to show up. We have no evidence of that, by the way, in the first few hours of this crisis. We appear to be in a good place. I think that the activities and the structure through which we have managed this particular liquidation has thus far mitigated the worst of those impacts and our intent has always been to maintain the consistency of public services.

Chair

Just for clarification, you are talking about the public sector contracting part of the business, not the construction side?

John Manzoni

Not the private sector. Some of the construction activity is related to the public sector as well.

Mr David Jones

One of the major contracts that has been referred to extensively in the press today is the £745 million Aberdeen bypass, which I assume is a contract entered into by the Scottish Government. Have you been liaising with the Scottish Government on this?

John Manzoni

Yes.

Mr David Jones

Are the same assurances being given in respect of Scottish contracts?

John Manzoni

To all of the Carillion public sector contracts, yes, those assurances have been given. In the case of the Aberdeen bypass and in many of the infrastructure contracts, by design these are undertaken by joint ventures, so Carillion is one of a number of partners. The construct of those contracts is joint and several liability and that is exactly the reason we do it, so that if one of the parties fails the others can step in. Indeed, today Kier has stepped into one of the very biggest contracts immediately on the failure of Carillion to say, “We will cover and take over.” That is true for many. There are many other companies.

Chair

Which contract?

John Manzoni

It is the HS2 contract. The same is true in Aberdeen. Aberdeen is in a joint venture structure.

Chair

What happens to the PFI contracts for individual schools where the school is paying for the financing and paying for the facilities management perhaps?

John Manzoni

It is a horribly complex set of financial structures, which I will just get in a knot if I try to explain it all in this Committee. In fact, the Department for Education has put in place over the course of several months assurances to itself, and so far so good; there are contingency plans for all of these things. Usually what happens is that the SPV—the special purpose vehicle in order to run the PFI—steps in and the lenders to the SPV get to pick up the bill. That is roughly—

Chair

We will not go into more detail now. I will bring in Kelvin briefly because he has a question.

Kelvin Hopkins

I put it to you that this phrase has been used quite a lot: lessons learned or lessons to be learned. This is not the first crisis of this kind. We had Jarvis in 2004, when I asked a question of the Prime Minister—which I have here—about Jarvis. Later on we had the double debacle of Tube Lines and Metronet on the London Underground, which was absolutely opposed by the Mayor and TfL. Eventually that collapsed and it went back into the public sector. Do we learn some lessons from these things or do we just carry on?

John Manzoni

No, I believe we learn some lessons. First of all, what I would say is that in the end of course we are talking about private sector parties. Companies fail and succeed, so we need to expect some of that to happen. Secondly, I would say that, as I have mentioned, the commercial function I believe has put us in a much, much better place to manage this particular issue than we would have been in the past. Indeed, some of the lessons learned resulted in the building of commercial capability across the public sector and across the Government. In fact, in this particular instance, the official receiver is duty-bound to investigate what went wrong in the fullness of time. We need to be slightly careful about how we do that, because otherwise we might prejudice the official receiver’s ability to do that, but of course we should be interested in learning lessons in this and across our system to see how we can improve. Let me repeat that I think in many ways this is the failure of a private sector company. It failed to reach agreement with its lenders in the final analysis. Some wheel is going to come off sooner or later somewhere in the system, but this is a very complex structure. I believe that our structures and the lessons that we have learned from the past have put us in reasonably good stead for this.

Dame Cheryl Gillan

Aren’t you just putting a hugely brave face on what is an absolutely catastrophic situation? Basically what you are saying to us is that there is no contract that the Government can sign that will ever be too big to fail.

John Manzoni

This company has failed. I think the shareholders and the lenders to this company have lost billions. This is certainly not an example of too big to fail. This company has failed and its shareholders and lenders have been wiped out to the tune of billions of pounds. That is genuine failure.

Dame Cheryl Gillan

But you are going to still support HS2 and all the other projects that this company was signed up to?

John Manzoni

What we are doing is paying for services that the public sector is going to receive. Essentially, we want to build HS2, so we will pay for the building of HS2. What has happened is that the intermediary, which happens to be this company, has failed in so doing. What we have done is put in place processes and structures that will allow us to continue to pay for the service we receive, because that is what we want to do.

Dame Cheryl Gillan

It is no secret that I have taken an interest in the HS2 project over the past few years.

John Manzoni

I understand.

Dame Cheryl Gillan

On 17 July I forced the Secretary of State for Transport to come and make a statement to the House of Commons very late at night—it was a very unusual thing—because after the contracts were signed there were question marks over a large number of the companies that were signed up to HS2. I asked on that occasion whether due diligence had been carried out on all the companies and whether we weren’t, in reality, transferring to the taxpayer unacceptable levels of risk. They were companies that had major project overruns, where there were £50 million of losses from another company and where there were three outstanding health and safety prosecutions. One of those companies is one the Government are seeking to rely on to pick up the bill on the particular HS2 project. Do you think that is acceptable in terms of risk to the taxpayer, bearing in mind it is a £64.5 billion project now, at a conservative estimate?

John Manzoni

Let me answer in this way. The private sector has successfully delivered many, many projects for Government. Just through the PFI structure, £60 billion-worth of infrastructure has been delivered into this country, which the Government have not paid for and the private sector has paid for extremely successfully, all by the same companies, one way or the other. Of course there are good ones and bad ones, but the structure of what we do in that particular case is a joint venture of three companies in particular for this reason: the risks are shared. In this case, one of those companies has already chosen to step in and said, “We will cover this.” That is why we structure it that way. It is of course a much bigger debate and there are various better companies and worse companies, but in particular this country is very good at building infrastructure through the private sector and through the various financing constructs that we use, through the delivery authorities that we use, and we have been very successful at it. In general that is of course something that we have to keep under review, but I come down to say it has been net/net very positive for the country.

Paul Flynn

Could I ask Sir Jeremy the questions, because mine are more general ones about the conduct and the role of the civil service? How would you describe the conduct of the two civil servants who warned about giving £3 million to the bottomless pit of Kids Company—which happened to be a Government poster project at the time—and who made a public statement saying that giving £3 million to them was unwise, four days before they went bankrupt?

Sir Jeremy Heywood

I think the civil service and the civil servants involved conducted themselves very well in relation to Kids Company. They demanded an accounting officer direction because we were uncomfortable about the decision that Ministers wanted to take. I think the system worked in the way that it was intended to, which was that we took a dispassionate view as civil servants as to the likelihood that that was going to be a productive use of money. Ministers decided that they wanted to give it one last go and that was very public. This Committee has subsequently looked at it, so I am very comfortable with the quality of the work done on that.

Paul Flynn

I think we would all agree that this is civil servants doing the job they are supposed to be doing in the interests of the nation. Why did that not happen with Hinkley Point? We have had two reports on Hinkley Point from the National Audit Office and from the Public Accounts Committee. They have pointed out that the additional cost that is likely to be paid on future bills by the poorest section of the community is £30 billion for a system that technically has never worked anywhere. Do you think there should have been a point where civil servants should have intervened and given us the information that we have now from the auditors, but we did not have when the decision was made?

Sir Jeremy Heywood

The civil service has looked at that issue on multiple occasions in a very searching way and at each time has looked at the value for money calculation and has concluded that on balance it is a value for money project. That is because a lot of the analysis that people put forward fails totally to take into account the risk transfer that is there. Not a penny of taxpayers’ money is at risk in relation to Hinkley Point, and that is because we have structured a contract that leaves the risk with EDF and its partners. Therefore, just simply looking at this without taking into account the risk transfer is a very narrow way of looking at it.

Paul Flynn

Your view is not the one that is supported by the National Audit Office or the Public Accounts Committee. If we can take one part of your very optimistic view of the future of this, Électricité de France at the time of the award of the contract and now are 38 billion in debt. The assumption was that if Hinkley Point had not gone ahead they would have gone bankrupt, if a nationalised company can go bankrupt. Do you think that there is a bearing on this; that when we look at a company that is clearly a basket case it is up to civil servants to intervene and stop Ministers—or at least try to persuade Ministers—from making a catastrophic mistake?

Sir Jeremy Heywood

It definitely is the job of the civil service to look at the facts, look at the analysis, look at the balance sheets, look at the risks, the contracts and so on, and if the civil service thinks that Ministers are making a mistake by going ahead with a course of action, they should certainly say that without fear or favour. On this one, I do not agree with the NAO’s analysis. I do not think that took into account the risk transfer that was there. So far, I repeat, the taxpayer is not subject to any cost overrun at all. That is held entirely by EDF, the contractor.

Paul Flynn

There are other problems. I will not dwell on it. Just take the case that we have before us now. Early in the year, in the summer and in the spring, there were profit warnings from Carillion. It was quite clear that there were serious problems there. Why were they awarded a big contract subsequent to that?

Sir Jeremy Heywood

John has already partially answered that. There was a profit warning last July. Profit warnings are made by companies. That obviously puts us on warning that there is an issue here. It does not necessarily mean that the Government have to pull all their business because that could then trigger a complete collapse of the company. What we do have to do is be much more vigilant and we therefore have to look at these things case by case. As John said, we have to apply the criteria that has to be applied, including financial management quality of the potential bidders and so on. In this particular case, as he has already indicated, I think in almost all cases since that July profit warning the contract was handed to a joint venture. The joint venture partners have then become liable to step in, in the event that Carillion was unable to fulfil its role. That is the extra protection that was secured post that profit warning.

Paul Flynn

The private financial initiative, as introduced by Prime Minister John Major, was an attempt to get instant gratification for politicians by paying expensively for money borrowed usually from the private sector. Has an analysis been done to say how much the economy has gained or lost from this, bearing in mind the great debt that many of the PFI schemes are still carrying? Mr Manzoni seemed to suggest that this PFI practised by all those Governments since John Major’s time was a great success. Was it?

Sir Jeremy Heywood

I think there have been some very, very successful PFI contracts.

Paul Flynn

I am aware of that. You are not answering my question, are you?

Sir Jeremy Heywood

I think your direct question is: have studies been done? I am sure lots of studies have been done. Certainly in Government we have studied PFIs. We have improved PFI along the way. We now have PF2. We have tried to learn the lessons. Yes, the cost of finance has sometimes been expensive, but equally it has been a way of disciplining the project so that we have had more success in getting projects in on time and on budget.

Paul Flynn

But there has not been a proper analysis of it on the whole and what has happened where there has been a private gain or a private loss?

Sir Jeremy Heywood

There have been plenty of analyses done of the success or otherwise of PFI.

Chair

We will conduct our own analysis as part of our new inquiry.

Paul Flynn

I look forward to that. I am interested. As we know, there was a story that there was a video that civil servants had preparing to give answers to questions from a Select Committee. The general advice is to make your answers as puzzling as possible and use as many words as possible and speak for as long as possible in order to avoid the Committee asking too many questions. Are you rehearsing for making a new video today?

Sir Jeremy Heywood

Sadly, I have never seen this video. It would have been very good preparation for this Committee.

Chair

I have no doubt that you will put it into the public domain, if it exists, as quickly as possible. Could we move on now? Thank you very much for being so candid.

Sir Jeremy Heywood

Could I make one general point, just to echo the point that John made? In the context of this overall inquiry into the effectiveness of the civil service, I do think the point he makes is absolutely right. One of the things we have learnt over the years—and I certainly learnt this following the Serco/G4S saga a few years ago—is that we needed to improve the quality of our commercial function. That is one of the reasons why for the last three or four years we have absolutely prioritised building the quality of our commercial profession, bringing more people from outside, making sure that everybody that is in the commercial profession is of the right standard by putting them through an assessment centre, having much more of a grip at the centre, better information about what contracts we have and also doing this contingency planning. People are lightly moving over this thing, but the fact is that John’s team—and John has led this work—have done weeks and weeks of contingency planning against the worst-case scenario, which is what has happened today. No doubt it is a bad outcome for the country, but the work that we have done in the commercial profession, trying to understand across 450 public sector contracts what will happen in this worst-case scenario, is work that 10 years ago the commercial function in the civil service would not have been capable of doing—it would not have known where to start, frankly. The fact is that we now have a total understanding of where the contracts are and we have the ability to convene Whitehall and we have the ability to interrogate what the planning is, learn from each other and so on. None of that 10 years ago, probably even five years ago, would have been possible. I think you have seen a step change in the maturity of that commercial function. On days like this, it reminds us why that is so important. It is not bailing out companies; it is the continuity of services. It is making sure that essential services are not interrupted when something like this happens.

Chair

I am grateful for that and that gives us a lot more to draw on. I have three more supplementary questions on this topic, but I do want to get on with the main topic of this evidence session. I am going to start with David Jones, Cheryl Gillan and then Sandy Martin.

Mr David Jones

If we could go back to the profit warning last year, three separate contracts were allotted to Carillion on a joint venture basis after that profit warning. Did officials ever consider in the case of any of those contracts requesting a letter of direction from the responsible Minister?

John Manzoni

No. As Jeremy said, if you go and look at the market, there are profit warnings pretty much every day across the market, so we have to be a bit cautious about how we deal with this. Of course it also put us on alert in July. This company we really started to notice as late as November, when it said it was going to miss its bank covenants or it had some danger of missing its bank covenants. No, no directions were asked for as a result of the profit warning in July.

Mr David Jones

Again, the second profit warning was in November, and I think a contract was allotted after that profit warning.

John Manzoni

I think a very small one has been.

Mr David Jones

That was the upgrade of the London to Corby route?

John Manzoni

Yes, I think that one was a £10 million or £20 million contract. I do not have the complete detail, but it was after the November warning.

Chair

My understanding from what you have already said is that it was the other way around: officials and lawyers were advising Ministers that Carillion could not be excluded from the contracting process for fear of legal action.

John Manzoni

We do not have explicit conversations. There is a law and we follow the law.

Chair

I made the point.

Mr David Jones

Secondly, given that these were all joint ventures, presumably you carried out extra-vigilant due diligence in respect of the other parties to the joint venture?

John Manzoni

Since the summertime, the answer to that question is yes. In fact, the big contract that was awarded at around about the time of the summer profit warning—these things take time to go through the process—was specifically amended in order to ensure that joint and several liability, to make sure that the protections were greater thereafter. I do not have the detail, frankly, of all of the contracts today, but I know that that one was specifically amended to make sure that there were stronger protections in place.

Mr David Jones

You are comfortable with the wherewithal of the other contracting parties to the joint ventures?

John Manzoni

For the moment. There is no reason to believe otherwise.

Dame Cheryl Gillan

I want to ask you why the due diligence on all these companies was not carried out in depth before the contracts were awarded.

John Manzoni

It was.

Dame Cheryl Gillan

You immediately went into action in July, you said, or in the summer to—

John Manzoni

No, we changed the nature of the contracts in July. All the due diligence is done on all these companies all the time.

Dame Cheryl Gillan

Surely that meant therefore that the due diligence that had been done before had not been sufficient for you to have to change the contracts.

John Manzoni

Not necessarily. Nothing happens overnight in the market. Companies go from strength to—

Dame Cheryl Gillan

No, but let’s face it: the hedge funds were betting against Carillion from before the summer.

John Manzoni

Yes, hedge funds do and sometimes they win and oftentimes they lose.

Dame Cheryl Gillan

But this was on a company that was being awarded major, major contracts with—

John Manzoni

I think Jeremy made the point earlier that Government have to be quite thoughtful and responsible about this. If Government take a radical view, it could almost make that outcome inevitable. We have to be very even-handed about this. Just because the company has given a profit warning, we cannot immediately say, “We do not want to touch that.” First, it is not legal, and secondly, it might even make it all happen.

Dame Cheryl Gillan

I appreciate there is going to be a huge post-mortem on the whole of this operation. On this Committee, we have looked quite closely at the capabilities of the civil service as regards risk assessment and also procurement. We have found it has been wanting in both those areas. In order for this Committee to be able to understand that process better, because obviously you are in the middle of handling the situation, could you provide a timeline and the details of what due diligence was carried out on all the bidders for the HS2 contract and at what stage you reverted to changing the contracts and so on? We always find these documents are usually quoted as being commercial in confidence and it would be very helpful for us to be able to learn lessons from this and to be able to see that timeline in detail. Do you think that is something you could provide to the Committee?

John Manzoni

Let me go and check. If I can provide it, I will.

Dame Cheryl Gillan

Sir Jeremy, is that possible, as such?

Sir Jeremy Heywood

It should be possible, yes.

John Manzoni

There are some commercial confidentiality issues.

Sandy Martin

I just want to come back on something you said, Sir Jeremy. You said that not a penny of public money was at risk from the Hinkley Point contract because the risk had all been transferred in the contract. Why was the risk not all transferred in the Carillion contract, or indeed in the Railtrack contract, or in various other contracts that the Government have had with private sector companies? I do not understand how you can say that there is no risk because it has been transferred in the contract when the entity that you are contracting with is at risk of disappearing.

Sir Jeremy Heywood

The point I was making in relation to Hinkley Point was that the Government, or the energy consumer in this case, will not pay anything if this company fails to deliver the project.

Sandy Martin

If they build three quarters of it, or nine-tenths of it, or if they have started to fuel it up and then they go bust, are you just going to leave it?

Sir Jeremy Heywood

That is their problem. They do not get a penny from the UK taxpayer or the UK energy consumer.

Sandy Martin

We do not spend any public money on cleaning it up afterwards or anything like that?

Sir Jeremy Heywood

There would no doubt be a big legal wrangle over that, but definitely in principle it is their obligation to clean it up as well. Since they are owned by the French Government, they probably have quite deep pockets.

Ronnie Cowan

You say, “That is their problem.” We are talking about a nuclear power plant here. It is kind of our problem if there is an issue there, yes?

Sir Jeremy Heywood

To pay for it.

Ronnie Cowan

I am, to be honest, a little bit confused here. We are looking at a company that is clearly in a lot of financial trouble. A year ago Carillion had a pensions deficit of £587 million. Today we are hearing that those who have already received their pensions will continue to receive their pensions. The Government have backed that up. There are about 27,000 staff who are currently working for Carillion or work for them through many different versions of Carillion. Where do those 27,000 people stand?

John Manzoni

Other than the contracts that were bad contracts—which, as I say, are a few of the many and certainly in the public sector a significant minority of our business with that company was, if you like, bad business for the company—most of those jobs over time will be secured because those services, whether they are for the private sector or for the public sector, need to continue to be delivered. The question is how we manage the transition from Carillion, which has failed, and as I have made the point, billions of pounds have been lost by the people investing in Carillion. We are already being approached by lots of people to buy the business that was being provided by Carillion. I am hoping and we hope that most of the 27,000 people—actually, there are 20,000 in this country—will continue to have their pensions paid in a new employment structure.

Ronnie Cowan

There is always a danger in that position where somebody steps in and says, “Yes, I will buy your company from you, but your pension scheme is going to take a downward slide,” and people will be affected in the long term. It is a quick way of saving money.

John Manzoni

I am not sure that people think about it like that.

Ronnie Cowan

It has happened time and again.

John Manzoni

No, I think that, first, most of these jobs will be preserved, I hope, and indeed most of the welfare of those people and the pensions we hope will be preserved.

Ronnie Cowan

We have talked about the issues that were identified last July, but in the last six months Carillion has secured contracts worth £158 million servicing 230 military sites. At what point were we going to say, “Look, guys, you have to get your house in order before we start handing out more contracts to you”?

John Manzoni

Again, it is a joint venture with another company that has already expressed interest, and that is the reason it is a joint venture. In this case, we hope that that work will continue on the military sites.

Ronnie Cowan

I understand what you are saying, but it is a joint venture with Carillion, who were clearly in financial trouble.

John Manzoni

They are now. It is easy in retrospect.

Ronnie Cowan

They have clearly been in financial trouble for some time. There are problems within the reports from KPMG last year.

John Manzoni

The contracts I think you are talking about were around the time of the summer.

Ronnie Cowan

That is convenient.

John Manzoni

It is fact, I think.

Ronnie Cowan

It does go back to the point my friend made earlier about this sudden handout to Kids Company just before they went out of business.

Chair

Part of the joy of being a Select Committee is to be wise after the event.

John Manzoni

Of course.

David Morris

I am intrigued to learn more about what you have just said—that Carillion is not going to be able to take forward these projects. However, there are other companies willing to step forward to take those projects on. Would that cost the taxpayer more in the respect that there would be some kind of administrative cost for transferring the contracts across to the new company?

John Manzoni

You mean for the public sector activity?

David Morris

Yes.

John Manzoni

For the private sector activity it would be a private transaction. For the public sector activity, as I have said, it is hard to tell. Most of this is good business for the public sector. Almost all of the contracts in the public sector are good business, so it is profitable business. The question of what a new company is prepared to pay the official receiver and the administrator will be a matter of negotiation, but on the other hand of expedition as well, the receiver will want to do this quite quickly. These are good businesses. Therefore we are hopeful, and it is hard to say of course, because it is a very complex structure and it is hard to know. There will always be the administrative burden of the team that is having to step in and replace the Carillion management team to do this. There will always be that cost. There will of course be some costs associated with what we are doing because any discontinuity like this is not for free. I am not saying that there will be no cost—there will be some cost—but I am hopeful that we will be able to minimise that cost over time. Indeed, the receiver is bound to do that; that is what their job is.

David Morris

Would it be possible in any way, with future contracts being awarded, that the new company that steps up to take on the new contracts could pay the administrative costs as part of the contract for taking on that particular loss in the first place?

John Manzoni

I am sure if the receiver is astute, he or she will try to do that.

David Morris

But can we enforce that with it being a public contract?

John Manzoni

I do not know the detail of exactly what we can and cannot do. We have said to the receiver that our main aim is the continuity of public services. How that receiver then executes that activity—I do not know the answer legally whether we can. He is duty-bound to do this as quickly as possible, so there will be a pace versus price debate, I suspect. There is no doubt we will get into those conversations. I do not happen to know the answer to that right now.

David Morris

Could you inform the Committee when that advice comes out?

John Manzoni

Yes, sure.

Chair

How do you stop all these contracts just being scooped up by the usual suspects so that we finish up with less competition in the market than we had before?

John Manzoni

We, as the public sector, since we are funding this activity, will have some locus over that.

Chair

How practical might it be, in fact? Since the public contracting part of the business is quite a viable part of Carillion, is it possible for the employees to buy that part of the business and create a new player in the market?

John Manzoni

Good question. I do not know the answer to that. Some of these are quite big, by the way, which is unlikely that they—

Chair

Or create a mutual company to manage these contracts?

John Manzoni

Yes, all of this is possible and we will have to get into those conversations with the receiver and the special manager, which is PwC, as we go forward.

Sir Jeremy Heywood

Mr Chairman, I think this is an important area for investigation. I do not know whether your future inquiry will look into it. It is certainly something that our Ministers have asked us to look at: how we can make sure that the contractor market is not totally dominated by a small number of large, mature companies. Of course we welcome those companies, but the Prime Minister and other Ministers are very keen to ensure that we make sure that we are not biasing the system against small businesses, medium-sized businesses, new entrants. Whether it is part of your inquiry or part of the lessons learned, we will be—

Chair

We will certainly be looking at that, because the trends for the way Government Departments contract with small and medium-sized businesses directly is not encouraging. It relies very much on the prime contractors.

Sir Jeremy Heywood

We have made some progress on that, particularly in the digital space, but it is definitely an area where a further prod would be welcome.

Chair

Anyway, we will continue this inquiry in due course. We will be very interested in evidence not just from the Government but from the former directors of Carillion, from the contractors, from the suppliers, from the customers and from the employees, who we hope will give us insight into how this company was run and what lessons there are to learn. I just want to emphasise that we will not be interested in a prosecution; we will be interested in helping the Government to learn the lessons from this exercise, rather than creating an atmosphere of blame and recrimination, which gets us nowhere.

Dame Cheryl Gillan

Can I briefly ask what is happening in the interim? Presumably there is now going to be a hiatus on all Government contracts of this nature while you have a post-mortem.

Sir Jeremy Heywood

I do not think so, no.

Dame Cheryl Gillan

Will the Government be signing a contract tomorrow, for example?

Sir Jeremy Heywood

John might want to comment on this, but I do not think we will have a hiatus. I do not think we could deal with that. We do loads and loads of contracts every year, as you know. We think that the system as a whole is robust. Obviously this has gone badly wrong, but ever since the profit warning we have put in place—

Dame Cheryl Gillan

It is not the first time, because CH2M went badly wrong as well, where the due diligence was not carried out properly.

John Manzoni

This is a failure of a private company. This is a failure of commercial activity. This is a failure of the management and companies do succeed and fail. They come and go.

Chair

We will come back to these issues, but thank you very much for being so open and candid with us, and indeed quite forthcoming. I am grateful for that. On our main inquiry on civil service effectiveness, which we are close to concluding, can I also thank you, Sir Jeremy, and the civil service generally for helping us with the inquiry and helping us with the investigations and interviews that are to be conducted by Professor Kakabadse, which is now beginning to form the main body of evidence for our report? It looks in an unprecedented way at the relationship between Ministers and officials, which is what regulates and can determine the success or failure of a Government Department. We have become quite interested in the way Ministers and officials take up their appointments. What are the main challenges that Ministers face when they take office?

Sir Jeremy Heywood

Maybe I will start with this one. There are two distinct things to look at here: first, Back-Bench MPs or Opposition MPs becoming Ministers for the first time, so the concept of being a Minister is new; secondly, the question of when a Minister takes up a new ministerial post and the specifics of what is new about that ministerial post. On the first, the honest truth is that the civil service does not spend a lot of time working with Back-Bench MPs or Opposition MPs in preparing them for ministerial office—we do not see that as our role as a civil service; we work for the elected Government—but the Institute for Government and one or two other organisations have sprung up to try to fill that gap. There is a gap there. There are plenty of ministerial memoirs and books that have been written about how to be a Minister and so on, but as a general question, is there a systematic training programme or induction programme for people who might at one point become a Minister? There is probably a gap in the market.

Chair

We have suggested before that there should be a civil service parliamentary scheme, rather like the armed forces parliamentary scheme. Everybody seems to think it was a good idea. Why do we not make it happen?

Sir Jeremy Heywood

It has just never been a priority for Government Ministers that we have worked with. However, if you want to pursue that, we can obviously look at it again with our Ministers and see whether that is something they want to take up.

Chair

When a Minister arrives in his or her post, what does the civil service do to help that Minister adapt to ministerial office?

Sir Jeremy Heywood

That is my second category, in a sense, which is about arriving in a ministerial post. I think the civil service would feel that we have quite a good, practised methodology. We have induction packs; we have day one briefings; we have week one briefings; we set out all the issues facing the Department at that moment; the organisational structure of that Department; issues likely to arise over a period of time; the stakeholders; suitable groups of people to meet in the first few days and weeks. That is a proven process of producing an induction pack for new Ministers. Andrew Kakabadse has made the point, I think—certainly some of your other witnesses have, anyway—that a large chunk of the training of Ministers is going to be done on the job, and there is no doubt about that.

Chair

He also suggests that there should be coaches, that each Secretary of State/permanent secretary relationship should have quite intensive coaching during the first few weeks and months to accelerate that process of integration and bonding. What do you think of that proposal?

Sir Jeremy Heywood

I personally do not think that is necessary in all cases. Some Ministers do choose to have coaches; some permanent secretaries have coaches. I am not aware of any coach that is in common between the two; it has just not come up as an issue. Obviously I will talk to Andrew again about it. I do agree with him that getting the relationship off on the right footing is very important. I believe he puts a three-month timeframe around that. I would not be as scientific as that, but an independent person, whether it is perhaps the senior non-executive director of the Department—sometimes I play that role, funnily enough; not really as a coach but as a person who both sides will talk to—to try to make sure they are understanding each other’s needs. Particularly if something has gone wrong, having a third party helping them with that relationship is a good thing to do. That is obviously a relatively narrow part of how a Minister settles into a Department, particularly a junior Minister.

Chair

But joint coaching could be regarded, rather than ameliorative of what has gone wrong, as a preventative, maintenance or introduction system.

Sir Jeremy Heywood

It could be, but all I would say is that, in my experience anyway, it has not been necessary to have coaches in many of those cases.

Chair

I am sure that is correct, but there are relationships that go wrong and that could have been prevented.

Sir Jeremy Heywood

To normalise the concept, so that it seems less exotic, less patronising to suggest it, that it became one of the normal things people do if there was something that was not working quite right in the relationship, having a group of trained coaches who were sufficiently aware of the difference between, for example, the business world and the world of politics and the civil service so that they could immediately bring some relevant insight to bear I think would be a good thing to do.

Chair

We have ended the experiment with extended ministerial offices—there was not much demand for it—but what do Ministers ask for most?

Sir Jeremy Heywood

Some Ministers do want more people working directly for them. Some Ministers say that the expertise that they have at their disposal in their Departments does not cover all the areas where they want to have challenging advice and so on, so we do have ad hoc arrangements for bringing in fixed-term appointments and so on. However, that is not generally one of the issues that people ask for. Let me take a step back. Most of the relationships now, I would say, between Secretaries of State and permanent secretaries are excellent. There are no huge tensions right now across Whitehall—in fact, none at all, I would say. There is no constant demand to solve this problem, solve that problem, but in the past there have been issues. They are often just people getting used to each other’s ways of working, information flows that they want, reassurance that the Minister’s priorities are being taken fully seriously and finding the right way of demonstrating that on a real-time basis; these are the sorts of issues that have come up.

Mrs Cheryl Gillan

When there is a breakdown between the permanent secretary and the Secretary of State, what, in your view, in the past has been the cause or causes of it?

Sir Jeremy Heywood

I repeat that it is not a current issue—

Chair

Taken as read.

Sir Jeremy Heywood

Taken as read. Sometimes, very occasionally, you will get personality clashes; two human beings just talk past each other, having very different characteristics, and do not like working with each other. It is more often that they just have not established a relationship of trust, where the Secretary of State is confident that he or she is getting across to the permanent secretary what he or she really wants the Department to do. In my experience that usually is not the case, but sometimes there is a communication failure so we then have to adjust the way in which the permanent secretary reveals in real time what the Department is up to, what he or she is doing as the permanent secretary and so on, but it is a hypothetical issue at the moment, as far as I am concerned.

Mrs Cheryl Gillan

That is fine, but who would flag it up first? Would it be the Secretary of State or would it be the Minister? Who would they flag it up to? How would you deal with it?

Sir Jeremy Heywood

In the cases where it has happened in the past, I would say it has been the Secretary of State who has usually come to me. Obviously part of my job is to work out whether Secretaries of State are happy with their permanent secretaries. We do that in a systematic way twice a year, but just in the normal course of events I would expect to talk to Cabinet Ministers about their permanent secretaries through the year, and that has on occasion revealed that there is a sort of unhappiness. I suppose sometimes they would go to the Prime Minister, although I cannot think of any concrete example of that. I would see it as part of my role—an essential part of my role—to make sure that the relationships between the two people running Departments are as harmonious and smooth as possible.

Mrs Cheryl Gillan

What would your remedy be if there was a perceived breakdown of communications or lack of trust between the senior official and the Secretary of State?

Sir Jeremy Heywood

Simply to understand what exactly it is that is causing the problem and then make sure that the permanent secretary is aware of that issue, ideally get the two parties together in one room and agree on a plan, which would normally involve saying, “Let’s see if we can turn this around within three months.”

Mrs Cheryl Gillan

Would you move a permanent secretary?

Sir Jeremy Heywood

I cannot think of a case where we have done that, because it is very difficult to find a slot to move a permanent secretary to, but obviously if there has been a breakdown that over a period of weeks and months cannot be resolved, you would have to take that action.

Chair

It is quite common in the private sector to move clashing personalities.

Sir Jeremy Heywood

It is, but again it is difficult to find another role for the chief executive in a company. It is basically that if you cannot get on, then you would have to be out. Similarly with a permanent secretary, it is very difficult to find another slot for them, but of course you would have to do that and there have been occasions in the last few years where we have had to, in the end, part ways.

Chair

But in the civil service there is a kind of shame attached to a permanent secretary who cannot manage their Minister. Should there be that sense of failure, when it is a perfectly natural thing, in certain circumstances, not to be able to get on with somebody?

Sir Jeremy Heywood

I think shame is too strong a word. This is a theoretical conversation because there are no current examples of this and no recent examples. However, being able to manage the relationship with the Secretary of State to the Secretary of State’s satisfaction is an essential prerequisite of being able to do the job of permanent secretary. If that relationship does not work, the Department will not be able to perform well. I would not use the word “shame” because occasionally these things, in a no-blame sense, just happen—

Chair

Agreed.

Sir Jeremy Heywood

—but we do have to try to find a way through in that situation.

Mrs Cheryl Gillan

We have dealt with the Secretary of State and the permanent secretary. What about other Ministers within a Department, when there is clearly a problem between the permanent secretary and Ministers further down the pecking order?

Sir Jeremy Heywood

Again, that is pretty rare, in my experience, and that is something we would expect the permanent secretary and the Secretary of State to have the first conversation about. You would expect that to be dealt with within the Department. I cannot think of an example, frankly, when either the Secretary of State or a permanent secretary has come to me and said, “I have a problem with this junior Minister relationship,” but I guess if that happened in future we would try to deal with it in the same adult way that I have just described.

Mrs Cheryl Gillan

Have junior Ministers, when it came to reshuffle time, been on the transfer list because of relationships with civil servants?

Sir Jeremy Heywood

Not because of their relationships with civil servants, I would say, not in general.

Mrs Cheryl Gillan

You work with them whatever they are like?

Sir Jeremy Heywood

Reshuffles are for Prime Ministers, as I have said many times before.

Mrs Cheryl Gillan

That is why I said “on the transfer list”.

Sir Jeremy Heywood

It is a matter for the Prime Minister to decide how to deploy junior ministerial talent.

Mr David Jones

We have heard evidence that rather than present a Minister with concerns about a particular policy, some officials have found it easier to privately resist or even ignore that policy. Is that a phenomenon you recognise?

Sir Jeremy Heywood

I recognise the allegation—the suggestion—because Francis Maude and I have discussed this before when he came across, in his view, examples of this and we talked about it at the time. I believe it is very, very rare. It really should not happen. It should not happen in two respects. First, if civil servants are concerned that Ministers are making bad decisions or making decisions on the basis of bad evidence and so on, they absolutely should have the integrity and professionalism to raise their concerns directly, rather than just sit quietly. They are not doing their job as a professional civil servant if they are not giving the best possible advice. Secondly, if the Minister has made a decision to do something, even if you disagree with it personally, your job is to get on with it. I do not believe that in general the civil service does try to quietly stop what Ministers are trying to do. I do not believe there is this culture of obstructionism. There may be one or two rare examples across the civil service and I deplore those, but that is not the civil service that I know.

Mr David Jones

It is, however, a perception that at least one Minister has formed. Why do you think a Minister would form such an opinion?

Sir Jeremy Heywood

I do not know why Francis has that opinion. Equally, other Ministers or former Ministers who have appeared before you have said they do not recognise it either. It is possible that a civil servant may be disagreeing with the views of a central Minister or the Cabinet Office Minister, but may be adhering very firmly to the views of their own Secretary of State, so this is an issue where one Minister’s preferences are being given higher weight that those of other Ministers. That may be the issue; I do not know. You would have to ask him again in more detail. I am not saying those things never happen. Of course in an organisation of 400,000 people doing controversial stuff the whole time, you are going to have some occasions when people do not behave in a professional fashion. That is life. All I am saying is that it is absolutely not the culture of the civil service that I lead and want and it is not acceptable.

Mr David Jones

Should officials feel comfortable challenging a Minister over permanent policy or anything else?

Sir Jeremy Heywood

I would hope so. Most Ministers that I have ever spoken to about this want civil servants to be challenging and want them to give them the best advice. Certainly what I always say to young civil servants—and indeed my direct reports—is, “You have to give your best advice and you have to be challenging,” and that is what Ministers tell me they value. Whenever I get feedback on civil servants from Ministers, I have never heard any of them say, “I don’t like this civil servant because they offer me challenging advice.” Far from it. They actually like robust debate and they like to be told if the civil service thinks they are doing something wrong.

Chair

They might say, “I don’t like this civil servant because he says he is going to do it and then he doesn’t do it,” or, “I have given the instruction that something should be done and then I find later that it has not been done.”

Sir Jeremy Heywood

As we have just been discussing, there clearly are one or two former Ministers who think they have had that experience. I criticise that—I deplore it. I do not think that is how civil servants should behave. I do not think it is very common; I think it is extremely rare.

Chair

Why do you think civil servants get themselves into that position? I would suggest that it is because generally there are mixed signals being received from different parts of the Government about what it is that civil servant should do and they find that difficult to talk about with their Minister.

Sir Jeremy Heywood

As I mentioned to Mr Jones, I think that is a possible explanation in some of these cases. An individual from a Department is being told loud and clear by his or her Secretary of State, “This is our priority” and then someone from another Department comes along, perhaps someone from the Cabinet Office, and says, “Actually, we want you to take part in this central initiative.” It is just possible that they may say, “I am going to prioritise the view of my Secretary of State over that of the centre.” That is a possibility.

Chair

Anyway, it is terrific that we are discussing it in this open and transparent way, which I do not think would have happened a few years ago. David Jones.

Mr David Jones

If an official feels conflicted in the manner that you have just outlined, shouldn’t that official feel comfortable raising the issue of the conflict that he or she is experiencing both with other officials and also with the relevant Minister?

Sir Jeremy Heywood

Definitely. Yes, absolutely. The right course of action in that case is not to quietly block the action, but to make sure that the two Ministers talk and resolve the dispute.

Mr David Jones

Of course it could be the case that some officials feel more comfortable about doing that than others.

Sir Jeremy Heywood

It could be, but the culture we are trying to engender in the civil service is one where there is a right to challenge and there is openness. That is definitely, in my experience, by and large what Ministers want as well. Like you, Mr Chairman, I am pleased we are discussing this in an adult fashion, but I hope the whole hearing is not going to get dominated by this, because I do regard it as a very small part of the civil service.

Mr David Jones

On the question of culture, which you just mentioned, surely it is also part of the responsibility of Ministers to foster a culture in their own Department in which challenge is welcomed and encouraged.

Sir Jeremy Heywood

Very much so. Yes, I think absolutely the Minister should set the right tone for that, making it quite clear that challenging advice is really important, and most Ministers do that.

Mr David Jones

Therefore, just to get back to a point that we touched on earlier, it would surely be helpful if new Ministers had been prepared for ministerial advice and the sort of culture that they should be encouraging within their new Departments.

Sir Jeremy Heywood

I completely agree. That is definitely something you would expect to cover in any sort of induction programme or day one briefing.

Sandy Martin

Very briefly, Sir Jeremy, how does a permanent secretary cope with a Minister asking them to do something that is impossible?

Sir Jeremy Heywood

Hopefully in that case they will just simply say, “That is impossible, Minister.”

Sandy Martin

Do they?

Sir Jeremy Heywood

I would hope so. It is certainly better than trying to do the impossible and failing.

Chair

I had one account of a Minister who, when confronted with the impossibility of the task, said, “Why did you not tell me this before?” and the official said, “I tried to tell you two years ago” and the Minister apologised. However, we need to accelerate that conversation. How do we accelerate that kind of conversation?

Sir Jeremy Heywood

We do all the things that we are trying to do, which is to encourage a culture of challenge, openness and assurance. In projects, for example, we have far more formalised assurance processes, gateways and so on, so that we create a moment, quite frequently, where everyone has to stand back and say, “Is this on track or not?” rather than just allowing the thing to slide off. We do try to formalise some moments, particularly in long-term projects or programmes where there is a sort of dispassionate occasion on which everybody has to sit down and work out if we are on track or not. However, fundamentally this is about a professional approach to policy advice, implementation and delivery. This is what professionalism means.

David Morris

It is intriguing to hear how the relationships develop in the respect that if you can see there is a problem occurring between the two individuals. How well is that tension understood? When such tensions become contentious, how do you feel should they be resolved?

Sir Jeremy Heywood

To be honest, I do not have a magic solution here. This is a case of maintaining close relationships, as I try to do, with all the permanent secretaries and Secretaries of State and making sure that there is an open discussion where people feel able to set it out if there is a problem and then trying to resolve that problem by bringing the two parties together in a non-blame environment to try to work it through. My experience as Cabinet Secretary for well over six years now has been that that approach works. I think we are in a good phase of relationships now at the most senior level.

David Morris

I have a quick question about special advisers. There is often another player in these relationships: the special adviser.

Sir Jeremy Heywood

Absolutely.

David Morris

Sometimes they are difficult and sometimes they are helpful. Do you have problems managing special advisers?

Sir Jeremy Heywood

The civil service does not manage special advisers. You are absolutely right that the special adviser relationship is very important. The Minister relies usually very heavily on the special advisers and it is a very sensible idea for the permanent secretary to have a good relationship with special advisers, and of course with the principal private secretary in the private office as well. Departments that work well are those in which the relationships between all of those parties are excellent and transparent and there are no secrets and so on. Again, I think we are in a relatively good phase of relations at the moment between special advisers in most Departments and the civil servants. There have been some difficulties in the past, as everyone knows, but at the moment we are in a reasonably good place, I would say.

Dr Rupa Huq

I want to ask about workforce planning aspects. The civil service has been criticised, I think by the NAO, in fact, for not having the information to assess its existing stock of skills and expertise. What steps have been taken departmentally to rectify this?

Rupert McNeil

The NAO report was extremely helpful for us. It came along at a time when we had already done a lot of work on workforce planning, starting in 2015 and 2016. What they pointed out to us was that we needed to be doing it at a faster pace, and in fact that is something we have been doing. When you look at what they proposed, we have several things in process at the moment. First, there is being able to define the skills that we need in a sensible and sufficiently granular way, and that has been hugely helped by the growth of professions and functions across the civil service. If you take an area such as project delivery, which is one of the first where this has really got underway, we have 19 roles that were defined in that area at multiple levels, the capability required for each of those roles, and then programmes, whether it is an apprenticeships or university courses to put people through them. We are doing pilots now in a number of Departments to test this out, to integrate it with our single departmental plans. We are also making sure that we have the same common terminology across the civil service and across the professions so that we can do this civil service-wide view of workforce planning.

Dr Rupa Huq

Have shrinking numbers—because of Brexit and the new Departments, things have maybe gone up a bit—impacted your ability to do this properly?

Rupert McNeil

I do not think they have. The civil service, like all large organisations, is changing its shape. It has become less an organisation with large numbers of operational staff—there are still large numbers of operational staff, but those numbers relatively will become smaller, inevitably—and we have an increase in other areas, such as commercial skills or project delivery skills. Also, you have a better definition of some areas. One of the areas that has seen a lot of that has been the policy profession itself, which has seen a lot of definition of what skills are required and how people can progress.

Mr Marcus Fysh

I want to ask about how Departments can ensure that they have the right resourcing to match the policy initiatives that are decided to be undertaken. I know you did some work on single Department plans a couple of years ago. Could you give an update on how that is travelling? It would also be interesting to hear your view on, for example, the 2015 defence and security review. The challenges of delivering it now are not just that the exchange rate has moved against us. There appears to have been a lack of money in the system to enable the delivery of that programme. Could you look at that example and others and compare and contrast the experience?

Chair

Shall we take the first part of that question, the general question, first?

John Manzoni

The basic hypothesis of single Department plans is a business plan, intended to bring the inputs and the outputs together, which I am not sure is happening in the way that I would like to see it happen. We are on our third iteration, getting better all the time. It needed to happen perhaps in the past, because there was more capacity than there is today to do the things that are on the docket to get done. The tighter the resources against the outputs, the more important it is to do the planning. We recently published a public version of the most recent plans, which was, I think, favourably received by the Institute for Government, saying it is better than the last lot. We are going to do another round now as we go into March this year and I believe that will be even better again. I do think that these things are getting better. This is a system that is not used to writing a business plan that brings financial, operational and outputs together. It does take a bit of time; you cannot instantly click your fingers and do that. I do think we are making good progress. It will continue to be important that we build our competence in this. I do think this is all good. I am not sure what else to say, other than I think the direction of travel is good. Are we there? No. But the direction of travel is good. As for the defence review specifically—

Chair

It seems to be a classic example, doesn’t it, of a policy whose ambition outstripped the resources available to it?

Sir Jeremy Heywood

I am not sure how much I can say about that at the moment because it is a matter of some internal debate and discussion. What I will say is that, yes, the foreign exchange was not helpful. The other thing I would say is that it rested upon some very ambitious efficiency assumptions about how much was to be saved through efficiency. Although the MOD has done a heroic job in many respects, if you look at the efficiencies compared with 2010, there is quite a lot of efficiency that still needs to be ground out of the system. The more John and I have looked at this over the last year, the more we have felt that MOD headquarters have not really had the capacity to drive the efficiencies. Peter Levene came and did a very important structural review of the MOD, which led to a lot of decentralisation of authority, but the counterpart to that should have been a building up of the financial control function, financial challenge function and the relationship between the finance function at MOD headquarters and those in the frontline commands. I do not think that was properly articulated and properly implemented. The relatively new permanent secretary is basically putting that right, and as a result of that I think we will see a much stronger focus on financial control. Hopefully we can then see not just the efficiencies delivered, but will go beyond that as well. Beyond that I think it would be quite difficult to say without straying into policy discussions.

Mr Marcus Fysh

Can I follow up and ask about the extent to which the single Department approach that you just described can potentially be a bit of a hindrance and if it might be more sensible to try to take a holistic view? For example, defence procurement decisions have potentially large impacts economically on different areas of the country. To what extent do you think that it is necessary to have good Cabinet Office or other co-ordination of these thoughts, so that it is not just thought of as purely a financial decision for a Department or an operational decision for a Department?

Sir Jeremy Heywood

You are absolutely right. These big defence procurement decisions, just to take that as an example, do have profound implications for particular regions of the country, industrial policy, the Treasury obviously, and to the extent that other Departments’ interests are engaged, then we would expect that to be subject to a collective discussion; it would not just be left to one Department, in theory anyway. Part of my job as Cabinet Secretary is to make sure that theory turns into practice, that if there are big decisions like that, which impinge on other Government Departments’ interests, they have the opportunity to help shape those decisions. I think that by and large we police that fairly effectively.

Chair

What you are telling us about what has gone wrong with the 2015 SDSR is quite a common theme that we have drawn from Professor Kakabadse’s work about how policy making can be perfect, but the implementation is lacking. Can I bring in Sandy Martin at this point?

Sandy Martin

Indeed, Lord Maude mentions this as well; that somehow or other there is a theory of policy making that does not seem to include the ability to understand how the implementation is going to go forward. I am sure you can appreciate that if there is no understanding of the way in which something is going to be implemented or not a sufficient understanding, it makes it extremely difficult to design the policy correctly. Do you think there is a problem in the senior part of the civil service of a divide between policy making and implementation?

Sir Jeremy Heywood

No, I do not think there is a problem of that sort. There is always a risk, whether it is in a manifesto, a budget or a political speech that there will be headline commitments made without enough prior thought being given to the implementability of those policy commitments or the timeframe over which it is sensible to implement or without, for example, a suggestion of piloting and trying out different versions. There is always that risk. I think we are getting better and better at making it quite clear to all our policy profession, for example, that good policy cannot be developed in a vacuum, without discussion of implementation. It would be completely wrong to say that we think there is a philosophy of policy making that does not involve a very hard-headed look at the implementability of that policy. As you implied, a policy that is unimplementable is a hopeless policy. That is 101 of policymaking, frankly. Part of the reason for John’s role and for developing the various functions across the whole civil service is to make tangible our commitment to ensuring that the implementability of policy is front and centre of the policy design. I think we are making progressively good progress in bringing the commercial profession up to a level where the obvious thing for policy makers to do is involve commercial people because they are excellent people and they bring real insight. All experience tells us that unless they are consulted, we are likely to end up with a suboptimal outcome. That is true of the policy, the programme management function, the digital function and obviously the finance function—they have always been more centrally involved in Whitehall. We are developing those functions. A progressively larger proportion of our very senior civil servants come from those sorts of functional backgrounds. Definitely the message that John and I are giving the whole time—and the permanent secretaries know this anyway—is that you have to make sure that the policy that is served up to Ministers does take due account of these practicalities. However, I do think there is always a risk at times, dare I say it, when the civil service is less involved, when manifestos are drawn up and so on. Commitments at that point do tend to be put out into the public domain that have not been stress-tested in the way they would be in the normal course of Government, so you do still find political commitments being made that become set in stone. We then struggle to find the right way of implementing them. I hope that is increasingly the exception rather than the norm.

Sandy Martin

That may be a problem with the overall grand policy, but obviously when it comes to details of how to put that policy into practice and design an actual implementation, that is part of the policy-making process. The analogy is a little like that between the brain and the hand, where the brain needs to make the decision about whether to pick up a cup, how to pick it up and so on, but without the feedback from the hand, without knowing exactly what is going on, it is very difficult not just to get the implementation right, but to get the policy right. What is the feedback from implementation like? To what extent can you change the way in which you design policies as a result of feedback? Is the feedback there? Is there an ability for implementers to let the policy makers know what problems they are facing? Is that there?

Sir Jeremy Heywood

Not in all cases. John, you might want to respond to the Committee on this.

John Manzoni

This is a deep question. In the end, the answer to your question lies in the experiences of the people taking the decisions or making the policies. Progressively we can then therefore build. Right now we are introducing a function structure across the system. This is not a straightforward thing to do, but increasingly those people who bring specific skills of implementation at the point of delivery need to become more common, everybody needs to be more used to them being around and all of that has to happen. You cannot click your fingers, because organisations move in circles. We are in a place where increasingly graduates coming into the service today are coming in to follow commercial or technical careers just as much as policy careers, so we can be optimistic that we are going to get progressively better. I have a role that is called chief executive of the civil service, and Jeremy has a role that is called the head of the civil service, but in my role I do not pretend to be a policy specialist. I get on fine with most of them and tell them what I think when I think they are doing it wrong, and that seems to be okay as well. The blend of those skills—and I have 30 years of grubby industry—bringing that into the civil service and then making it okay for other people to follow that sort of career in the civil service I think progressively helps to bring these two things together, as Jeremy has been describing.

Chair

Getting better at what we do relies upon people being able to use their experience. Kelvin Hopkins.

Kelvin Hopkins

There has been concern in this Committee and beyond—it has been widely noted—about the tendency of people in key positions to keep changing jobs; what we call churn. We are concerned about the loss of experience and knowledge in particular areas. I spent 23 years working in two policy institutions doing this kind of work, and having a long-term connection with a particular area was really very beneficial indeed. Are you concerned about this? Do you have any accurate data on the scale of the problem?

Sir Jeremy Heywood

It is a matter of concern. I agree with you intuitively, and Ministers raise this issue quite a lot. They get used to somebody being their expert adviser in an area and then after three years that person gets whisked off on promotion to somewhere else.

Kelvin Hopkins

Three years? That would be good. Quite long.

Sir Jeremy Heywood

I was very careful in my choice there. Yes, it is an issue that comes up and it is an issue that we have to be mindful of. If you look at the data—Rupert probably has it at his fingertips—turnover in the UK civil service is less than in the private sector. There is no sign of it increasing. It is difficult objectively to say we have a massive problem compared with other organisations. However, we are looking this year at our senior civil service salary structure, for example. One of the issues we have alighted upon is that in the environment where you have a 1% pay increase, basically the best way in which people can get an increase of more than 1% is to move jobs and get an increase on level transfer or on promotion. In a sense there are incentives in the system for people to move around more often created by the pay policy, and we understood the fiscal reasons and all the rest of it, so we are going to try to do something about that as part of our reform of the pay system. We have also introduced something called the pivotal role allowance, to try to persuade people to stay longer, particularly on big projects. It is particularly pernicious when somebody is doing a really complicated project, if they feel they have to leave before the project reaches fruition/maturation just to get a promotion. We have basically been able to agree in very, very select cases maybe £10,000 or £20,000 for staying the course on the project, meeting certain project milestones. We are mindful of the issue. At permanent secretary level, I think it starts at the top. I have tried to create a norm that people stay in their roles for five years; they do not dart around after two or three years. The title “permanent” secretary implies staying in your job for a little bit longer than two or three years, so we have tried to establish a norm at the very top that you stay in your job for five years, unless there is some major problem. In a number of different ways we are trying to address this issue, but fundamentally the numbers do not suggest we have a bigger problem than any other organisation like the civil service.

Rupert McNeil

Just to add a different perspective, if you look at the permanent secretary population at the moment, about two thirds have come up through the civil service and about half of them have spent time —not necessarily in their last role—in the Department for which they are the permanent secretary, which I think is an interesting perspective. If you look at the internal churn, we are talking here of course about internal churn of roles. Turnover is another thing, when people are just leaving the organisation or resigning. The most recent figure we have for the current rate of churn is about 11% for the senior civil service, for those roles changing in the course of a year.

Chair

By senior civil service you mean?

Rupert McNeil

The top 4,000 or 4,200.

Chair

Grade what and above?

Rupert McNeil

That would be deputy directors, directors, directors general and permanent secretaries. Last year that was just below 6%, so the internal churn has been increasing, as people have been moving roles more quickly, but I think that is as much a factor of reprioritisation—the fact that we have been able to move people around to respond to challenges that we have had in the past 12 months.

Kelvin Hopkins

There are other examples: the west coast main line franchise debacle of a few years ago, with staff disappearing from the Department and nobody around with the long-term memory to deal with it. One of the reasons why it went so badly wrong is because of the churn and loss of staff. Is that not the case?

Rupert McNeil

This is why the role of the professions is so important, the role of project management disciplines and having good structures for handover and retaining institutional knowledge. It is also why it is so important, through what we are doing on leadership, to make sure that people are able to absorb that through training in particular disciplines and in the context in which they are going to be moved.

Kelvin Hopkins

The reduction in the size of the senior civil service over the last seven years, as a result of the Government’s policy to squeeze the civil service and reduce numbers, saw a lot of early retirements of very senior people with lots of experience. Hasn’t that caused a problem as well?

Sir Jeremy Heywood

The senior civil service has increased in size by about 20% since 2012. That is a little-known fact. The overall civil service has shrunk by 20% but the senior civil service has increased in size by an equivalent amount. Over the last year in particular we have added quite a lot of headcount to help with Brexit. However—Rupert was making this point earlier—we have had a fundamental rebalancing within the civil service. We have taken a roughly 40% reduction in the number of clerical staff since 2010, reflecting the onset of technology and the ability to economise in labour, but at the same time we have definitely increased the number of senior people and we have definitely increased the number of functional experts in digital and commercial, the number of lawyers, the number of project managers. I think that is the right balance, given the challenges we face and the ability to use technology. I think that has been a very sensible thing, an overall decline and an overall reduction in cost. The civil service is still very good value for money, but within that we have managed to allocate the money for the senior people needed to help, with the judgment and experience required for the challenges facing the country.

Kelvin Hopkins

My last question is about institutional memory and the loss of it and the importance of record keeping. I understand that under previous Government—not the present one, but perhaps the previous one—that tailed off, with a lot more informal chats rather than recorded conversations. Every word we say is taken down for posterity, but it is much more important that this is done inside Government than it is in the Select Committee. Would you not think that record keeping for the long-term future written records is absolutely crucial?

Sir Jeremy Heywood

I do. I am a trained historian. I strongly agree with you. I think there was definitely a period when e-mail was coming in where we did not really get our act together and it will be a difficult period, I think, when the National Archives gets to that period, when we find that the record is patchy. We have, over the last couple of years, put quite a bit of effort into this in the Cabinet Office. I appointed Alex Allan to give us an independent perspective on it. We have had a couple of senior people working on a big project for me on this question. I do not say we have completely cracked it, but we have put a lot of effort into trying to understand how we bring order to that mass of electronic records and how we make sure that we have the right protocols for the future using machine learning and some of these new devices that are becoming available now. That might facilitate it, but this is definitely an issue.

Chair

I am very pleased to hear that, given that our predecessor Committee raised concerns about this a few years ago. Mr McNeil, can you provide us with the churn data for the senior civil service by Department?

Rupert McNeil

I think we would be able to do that.

Chair

If there is comparative data with a year or two ago, it would be quite interesting to see what the trend is.

Rupert McNeil

I will see what we can provide.

Chair

That would be perfect. Thank you very much.

Mr David Jones

Sir Jeremy, you mentioned the issue of Brexit, which is obviously a huge challenge for the civil service. How confident are you that the civil service has both the capacity and the expertise to manage the Brexit process effectively?

Sir Jeremy Heywood

As you say, it is a hugely complicated, challenging project for us—probably the most complicated and challenging since the second world war. It changes all the time. For the last year we have been very focused on the withdrawal issues and getting the legislation—the withdrawal Bill—drafted and through the House of Commons and hopefully on to the House of Lords. We have started the planning work in relation to the different scenarios that might result from the negotiations or a no deal scenario. For that task, I am confident that around 3,000 to 3,500 extra posts have been on top of that work. I think we have done that to a very high standard. Most people in the country think there was a good deal done before Christmas and the work is progressing in Parliament on the legislation and so on. Of course, as soon as you achieve all that, the next phase starts and we have been planning for that. The next phase will be, yes, continuing negotiation—in fact, a very big scaling-up of the negotiation as we move on to a future partnership—there will be a further tranche of legislation, there will be continuing intensive work with the devolved Administrations, but to a greater extent than before there will also be all the bringing the plans to a point of implementation. This is the point at which—and John is taking an ever-increasing interest in this, obviously—we need to start not just planning new systems with the different scenarios, but starting to build them, design them in IT terms, procure them in commercial terms, project manage them and so on. We move from a phase of policy analysis, negotiation and legal drafting, if you like, through to one in which we are now much more focused on turning the plans into implementation. I would say that we are making good progress on that, but we still have quite a lot of headcount that we will have to add over the period ahead, and clearly we need to remain very responsive, depending on how the negotiations go. If we go down a no deal route, that will require X thousands of extra people. If we go down a negotiated deal of one sort or another, that might require the same number or a smaller number. We have a very real-time analysis of this that Rupert leads. John and I get reports on this every fortnight. It would be wrong to say we have every single person in post that we need for all of that phase. Equally, we have taken the view we do not want to recruit hundreds and thousands of staff in advance of need. I think we are on top of it, but I would say that a large chunk of the challenge is still ahead.

Mr David Jones

Of course the difficulty is that none of this is entirely in the hands of the British Government, because the European Union has a say in the matter as well. You mentioned going down the no deal route, but of course the no deal route may be something that we are obliged to pursue because of the intransigence or whatever on the part of the European Union. Are you confident that, for example, you have all the necessary computer systems in place to handle the challenge of a new customs system that we would need to put in place?

Sir Jeremy Heywood

I do not want to sound complacent, because there would be huge challenges with no deal. Obviously we have done a vast amount of work on the no deal scenario and that work continues. We will do it to the best of our ability, but the most important thing to understand about the no deal scenario is that a lot of the work that would determine whether or not it was a smooth transition to no deal is work that will have to be done by other countries. On the Port of Calais, for example, we can get our ducks in a row entirely in Dover, but if that is not the case in Calais then that causes some problems and some problems to the French as well, of course. Similarly, our private sector companies will have to do quite a lot of preparation and so on. There are things external to Government, but of the things that we can control ourselves, I would say that we—I do not want to sound over-confident about this—have a very, very good grip on the issues. We go through them on a very frequent basis. I do, John does. We have a very good inter-ministerial group of Ministers that now look at this on a weekly basis, so we know what the issues are, we are working them hard. I do not want to review all the vulnerabilities of our planning position, but we are completely on it. That is what I would say.

Mr David Jones

Isn’t the prudent approach to assume that there is a strong possibility that we will have no deal, prepare for that and then trim our course if it looks more likely that we will achieve a deal or achieve a partial deal? Is that not the prudent approach to take, that we must assume that there will be no deal?

Sir Jeremy Heywood

It is not an either/or; we plan for all the different scenarios. Ministers are very clear that they want us to plan for the no deal scenario, but also for different versions of the deal scenario, and that is what we do. Of course a lot of the planning is common to all of them. It is not the case that we do that planning for that scenario and that planning for that and it is totally different, because quite a lot of it overlaps. We do all of that and we do not prioritise one over the other. We have to be ready for all outcomes and that is what the British civil service will do.

Mr David Jones

Are you comfortable that the civil service can achieve a good outcome, however the negotiations progress?

Sir Jeremy Heywood

The word “comfortable” would misconstrue how difficult this is, because it is an extremely difficult task. All I would say is that we are completely on it.

Mr Marcus Fysh

How well co-ordinated is the work going on in different Departments to deliver on the Brexit process?

Sir Jeremy Heywood

I would say it is extremely well co-ordinated, both at ministerial level, where we have a number of frequently meeting Cabinet Committees—some of which the Prime Minister chairs, and some of which David Lidington will chair—and also at official level, where we have multiple groups. I do not think it would be want of co-ordination; it is just the size of the challenge that is the most daunting aspect.

Mr Marcus Fysh

Who is in charge of the different decisions that might have to be made between conflicting approaches to the basic process that the Government might take?

Chair

Between Departments?

Mr Marcus Fysh

No, who is in charge?

Sir Jeremy Heywood

Obviously we have Cabinet Committees to resolve inter-departmental disagreements. If this is an issue about what the Government’s negotiating position should be, that would come up to the Strategy and Negotiations Committee, which is chaired by the Prime Minister. If is an issue about legislation, it will go to the Committee chaired by David Lidington. If it is an issue about prioritisation, it would probably go to that Committee as well. David Davis is the lead Minister across the whole piece, the Minister to whom the Prime Minister will look as the prime adviser. But most of these issues, if they involve an inter-departmental disagreement, would end up at one of those two very senior Cabinet Committees.

Mr Marcus Fysh

When it comes to trade policy, clearly part of whatever new arrangement we have with the EU relates to trade policy. How much trade expertise or trade negotiating expertise is there now helping with the process?

Sir Jeremy Heywood

I think increasing amounts, but the lead responsibility for a future trade relationship with the European Union lies with David Davis as the Chief Secretary of State and Oliver Robbins’s team in the Cabinet Office, but they will then draw on the expertise from around Whitehall on the various different subject dossiers, including DIT, which have the experience now of trade negotiations globally, which is increasingly valuable expertise.

Mr Marcus Fysh

Has that expertise been drawn on by DExEU and/or by Oliver Robbins’s team?

Sir Jeremy Heywood

Yes, I would say so, but do not forget that for the last period we have been focused entirely on the withdrawal issues, which have not been about the future trade relationship. I think they will have a progressively more important input as we move into the actual negotiation over the future trade relationship.

Mr Marcus Fysh

How much control of trade policy will the UK have if we are in a customs union with the EU?

Sir Jeremy Heywood

The Prime Minister has made it clear that we will not be in a customs union with the EU.

Chair

That is a policy question. I am meant to protect you from policy questions.

Mr Marcus Fysh

It was a technical question—I think A or B. The answer is none, is it not?

Sir Jeremy Heywood

Let’s approach it from the other end. The Prime Minister has made it quite clear on behalf of the Government that the UK must have an independent trade policy, so that is the outcome we seek.

Sandy Martin

We are not going to deal with the Baxendale report?

Chair

Yes, we are, but I thought you were going to ask your supplementary on Brexit. I will just ask very briefly two questions. You mention the expertise of the DIT. Of course, whatever is being negotiated in the trade agreement or the potential trade agreement with the EU is going to have a knock-on effect on what we can agree with other trading partners afterwards. Surely DIT has to be integrated into the negotiations concerning trade with the EU?

Sir Jeremy Heywood

Absolutely. The Secretary of State for DIT, Liam Fox, is absolutely on the key Cabinet Committee and his senior official, Crawford Falconer, will be very closely involved in the official level group underneath that, as it were.

Chair

The National Security Council has non-Ministers in attendance to make sure that decisions are properly informed. Shouldn’t Crawford Falconer be attending the Brexit Committee when trade is being discussed, because otherwise he can hardly be described as the UK trade negotiator, which is what his role is?

Sir Jeremy Heywood

He is not negotiating the EU future partnership.

Chair

But it sounds like a pantomime horse then. This is a simple departmental structure point: we either have a unified trade policy or we do not. It sounds at the moment like EU trade is going to be disconnected from the rest of the trade negotiations.

Sir Jeremy Heywood

No, I do not think so. It does not follow from which senior officials are included in which meetings that we will have a disconnected policy or not. We have very good co-ordination mechanisms, and the policy towards the European Union future partnership will of course take full account of overall trade policy. Who attends the Cabinet Committees chaired by the Prime Minister is a matter for her.

Mr Marcus Fysh

Can I clarify that there is no one else in the Government or in officialdom who has actual trade negotiation experience other than Crawford Falconer? Is that true?

Sir Jeremy Heywood

No, that is not true. We are assembling a number of people who have trade policy and negotiating experience.

Chair

How many are in DExEU?

Sir Jeremy Heywood

I could not answer that question off the top of my head, but we do not need to have parallel streams here. We have a very good diplomatic academy, which is busily training up people to a high standard, and we will be ready when these trade negotiations start.

Chair

I leave that thought with you. Which Cabinet Committee could be described as the “no deal Cabinet Committee”?

Sir Jeremy Heywood

I do not think you would describe any of them as that—