The States as Shareholder – Follow-up (R.25/2019) – Executive response with comments of the Public Accounts Committee

STATES OF JERSEY

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THE STATES AS SHAREHOLDER – FOLLOW-UP (R.25/2019) – EXECUTIVE RESPONSE WITH COMMENTS OF THE PUBLIC ACCOUNTS COMMITTEE

Presented to the States on 23rd May 2019 by the Public Accounts Committee

STATES GREFFE

2019  R.25 Res.

FOREWORD

In  accordance  with  paragraphs 64–66  of  P.56/2018,  the  Code  of  Practice for Engagement between Scrutiny Panels and the Public Accounts Committee' and the Executive' (as derived from the Proceedings Code of Practice), the Public Accounts Committee presents the Executive Response to the Comptroller and Auditor General's ("C&AG") Report on The States as Shareholder – Follow-up' (R.25/2019, presented to the States on 14th March 2019).

Comments of the Public Accounts Committee

1. In her report and follow-up report on the States as Shareholder, the C&AG recommended  that  the  Executive  access  sector  expertise  to  address  the disparity in its own expertise and that of the companies controlled by it. Such sector expertise, if independent from that of the companies controlled by the Executive, would assist in the expert appraisal by the Executive of the advice of consultants to which it refers in its response. The Committee is concerned to  note  the  Treasury  and  Exchequer's  apparent  tardiness  in  appointing independent expertise to advise on the operations of the various companies.
2. The Committee is also concerned to learn that the rationale for ownership of several companies is still not clear. The Executive has not specified when it will articulate whether (and why) it should continue to hold its investments in all 7 companies controlled by it. The Public Accounts Committee makes no judgment as to whether the States controlling these companies is right or wrong, simply that the reasons for retaining or disposing of the companies should be laid out clearly.
3. The Committee was also disappointed to note the slow progress in updating the  Memoranda  of  Understanding  ("MoUs")  between  the  States  and  the companies. It considers this to be crucial, especially as the risks of all the wholly-owned  States  subsidiaries are carried by the States and, therefore, ultimately by the taxpayer. The timetable offered by the Executive for revising its MoUs with such companies before the end of the year will require clarity on the position, as well as the identification of the Government's risk appetite.
4. The  Committee  is  concerned  that  the  Executive  does  not  contemplate completing a review of the effectiveness of new arrangements for oversight of controlled companies until the end of 2020. In view of the risks and waste of public funds that can arise from the failure of the Executive to oversee its investments  effectively,  the  PAC  wishes  to  see  the  Executive  accessing expertise and implementing improved oversight of controlled companies as soon as possible.
5. The PAC will be holding hearings with relevant senior officers in due course.

Senator S.C. Ferguson

Chairman, Public Accounts Committee

REPORT TO THE PUBLIC ACCOUNTS COMMITTEE

Response of the Director General of the Treasury and Exchequer

1. INTRODUCTION

On 24th July 2014 the C&AG published a report entitled "The States as Shareholder: Jersey  Telecom"  (R.109/2014).  The  review  reported  on  the  adequacy  of  the Government's  governance  arrangements  to  discharge  its  responsibilities  as shareholder, and made recommendations for improvement.

The C&AG has now followed up the 2014 review to evaluate the progress made in implementing the original recommendations, and the effectiveness of the design and operation of the current governance arrangements for the Government as shareholder. The follow-up review focussed on the Government's role as the sole shareholder in Jersey Telecom ("JT") and was extended to include Ports of Jersey Limited ("PoJ").

This document provides the Director General ("DG") of the Treasury and Exchequer's ("T&E") response to the review's recommendations. At the same time as the follow- up review, T&E were already engaged with consultants to consider changes to the Memorandum of Understanding ("MoU"), and other policy work had already been completed for the telecoms sector by the Digital Policy Unit. This consultancy work and  policy development is  recognised in the C&AG's review. The  output of the consultancy review has demonstrated a clear need for a One Government' approach to  completion  of  the  C&AG's  recommendations;  particularly  in  relation  to  the development of sectoral policy, ownership objectives and Key Performance Indicators for  Government-owned  entities.  This  requirement  is  clearly  acknowledged  in  the C&AG's review.

In preparation of this response the DG has consulted with the other Departments responsible for the delivery of sectoral policy and the monitoring of JT and PoJ. Implementing the Target Operating Model ("TOM") is a priority for Government in 2019, this will develop a new way of working across Departments to deliver the partnership model which aims to ensure that the relationships with Arm's Length Organisations  ("ALO")  maximise  long-term  economic  contribution,  rather  than  a narrower view of short-term financial return.

T&E will be working closely with the Group Director of Economy and Partnerships, as  well  as  the  Group  Director  for  Financial  Services  and  the  Digital  Economy, engendering a corporate approach to integrated policy development, rather than each Department restricting themselves to their core functions.

The C&AG makes comments as to the relative slow speed of implementation since her 2014 report, reflecting in part that T&E cannot move forward with its objectives without progression of policy in respect of each of the economic sectors in which the ALO operate.

The  speed  of  direction  is  genuinely  regretted;  however,  the  T&E  takes recommendations and reports of the C&AG seriously, and welcomes the considerable value and contribution in the reviews and reports of the C&AG.

The speed of interaction principally reflects 2 factors –

• As recognised by the C&AG, additional resources have been deployed into the shareholder unit; however, these additional resources have faced a number of competing priorities. The new TOM developed for T&E recognises that further dedicated resources are required that will be focussed on shareholder matters, creating the opportunity to move forward with responding to the recommendations more quickly.
• A sequential approach was adopted, which seemed at the time to be the most effective  way  of  proceeding.  Once  assessing  the  bid  made  to  purchase a minority holding in JT had been completed, the approach adopted was firstly to agree and put in place resources to enable the development of a Telecoms Sector Strategy for the Island. The intent was that once this work had been completed and an associated action plan developed, then work could proceed to review the objectives of ownership and, following this, a review of the MoU, including both policy and financial KPIs. As highlighted in the C&AG report,  work  has  now  been  commissioned  to take  forward  the  ownership objectives and review of the MoUs.

Whilst this sequential approach is reasonable and appeared logical, in hindsight the time this has taken from initiation to completion suggests that it would have made more  sense  to  have  reviewed  the  MoU  in  relation  to  financial  and  corporate governance matters whilst the Telecoms Sector Strategy was developed.

2. SUMMARY OF THE MAIN FINDINGS

The C&AG concluded that of the 11 recommendations made in her 2014 review: 2 have been implemented, 4 have been partially implemented, and 5 have not been implemented (although one of these is dependent on another). Below is a summary of the findings from the follow-up review, and concluding comments are at the end of each section of those findings.

Implemented

• The C&AG notes that full financial statements for JT (and all Government-owned entities) are laid before the States Assembly and made publicly available.
• The C&AG acknowledges recent correspondence between the shareholder and the wholly-owned companies reminding them of the requirement to seek Ministerial approval for remuneration of directors and the extension of that requirement to subsidiary companies.

Public  accountability  for  the  Government-owned  entities  is  a  matter  of  great importance, and this goes beyond the requirement to simply publish annual accounts. As part of the actions detailed below, we will be adopting a consistent model of best practice across the Government's portfolio, with greater transparency in specific areas of reporting.

Partially implemented

• Since  the  2014  report  was  issued,  there  has  been  a  focus  on  the  ownership objectives for PoJ through the incorporation process, and ownership objectives for JT were considered in the context of a potential sale.
• Resources  have  been  reconsidered  and  the  shareholder  function  has  been strengthened,  it  is  too  early  to  evaluate  the  effectiveness  of  the  new  Target Operating  Model  which  includes a  client-side  partnership  function  within  the Department for Growth, Housing and the Environment.
• For the Ports of Jersey the Memorandum of Understanding was strengthened to require  the  shareholder  to  lay  all  sales  of  property  transferred  to  PoJ  on incorporation for a period of 15 days to allow any States Member to review the sale prior to it being agreed. Specific rules governing infrastructure assets have not been implemented for JT.
• The C&AG acknowledges that meetings with JT take place on a regular basis, and there is a good level of engagement between JT and the shareholder. This is similar  across  all  wholly-owned  entities  where  meetings  are  scheduled  at  a minimum  of  every  3 months,  and  every  6 months  at  the  majority  owned companies.

Some of the recommendations made in the original 2014 review were used to shape the incorporation of PoJ, and this is reflected in the C&AG's findings. Furthermore, the shareholder informed the Board Chairmen in November 2017 that it was intending to adopt a more rigorous and consistent approach to meetings.

The implementation of the new Target Operating Model and the One Government' approach  to  implementing  the  recommendations  will  be  dealt  with  later  in  this response.

Not implemented

• A  periodic  review  of  the  Government  ownership  objectives  can  only  be implemented  when  the  ownership  objectives  are  fully  formulated –  this  is acknowledged by the C&AG.
• Key Performance Indictors ("KPI") linked to ownership objectives can only be developed once the ownership objectives are fully formulated – at present the shareholder focuses predominantly on the financial objectives of each company. The Government considers financial performance as an area which should receive significant focus, but acknowledges the need for wider KPI.

• Specific  objectives  for  the  Government's  risk  appetite  as  shareholder  and associated Key Performance Indicators still need to be developed. Risk registers are discussed with each company at the regular meetings, but there is no specific KPI reflecting risk appetite.
• A thorough review of the Memorandum of Understanding has not been completed, but  the  scope  for  the  consultancy  review  of  the  shareholder  governance arrangements commissioned in November 2018 included an assessment of the MoU.
• A clear definition of proposed transactions  that require  consent is  still to be established, this will be addressed through the output of the consultancy review.

3. FACTORS THAT CONTRIBUTED TO THE FINDINGS

As the C&AG acknowledges in her review, successful implementation of her original recommendations will require effective working between the shareholder function in the  Treasury  and  Exchequer  and  other  Departments  responsible  for  policy development. This message is echoed in the report received from the consultancy review that commenced in November 2018, and reflects the partnership approach that we  know  already  exists  elsewhere,  e.g. between  H.M. Treasury  and  other  UK Government departments. This re-inforces the need to take a holistic approach to implementing all the outstanding recommendations.

The  new  TOM  introduces  a  model  of  partnership  liaison  to  supplement  the Shareholding activity, and whilst this is still to be fully established, the proposals are anticipated to provide more effective arrangements for both the shareholder and the client-side partnership function.

Shortly after the original 2014 C&AG review was completed, the original Head of Shareholder  Relations  (and  Treasurer)  left  the  Government,  thus  requiring  new appointments to be made and brought up to speed with the findings. Thereafter a number of specific projects had to be undertaken, some of which had a link to the 2014 review (*). These projects utilised resources which would otherwise have been directed  at  implementing  the  recommendations  of  the  review.  These  projects included –

• Project Dahlia (a review of a potential sale of JT)*
• Andium Homes incorporation – completion of process
• Incorporation of Ports of Jersey Limited*
• Development of a Shareholding Advisory Panel*
• Development and repeated revisiting of proposals for the financing of the new Hospital.

The  agreed  allocation  of  further  additional  resource  to  the  Shareholder  function through changes to the Treasury and Exchequer organisational structure will provide more  time  to  focus  on  strategic  matters,  such  as  policy  development  and  the implementation of review recommendations.

4. OUTLINE OF ACTIONS ALREADY TAKEN

Through  the  Implemented'  and  Partially  Implemented'  evaluations,  the  C&AG recognises  the  work  already  undertaken  to  address  the  findings  of  the  original 2014 review. In addition, in January 2018 the Government of Jersey, through the Digital & Telecoms Policy Unit within the Chief Minister's Department, published "A telecoms strategy for Jersey". This strategy provides clear policy recommendations against which ownership objectives for JT will be established on a cross-government basis.

The C&AG also alludes to the consultancy review that was commissioned by the shareholder function in November 2018 and is  now complete. The scope  of this review was to undertake –

• A thorough review of the MoU for JT and Jersey Post, as to their fitness for purpose, in order to establish a robust framework/governance structure for the Minister for Treasury and Resources and the Shareholder Function, to fulfil its shareholder role on behalf of the Government.
• To work with the shareholder to establish and define the Government risk appetite (and associated dividend policy) for each of the businesses, and to provide  a  framework  for  how  this  will  be  reviewed  on  a  regular  and appropriate basis.
• Key Performance Indicators for each of the companies to be developed and recommended that are relevant and appropriate to the businesses, their future strategies, and the objectives of the Government as owner and the Minister as shareholder.
• Following  the  reviews  of  the  MoU,  appropriate  recommendations  to  be provided for improvements to be made to each, to reflect the complexities of the businesses, the principles of best corporate governance, and the aim to operate as an intelligent and informed shareholder.

The output of this review has been received, and some of the high-level findings have been  referenced  in  this  response.  Greater  details  of  future  activity  are  shown  in section 5.

5. DEPARTMENT PLANS FOR REMEDIAL ACTION

As mentioned in the C&AG's review, the Treasury and Exchequer engaged in a consultancy review in November 2018 which is now complete, and the final report has been provided. This review concludes with 26 recommendations for consideration that are designed to help to address the implementation of the C&AG's previous findings and those from the follow-up report.

In summary, the consultancy review recommends that the Government consider the Memorandum of Understanding as a framework document' that clarifies the overall governance for Government-owned entities ("GOE") and provides clarification on their roles and responsibilities. Policy documents for each GOE are expected to be part of delivery, and should be identified and referenced within the MoU to clarify what is in scope for each entity.

The new MoU is likely to contain a broad list of areas which the Government as a whole will expect to see reflected through KPI. These should include Government policy objectives (both delivery and support), being a role model corporate entity, asset  efficiency,  compliance  with  and  timeliness  of  reporting  and  regulatory requirements. A process for KPI setting will be formalised, and monitoring will be included as part of a strengthened Strategic Business Plan agreement. These principles will guide the development of the new MoU and the subsequent internal resourcing requirements to achieve delivery.

KPI covering the delivery of Government policy should be included in the MoU's list of KPI areas, with the relevant policy owner and the Partnership team being involved with the GOE in setting and monitoring the KPIs and managing performance against them. Through this monitoring, the shareholder function will have an overview of each GOE's performance. This reflects the new Target Operating Model and the need for a more joined-up One Government' approach to the Government relationships with each GOE.

The MoU should include a requirement that, as part of its business activities, there is an expectation that each GOE co-operates with Government-led initiatives aimed at delivering policy objectives (e.g. Common Strategic Policy). Consideration will need to be given to the impact on each company's business, but KPI can again be utilised to support and monitor delivery.

In the new MoU, the shareholder function should mainly be directly responsible for the setting-out of governance requirements relating to areas of disclosure in respect of certain  policies,  such  as  diversity  and  inclusion,  Environmental  Social  and Governance,  corporate  role-modelling  and  remuneration.  Policy  setting  will  be managed, monitored and communicated through the Strategic Business Plan and other regular reports.

The new MoU should address the issue of approval rights for the Government in relation to certain decisions that will relate to a number of areas including, but not limited to, asset acquisitions and disposals, debt funding and changes to company structures. Consideration will be given as to whether this is better monitored against specific KPI or through the Strategic Business Plan process.

Whilst not specifically raised by the C&AG, consideration will be given to formalising a dividend policy for each GOE. Historically, a primary objective of ownership for the Government has been the financial return to the shareholder in the form of an annual dividend. Recognising that the dividend policy will need to reflect the needs of each GOE, the Government should give consideration as to whether it would prefer to raise the annual dividend percentage with the intention of increasing reserves for future investment, or lowering the dividend percentage to assist with policy delivery through direct investment by each GOE.

The consultancy review has identified some potential KPI areas and next steps for establishment  that  will  be  given  careful  consideration  across  Government.  For simplicity, these recommendations are replicated below. As KPI may change over time they will not all be specifically identified in the MoU; rather, reference will be made in the MoU to the broad areas where they will be required, and a process set out for developing and agreeing the detailed KPI for both short- and long-term objectives. This will allow the MoU to be completed for those GOE where sectoral policy is still being developed.

To assist with shaping how the future monitoring of GOE takes place, the Government should consider the merits of various governance and stewardship codes and adopt the most appropriate best practice standards to reflect the financial and non-financial ownership  objectives  of  Government.  This  will  provide  a  demonstration  of  the Government's commitment to acting as an effective shareholder on behalf of the public of the Island.

In conclusion, the consultancy review has identified a requirement for a fundamental re-assessment of how the Government utilises the MoU and manages its relationship with each GOE. The recommendations within that review should form the basis of how the Government will adopt a more collaborative approach to KPI setting, and the monitoring  and  management  of  performance  against  both  policy  objectives  and governance matters, with responsibility being shared across Government between all relevant Departments.

It is intended to apply the principles of the consultancy review to all other MoU not specifically  covered  by  the  C&AG  or  the  review  itself,  this  will  include  the implementation of a programme for regular reviews thereafter. The relationship with majority-owned  entities  is  documented  differently  because  of  other  shareholders' interests; however, best practice will be adopted wherever possible.

6. TIMELINE FOR DELIVERY

The C&AG recognises in her recent evaluation that successful implementation of clearly articulating objectives of ownership is dependent upon the formulation of sectoral policy. The initial focus is on the delivery of a policy for the Ports of Jersey which has a target completion date of 30th June 2019. Thereafter, work can commence on the policy for the postal sector that should be completed by the end of 2019.

Policy delivery aside, the completion of the consultancy review now provides the shareholder function with the guidance required to begin or complete delivery against the  remaining  C&AG  recommendations.  Noting  the  need  for  proper  consultation across several Government Departments and the GOEs themselves, it is anticipated that this activity will be undertaken on a phased basis throughout 2019, with a view to full completion by the end of the year. Greater detail of the activity to be undertaken against each recommendation is included in the Appendix to this response.

Successful  delivery  of  the  actions  needed  to  meet  the  recommendations  require effective working across the Government, between the Treasury and Exchequer, GHE and the Office of the Chief Executive, and the development of the Partnership model with the GOE is a priority for 2019. However, it is likely that additional manpower will need to be made available to ensure that delivery can be completed within the proposed timeframe.

NEXT STEPS

1. INTERNAL ORGANISATION TO MAXIMISE BENEFITS

1. Determine the role and accountability of the Head of Partnerships and other policy delivery bodies (e.g. Digital Policy Unit)
2. Interaction with the regulator
3. Reconsider the requirement for independent oversight (previously the Treasury Shareholding Advisory Panel)

2. DEFINE EXPECTATIONS AND THE WIDER ROLE OF GOE

(a)  Objectives  of  GOE  ownership  clarified  for  Jersey  Post,  Jersey Telecom and other GOE

3. GOVERNANCE FRAMEWORK

(a)  Development  of  accountability  framework  of  the  Shareholder, Regulator and other policy delivery bodies (e.g. Ports Policy Group)

4. ROLL-OUT OF GOVERNANCE FRAMEWORK AND REVISED MOU

1. MOU template wording
2. KPI framework
3. Governance code reviews
4. Rights of the Shareholder
5. Review of other MOU

7. CONCLUSION

The publication of the C&AG's follow-up review is timely, given the consultancy work that has just been completed by the Treasury and Exchequer. The outcome of that  consultation  has  reinforced  the  existing  understanding  that  the  Government relationship with each GOE needs to be considered on a wider governmental basis, rather than  solely  through  the  eyes  of the  shareholder function. The  new Target Operating Model is intended to make the management of these relationships more straightforward and holistic in the future.

The allocation of further additional resource to the shareholder function, as part of the new Treasury and Exchequer structure, enables specific focus to be given to the delivery of the recommendations from the consultation that will ultimately address the items raised by the C&AG.

The Government recognises the important role it plays as shareholder on behalf of the Public of the Island, and the need to ensure that the GOE similarly recognise the role they play as part of the wider Government family. By changing the MoU to reflect the changing external governance environment and Government's own expectations, and ensuring regular reviews of these MoU take place, the Government can ensure that it clearly understands why it owns each company, and the contribution each is expected to make to the delivery of government policy.

8. ACTION PLAN – FOLLOW-UP REVIEW

9. ACTION PLAN – 2014 REVIEW (recommendations not fully implemented only)

Recommendations not accepted None.