Energy from Waste Plant: management of foreign currency exchange risks - Report - 10 August 2009

Public Accounts Committee

Review of the report of the Comptroller and Auditor General entitled:

"Energy from waste plant: management of foreign currency exchange risks"

Presented to the States on 10th August 2009

P.A.C.1/2009

REPORT

CHAIRMAN'S FOREWORD

The publication of this review is the culmination of many months of investigation, diligence, and discussion by the Public Accounts Committee. It was undertaken as part of  an  ongoing  process  whereby  the  financial  management  of  the  States  will  be examined in great detail as we endeavour to ensure that high standards are achieved in every area.

It was always going to be difficult to write a non-political Report on such a politically charged subject and I would like to thank my colleagues, Connétable s John Refault and  Simon   Crowcroft ,  Senator  Alan  Breckon  and   Deputy  Tracey  Vallois,  and particularly the non-politicians on the Committee, Mr. Alex Fearn, Mr. Martin Magee, Mr. Kevin Keen and Mr. Patrick Ryan, for bringing balance to the review.

The Recommendations are for the Minister for Treasury and Resources to consider and we are pleased to note that he has already acknowledged that change is required in the Treasury area. I make no apologies if some of our views are somewhat forthright and our recommendations blunt as this is far too important an issue to skirt around the edges or make excuses.

Effective  financial  management  is  of  critical  importance  in  a  period  of  limited resources. In such times, allocating resources efficiently to achieve the greatest benefit and managing resources to achieve the greatest value lie at the heart of political debate. Improvements in financial management thus lie at the heart of government and are not a peripheral matter.

Finally, I would like to thank our Committee Clerk, Anna Heuston, for her support and hard work in piecing together the many fragments of detail that make up this report.

Senator Ben Shenton Chairman

TABLE OF CONTENTS

1  EXECUTIVE SUMMARY .......................................................................................  5 2  KEY FINDINGS AND RECOMMENDATIONS...................................................  7

KEY FINDINGS ........................................................................................  7 RECOMMENDATIONS............................................................................  8

3  PROJECT MANAGEMENT....................................................................................  10 THE TREASURY ......................................................................................  10

THE CHIEF EXECUTIVE.........................................................................  11 TRANSPORT AND TECHNICAL SERVICES........................................  11 THE MINISTERS ......................................................................................  12 THE CORPORATE MANAGEMENT BOARD .......................................  13 THE CORPORATE APPROACH..............................................................  15 CONCLUSIONS ........................................................................................  16

4  PROPOSED MANAGEMENT OF FOREIGN CURRENCY EXCHANGE  20 RISKS.........................................................................................................................

DELOITTE.................................................................................................  21 ROYAL LONDON ASSET MANAGEMENT..........................................  23 HEWITT.....................................................................................................  24 TAKING ADVICE.....................................................................................  25 INDERDEPARTMENTAL ADVICE........................................................  27 CONCLUSIONS ........................................................................................  29

5  CURRENT POLICY.................................................................................................  30 CONTRACT PAYMENTS ........................................................................  33 CONCLUSIONS ........................................................................................  34

6  ACCOUNTABILITY ................................................................................................  36 THE STATES.............................................................................................  36

MINISTER FOR TREASURY AND RESOURCES.................................  37 THE CHIEF EXECUTIVE.........................................................................  39 CHIEF OFFICER, TRANSPORT AND TECHNICAL SERVICES .........  41 TREASURER OF THE STATES...............................................................  43 STAFFING.................................................................................................  45 CONCLUSIONS ........................................................................................  46

7  GOING FORWARD .................................................................................................  51 FINANCIAL DIRECTION 3.8 ..................................................................  51

EXPOSURE MANAGEMENT..................................................................  51 HEDGING STRATEGY ............................................................................  53

8  APPENDIX A – PANEL MEMBERSHIP AND TERMS OF REFERENCE......  55 9  APPENDIX B – CHRONOLOGY ...........................................................................  57 10  APPENDIX C – FINANCIAL DIRECTION 3.8 ....................................................  62 11  APPENDIX D – REVISED POLICY FOR SCHEDULED EURO PAYMENTS  74 12  APPENDIX E – PROJECT BRIEF .........................................................................  77 13  APPENDIX F – CMB TERMS OF REFERENCE.................................................  90 14  APPENDIX G – DELOITTE BRIEF.......................................................................  91 15  APPENDIX H – DELOITTE WRITTEN SUBMISSION......................................  94 16  APPENDIX I – EVIDENCE CONSIDERED..........................................................  97

1. EXECUTIVE SUMMARY

1. The Committee has reviewed the Comptroller and Auditor General's (C&AG) report entitled: Energy from waste plant: management of foreign currency exchange risks' (R.24/2009 refers).
2. This report was the result of an investigation into the management of foreign currency exchange risks arising from a contract for the procurement of a new energy from waste plant for the Island.
3. The report of the C&AG focused around action taken by the States Treasury on 3 key dates – 10th July, 14th November and 17th December 2008 – and the impact these actions had on the cost of procuring the plant.
4. In his conclusions, the C&AG observed that the problems encountered in managing the currency risks had been exacerbated by 2 factors: the lack of staff with the appropriate skills and experience within the Treasury, and administrative failures within the department.
5. The Committee agreed to review the report in order to establish whether –

1. the currency exposure disclosed to the States in P.73/2008, which led to the cost of the procurement being higher than the cost originally indicated to the States, could have been avoided;
2. the total project cost of the energy from waste plant could have been reduced had there been sufficient staff with appropriate skills and experience within the Treasury and Resources Department, and had failures not occurred in basic administrative practice;
3. procedures could be implemented within the States to ensure the effective management of foreign currency exchange risks in future.[1] 

6. The Committee acknowledges that the scale of the economic downturn in 2008 could not have been predicted by the States, however, it considers that far greater precautions could have been put in place in order to ensure more efficient management of foreign currency exchange risks throughout this project.[2] 
7. Mistakes were made in managing the foreign currency exchange risks, and no civil servant or Minister will admit that they were accountable for the way the project was handled.
8. Poor project management led to risks not being identified, responsibility not being taken, and accountability not being accepted in respect of the funding process for the procurement.

9. Since the C&AG released his report, a new Financial Direction has been issued on managing foreign currency3 and the policy for managing scheduled euro payments on the energy from waste plant has been revised.4 However,

the Committee does not believe that this is enough. 1.10  Fundamental  changes  need  to  occur  in  the  way  large-scale  projects  are managed,  implemented  and  monitored  within  the  States,  and  the  senior management  team  should  examine  how  departmental  coordination  can  be improved to ensure clear lines of accountability in future. 1.11  This report contains a number of recommendations which, if adopted, will assist the States in avoiding a recurrence of the errors made in managing foreign currency exchange risks throughout this project.

3 Financial Direction 3.8 is included at Appendix C.

4 The revised policy on scheduled euro payments is included at Appendix D.

2. KEY FINDINGS AND RECOMMENDATIONS KEY FINDINGS

1. There was a lack of management applied across the project, particularly in relation to the project financials. (See 3.41)
2. There was lack of clearly defined areas of responsibility as the project moved from inception through design to implementation phases as established project management best practice dictates. (See 3.43)
3. Lines of accountability among accounting officers within the States are not clear in respect of cross-departmental procurements. (See 3.45)
4. The Chief Executive and Corporate Management Board failed to identify the risks involved and prioritise the largest ever capital project undertaken by the States. (See 3.50)
5. Project documentation was a problem, with key meetings and decisions not being recorded. (See 3.52)
6. The Committee is concerned that Ministers and departments might have the opportunity  to  mislead  the  States  by  including  vital  information  in  an accompanying report rather than a main proposition. (See 4.8)
7. The  Treasury  never  requested  or  secured  specific  advice  on  funding  the payments for the energy from waste plant. (See 4.25)
8. States advisers do not have an in-depth profile of their client and are unaware of the level of risk the States is able to take or their preferred investment options. (See 4.34)
9. The current strategy employed by Treasury and Resources, and supported by the Minister, to manage the ongoing currency exchange risks in relation to the funding process for the procurement of the energy from waste plant does not sufficiently  guard  against  further  strengthening  of  the  Euro  and  further substantial losses. (See 5.17)
10. The current policy does not meet the objectives as the Committee understands them and the risk is still not being appropriately managed, despite the focus in this area over the past few months. (See 5.28)
11. The States Assembly did not question or give full consideration to the risks associated with the management of foreign currency exchange when agreeing the funding for the energy from waste plant. (See 6.10)
12. The Committee is concerned that the Treasurer does not appear to have a sufficient balance between day to day accounting matters and the strategic requirements of his role, such as monitoring the funding of the largest ever capital project undertaken by the States of Jersey. (See 6.58)

13. At the same time as euros were being purchased to fund the energy from waste plant, the substantial sums of euros received as part of the French air traffic agreement were being exchanged into pounds sterling. (See 7.9)
14. There still appear to be no formal mandates in place for the ongoing provision of professional foreign exchange advice. (See 7.17)
15. A similar incident could occur on future projects, as the Treasury does not appear to have a robust enough policy for the management of foreign currency exchange risks going forward. (See 7.20)

RECOMMENDATIONS

16. The Chief Executive should ensure all States decisions are implemented and risks identified and managed appropriately. (See 3.53)
17. Key  project  roles  and  accountabilities  should  be  defined,  assigned  and recorded at the outset of every future project undertaken by the States. (See 3.54)
18. A  steering  group  should  be  established  for  the  energy  from  waste  plant project, which is likely to include the responsible Ministers and departmental Chief Officers. (See 3.55)
19. Lines of accountability among accounting officers within the States should be defined. (See 3.56)
20. States departments should ensure the proper recording of key decisions and the decision making process during all future projects in order to effect proper implementation and accountability. (See 3.57)
21. Where contractual negotiations are taking place, appropriate dissemination of progress and potential implications for risk and funding in particular should be disseminated to all project stakeholders, including steering group and sub project work-stream managers. (See 3.58)
22. Exchange rate considerations should be analysed, the appropriate policy put in place, and consideration given to the proper use of advisers, at a far earlier stage  when  managing  projects  in  future,  and  before  the  project  has  been approved by the States. (See 4.44)
23. Careful consideration should always be given to the appropriate time to sign up  to  high-worth  contracts  and  to  the  possible  financial  consequences  of variations in timetables. (See 4.45)
24. States' advisers should be provided with an in-depth profile of the States as a client which outlines the level of risk the States is able to take and its preferred investment options. (See 4.46)
25. Terms of engagement with Hewitt should be reviewed. (See 4.47)

26. The  Privileges  and  Procedures  Committee  and  Council  of  Ministers  are requested  to  ensure  that,  going  forward,  reports  and  propositions  are structured so that key undertakings are clearly stated and are binding. (See 5.29)
27. The Treasury and Resources Department should include a stop loss in its policy on the ongoing management of currency exchange risks with regard to the funding process for the procurement of the energy from waste plant. (See 5.30)
28. The  role  of  Treasurer  of  the  States  should  be  reviewed,  with  defined responsibility given in respect of overall financial control and responsibility. (See 6.61)
29. The Treasurer should receive appropriate sanction for any failure in relation to the financial management of this project. (See 6.62)
30. Financial  Direction  5.1,  which  deals  with  the  engagement  and  use  of consultants, should include an instruction to ensure that those giving advice are qualified to do so, and are provided with a clear brief regarding the type of advice being sought. (See 7.6)
31. A strategy should be in place to ensure that euros received by the States, such as airport landing fees, are used to fund the States' euro liabilities in other projects. (See 7.11)
32. Financial  Direction  3.8  should  be  strengthened  to  outline  clear  roles  of accountability; to include advice specific to actual currency problems that may need to be addressed and to outline procedures covering the appointment of advisers. (See 7.21)

3. PROJECT MANAGEMENT

1. Throughout the Committee's investigations, it has been difficult to determine exactly how the funding process for the procurement of the energy from waste plant was project managed.
2. There appears to have been some confusion within the States as to who should have been involved in a project of this scale.
3. The Public Accounts Committee has considered the departments, politicians and civil servants who were involved in the project, and has been unable to find  a  clearly  defined  overarching  project  management  structure  for  the funding process in respect of the procurement.
4. A project brief was created dated February 20085, which confirmed the source of funding as "financed through an alternative States funding source – namely through a Sovereign Bond or borrowing". It appears this document was never updated to reflect the changing scope of the source of funding or the required fixing of any exchange rate risk, as required by the States' approval.

THE TREASURY

5. When  P.73/2008,  Energy  from  waste  facility:  funding',  was  lodged  au Greffe'  in  May  2008,  the  accompanying  report  included  the  following statement:

"3.0  Fluctuations – Exchange Rate

3.3  The Treasury has conducted a sensitivity analysis of the currency exposure  and  obtained  expert  advice  on  anticipated  currency fluctuations.  As  with  all  States  capital  projects  the  Treasury  will monitor and manage the fluctuations risk."

6. This was the first time the Treasury had been involved in a project in this way. The Treasury had never before monitored or managed fluctuations risk on capital projects as it did not have the experience. Instead, currency exchanges had always been handled by individual departments:

"Senator B.E. Shenton:

the Treasury had no experience, with regard to the logistics of hedging or the management of foreign currency.

Treasurer of the States:

You are quite right There were no major currency exchanges prior to this one and those that did exist were handled by departments."6

7. Whilst accepting that this was a major project the Treasurer admits that the project management structure was unclear:

5 The Project Brief is included at Appendix E.

6 Transcript of hearing with the Treasurer of the States, page 7.

"Treasurer of the States:

there are lots of learning points from this. One of them was, we have not had such a major procurement before and one of the issues was a lack of clarity about who was responsible for what"[3] 

THE CHIEF EXECUTIVE

8. "Senator B.E. Shenton:

would you have expected the Chief Executive of the States to get involved in a funding of this nature?

Treasurer of the States:

I do not know, I do not think so. I am not sure, I do not think so."[4] 

9. The Chief Executive did not see a need to be involved in the energy from waste plant project, as he understood his role to be one of monitoring:

"Chief Executive:

I did not see myself having an active management role in the specifics of this contract."[5] 

TRANSPORT AND TECHNICAL SERVICES

10. A Funding Working Group was set up to deal with the funding issue identified in 2005 when the States approved the project in principal. The group was chaired by the Chief Officer, Transport and Technical Services, and included representatives from Treasury and Resources. The Group held its first meeting on 21st August 2007 and identified at that time that the funding source risk fell to Treasury and Resources[6].
11. The original project brief confirmed the project structure, citing the Minister for Transport and Technical Services as the sponsoring Minister and investment decision-maker. In addition, the project sponsor role was confirmed as the Chief Officer, Transport and Technical Services, who was also defined as the senior responsible owner, with the project manager being the Director, Waste Strategy Projects.
12. The project brief clarified these roles as: "being followed to align the project governance with the Office of Government Commerce (OGC) Construction (Achieving Excellence) model used within the energy from waste plant project governance." The brief said:

"This model has been introduced to ensure integration of processes across the project lifecycle given the scale and importance of the energy from waste plant project."[7]

13. The Committee notes that the formation of the project board and funding working group, together with the engagement of financial advisers, should have  been  sufficient  for  the  euro  exposure  to  have  been  identified  and appropriately addressed.
14. Although  the  Committee  believes  it  was  reasonable  for  Transport  and Technical Services to expect Treasury and Resources to find the euros, the contractual negotiations led by Transport and Technical Services should have recognised that the risk of exposure to the deteriorating sterling exchange rate was being shifted from the contractor to the States.
15. On  6th  November  2008  a  meeting  was  held  between  the  Ministers  for Treasury and Resources and Transport and Technical Services and staff from both departments, to discuss the funding position of the energy from waste plant project12.
16. It was then that Transport and Technical Services advised that they could not sign the energy from waste plant contract as the cost was well above the amount sanctioned by the States:

"Treasurer of the States:

That meeting on that day, which was arranged at very short notice, was quite simply because the costs of the contract had grown to the extent that Transport and Technical Services felt unable to sign the contract. It had grown because of the exchange issues. The States were informed it would be locked out on the contract date and ... the deal had been very stable . Suddenly it started declining and there was an additional cost to the contract and at the same time, there were contractual negotiations that had added some cost and there were legitimate planning requirements on finishes and the like which added quite significantly to the cost of the scheme. It was as a result of that that T.T.S. convened a meeting at short notice to say they could not proceed on that basis and that meeting was to discuss how to deal with the issue."13

THE MINISTERS

17. This  meeting  represented  the  first  time  the  Minister  for  Treasury  and Resources and the Treasurer had been involved in discussions to do with the immediate period prior to signing14.
18. Although  the  Ministers  for  Treasury  and  Resources  and  Transport  and Technical Services were present, and therefore aware of the issues arising in relation to the management of foreign currency exchange risks, it did not result in greater political involvement in the project:15

12 Transcript of hearing with the Treasurer of the States, page 29. 13 Ibid, page 30.

14 Ibid, page 29.

15 See paragraph 6.12 of this report.

" Connétable of St. Helier :

Following that meeting, did the Minister working with you realise that action had to be taken to bring this ... because clearly, politically, this was drifting away from what the States agreed?

Treasurer of the States:

That did not happen at a political level, to be fair. I am happy to talk about the other reasons why the decision moved but it was not at a political level that the decision to move it took place." [8]

19. This was a serious decision to make, and one that was never recorded – the C&AG could find no formal record of the meeting.[9]

THE CORPORATE MANAGEMENT BOARD

20. The Corporate Management Board is responsible for ensuring the effective and efficient allocation and management of resources within the States and for undertaking regular future scanning to identify major issues which could impact on the States or which need to be planned for.[10]
21. In 2006, the Corporate Management Board established an Audit Committee to support them in their responsibilities for monitoring and reviewing the risk, control, and governance processes within States' funded bodies and the associated assurance that these processes were adequate.[11]
22. On this basis, the Committee would have assumed that major risks were being monitored by the Corporate Management Board; however, the energy from waste plant project did not feature as a Board agenda item at any time between the States' decision in July and the signing of the contract in November[12] 2008.

"Former Chief Officer, Transport and Technical Services:[13]

At Corporate Management Board, very little discussion other than I was updating them on progress, it is clearly a very big project, and we were obviously very concerned because the costs of this project, which is the biggest capital project the States were undertaking, but it certainly was not ... this project and all of the issues relating to it was not referred to the Corporate Management Board as an item on the agenda."[14]

23. The risk was not being monitored at management level:

"Former Chief Officer, Transport and Technical Services:

I think that the risk for these specific projects would fall to the individuals concerned and the Audit Committee was established but their function tends to be to review the internal audit reports that come through and certainly the Corporate Management Board has got a strategic risk register which we monitor and maintain, but we do not go down into individual specific areas and specific projects as such."23

24. The role and function of the Corporate Management Board is called into question here. The Board has responsibility for monitoring and reviewing risk – a responsibility that they cannot waive whenever they see fit.
25. This was the biggest capital project the States were undertaking, and even in the knowledge that the States' decision to eliminate foreign currency exchange risk had been set aside, the Chief Minister (who was Minister for Treasury and Resources at the time), did not feel it was necessary for the Board to get involved:

"Senator T.A. Le Sueur :

I do not think that the Corporate Management Board has a role to play in this one. The decision had been made by the States. It is not for the Corporate Management  Board  to  second  guess  that  decision,  nor  is  it  up  to  the Corporate Management Board to implement the decision. So I fail to see any particular  role  in  this  particular  case  for  the  Corporate  Management Board."24

26. With a large project, where responsibility falls within the remit of more than one Chief Officer, the Public Accounts Committee would expect greater co- ordination  at  Corporate  Management  Board  level,  or  certainly  at  joint management level, as expressed by the former Chief Officer, Transport and Technical Services:

"Former Chief Officer, Transport and Technical Services:

I think if the Treasurer had flagged up that there was a significant problem then or a very high degree of risk or the Treasurer had a problem, then it would have been reasonable in the first instance for the Treasurer to have discussed it with myself and I would have expected probably the Treasurer, myself and the Chief Executive would have sat down and said: "What is the risk? How are we managing it? Is it an issue?" I do not think we would have gone straight to Corporate Management Board, but I certainly never had an indication from the Treasurer or the Treasury officers that they were not managing this, they were not in control of what was going on."25

23 Ibid, page 10.

24 Transcript of hearing with the Chief Minister, page 13.

25 Transcript of hearing with the former Chief Officer, Transport and Technical Services,

page 8.

27. The Committee has considered criteria warranting overarching control and oversight, as opposed to individual departmental responsibility, which appears to have been a contributing factor to the decisions made. These criteria include the following:

• the high cost of the contract compared to previous projects involving high levels of capital spend;

• cross departmental responsibility with increased risk associated with potential  lack  of  responsibilities,  accountability  and  key  decisions falling between departments;

• the first time involvement in such a project, and having to monitor and develop a payment strategy in light of a fluctuating exchange rate environment, through times of extreme market dislocation.

Based on these criteria the Committee would have expected acute focus to be applied at the Corporate Management Board level with regular discussions as to progress, key milestones, potential for cost overruns, risks arising with mitigation strategies and any potential divergence to agreed States policy.

THE CORPORATE APPROACH

28. The Committee considered how this type of decision might have been handled in  the  private  sector,  and  that  the  following  may  have  been  considered particularly relevant:

• it was a very large and unusual project;

• an undertaking had been given that the risk of currency fluctuation would be closed off;

• the lack of specialist currency risk management experience in the Treasury.

29. It considered that a corporate approach to a similar situation may have been to:

• recognise the importance of the decision and allocate responsibility for it to the finance director;

• seek specialist advice on an appropriate strategy for dealing with the risk, probably from the company's bankers;

• put  forward  a  strategy  for  managing  the  risk  to  the  executive committee  (the  corporate  equivalent  of  the  States  of  Jersey's Corporate Management Board) and then the board of the company (the  corporate  equivalent  of  the  Council  of  Ministers)  and  seek approval;

• once approved, execute the strategy promptly.

30. In this way there would have been clarity of the risk being taken which would have been in line with the capacity to take that risk. What ever risk was taken, the Board would certainly have known about, and approved it. There would also have been regular reporting about the risk and any open positions which would have given an opportunity for review and action where needed.
31. The creation of a cross-functional group by Transport and Technical Services in the form of the Funding Working Sub-Group26 was a good initiative, and the  Committee  recognises  that  a  decision  had  to  be  made.  It  also acknowledges that with foreign currency there is a level of risk, even with a well thought through and formal strategy.
32. However, in this case there seems to have been too many junior staff dealing with the issue and too many consultants involved without clear instructions. The group appears to have come to the conclusion that hedging the risk was just too expensive – a situation which appears to remain.

CONCLUSIONS

33. There were two separate States departments involved, namely Transport and Technical Services and Treasury and Resources, with the existence of distinct subgroups including the Funding Working Sub-Group. This should not have prevented a structure being put in place with an agreed steering group to make sure  the  required  liaison  and  interdepartmental  co-operation  continued throughout the project's lifecycle.
34. With regard to overarching responsibility, the clear line of sight between Ministerial  Decisions  and  implementation  and  accountability  remain  the Committee's  main concern, this energy from waste plant funding process being a good example of the shortcomings.
35. Project governance structure was, and remains, unclear.
36. The learning points are to ensure:

• clarity of control between the Chief Executive and the Treasurer of the States;

• the formal structure of a project to manage the full lifecycle from inception  to  implementation  and  to  ensure  robust  handover  of responsibility between the different phases;

• the  formation  of  a  steering  group  which  is  likely  to  include  the responsible Ministers and departmental Chief Officers.

26 The Funding Working Sub-Group first met in August 2007, as detailed in the report of the

C&AG  entitled:  "Energy  from  waste  Plant:  management  of  foreign currency  exchange risks", page 18, paragraph 69.

37. The normal discipline followed for a major project such as this is to appoint a project or programme manager if the size of the project warrants it (running a series  of  projects  or  work  streams  within  a  programme),  supported  by  a steering group or committee. This committee should meet regularly during the entire  project  lifecycle  and  to  make  decisions  around  key  milestones  and deliverables, including scope and financing.
38. The project manager is responsible for ensuring that all key project roles and accountabilities  are  defined,  assigned and understood.  This  would  include identification of specific project phases and appropriate risk management to ensure  clear  and  full  handover  between  phases,  and  as  different  parties become involved in those different phases.
39. The  project  should  have  a  dedicated  financing  work  stream,  with responsibility for funding, cash management, hedging strategies etc. In this case, while there was a dedicated financing work stream, its effectiveness could be questioned. The project manager should ensure that the aims of the project and agreed actions of the steering committee are implemented by the sub project groups.
40. Further key actions (for example the Strategic Investments Manager, Treasury and  Resources,  checking  whether  euro  payments  capability  existed  in  the States on 1st September 2008) should be centrally tracked and not left to individuals to complete.

KEY FINDING

41. There was a lack of management applied across the project, particularly in relation to the project financials.
42. As the project moved through the phases, there should have been discipline applied by the project manager and steering group to ensure key decisions which were made were communicated and implemented.

KEY FINDING

43. There was lack of clearly defined areas of responsibility as the project moved from inception through design to implementation phases as established project management best practice dictates.
44. Specifically there appears to have been a lack of clarity around the November 2008 signing of the contract and tracking the progress made in relation to how the price was going to be fixed and the key decision of 11th July 2008 to move responsibility for the contract payment, and therefore hedging, to the Treasury Department.

KEY FINDING

45. Lines of accountability among accounting officers within the States are not clear in respect of cross-departmental procurements.

46. It  is  also  unclear  whether  the  Treasury  officials  actually  understood  the progress of the contract at that stage and the lack of a fixed price around the forthcoming euro liabilities contained within the project. This would have been the responsibility of the lead in contractual negotiations and the chair of the Funding Working Sub-Group – the Chief Officer, Transport and Technical Services.
47. Also periods such as the 6-day gap between the contract being signed on 14th November 2008, and further communication between the Investment Officer, Treasury and Resources, and the Head of Decision Support on 20th November 2008, would normally be followed up and monitored, being a key project milestone.
48. Clearly  there  are  stages  when  the  responsibility  moved  from  project  to department or between departments. It is at these points that follow up is normally necessary – as can be seen in this case – to ensure responsibility and accountability is clearly understood.
49. This raises questions over the ability to prioritise and co-ordinate roles at the most senior level.

KEY FINDING

50. The Chief Executive and Corporate Management Board failed to identify the risks involved and prioritise the largest ever capital expenditure undertaken by the States.
51. The C&AG's report highlighted that meetings which were key to the project and which led to the adoption of the current strategy were not documented, for example  the  meeting  held  on  6th  November  200827.  This  is  a  necessary discipline which should be rigorously applied and enforced.

KEY FINDING

52. Project documentation was a problem, with key meetings and decisions not being recorded.

RECOMMENDATIONS

53. The Chief Executive should ensure all States decisions are implemented and risks identified and managed appropriately.
54. Key  project  roles  and  accountabilities  should  be  defined,  assigned  and recorded at the outset of every future project undertaken by the States.

27 Report of the C&AG entitled "Energy from waste Plant: management of foreign currency

exchange risks", page 44, paragraphs 162 – 163.

55. A  steering  group  should  be  established  for  the  energy  from  waste  plant project, which is likely to include the responsible Ministers and departmental Chief Officers.
56. Lines of accountability among accounting officers within the States should be defined.
57. States departments should ensure the proper recording of key decisions and the decision-making process during all future projects in order to effect proper implementation and accountability.
58. Where contractual negotiations are taking place, appropriate dissemination of progress and potential implications for risk and funding in particular should be disseminated to all project stakeholders, including steering group and sub project work-stream managers.

4. PROPOSED  MANAGEMENT  OF  FOREIGN  CURRENCY EXCHANGE RISKS

1. When  the  States  went  out  to  tender  on  the  energy  from  waste  plant  in November 2007, bids were requested in pounds sterling, rather than euros. However, when the bids came in on 29th February 2008, neither bidder had followed these guidelines, both choosing instead to bid with an element of the contract charges being paid in euros rather than pounds.
2. This was the first sign that the States would need to seriously consider the effective management of currency exchange risks.

"Former Chief Officer, Transport and Technical Services:

both bidders wanted to put in the most commercially attractive bid to try to win the job and they obviously took the decision that they would put in their bid with a mix of euro and sterling.

Senator B.E. Shenton:

You could perhaps also put that they realised what the currency risk was better than the Treasury Department or the States of Jersey and they did not want to take the risk on that [which] the States of Jersey seem to be more than happy to take on."28

3. The fact that the bidders were unwilling to take on the currency risk at zero cost did not alert the Treasury to the risk that they were potentially taking on. A review of the events that followed indicated to the Committee that there was an ill-judged willingness to accept a risk that was not there at the start of the process. Similarly, the Treasury took on the responsibility from Transport and Technical  Services  without,  it  appears,  a  structure  in  place  to  adequately manage it.
4. A Funding Working Group first met in August 2007 to consider arrangements for financing the proposed energy from waste facility. The C&AG set out in his report the initial consideration that group gave to fixing the Euro:

"The Funding Working Group considered the option of fixing the Euro rate on 1 May 2008 and again on 1 September 2008 by which date the Euro/Pound exchange rate had fallen to 1.26. The Euro rate continued to fluctuate but remained above 1.20 to the pound between the start of September and the start of November 2008. Thereafter, the rate deteriorated quickly."29

5. In May 2008, the Minister for Treasury and Resources lodged the report and proposition entitled: Energy from waste facility: funding,' (P.73/2008 refers). This set out the initial policy for the purchase of euros.
6. The report indicated that the total cost would be £106.31 million, a figure which had been calculated in May 2008 using the exchange rate at the time.

28 Transcript of hearing with the former Chief Officer, Transport and Technical Services,

page 14.

29 Report of the C&AG entitled "Energy from waste Plant: management of foreign currency

exchange risks", pages 14 – 15, paragraphs 60 – 61.

The States were advised that the euro/sterling rate would be frozen when the contract was signed, and the total cost of the procurement in terms of currency risk would thereby be established.

7. On 9th July 2008 the States approved the procurement of the energy from waste plant and associated funding, as outlined in P.72/2008 and P.73/2008. However, no action was taken by the Treasury to fix the exchange rate for the contract[15].  Instead,  discussions  continued  about  products  to  deliver  the strategy. The date of the contract signing came and went on 14th November 2008, and the exchange risk remained un-hedged. The exchange risk had been discussed with States' advisers, however, no action was taken.

KEY FINDING

8. The Committee is concerned that Ministers and departments might have the opportunity  to  mislead  the  States  by  including  vital  information  in  an accompanying report rather than the main proposition.

DELOITTE

9. First to be involved in the project were Deloitte, who were engaged by the Transport and Technical Services Department to act as financial advisers[16].
10. The Group agreed that "the project adviser role should be limited to providing financial models evaluations and life cycle analysis with the funding source role being a sub-cliented role for Treasury to call on as and when required for negotiations with funders"[17].
11. In his report, the C&AG considers that: "the initial assumption was that the procurement would be financed by borrowing, possibly by means of a bond issued by the States, and that companies tendering for the contract to build the new plant would be expected to denominate their bids in sterling so that the States would not be exposed to any currency exchange risk."[18]
12. Deloitte's brief did not include the provision of advice on currency hedging. However, when the bids came in with the requirement for partial payment in euros, the Treasury approached Deloitte for their thoughts on the matter.
13. Deloitte's written submission to the Committee[19] states:

"Although advice on currency hedging was not included in the initial scope of our work, as a result of a request from the then Strategic Investment Manager, Treasury and Resources Department, the scope of our work was extended to include advice on the options for currency hedging. This advice took  the  form  of  discussion  during  Treasury  and  Resources  Department

meetings and an email to [the Strategic Investment Manager] dated 25 March 2008." 35

14. The e-mail from Deloitte dated 25th March 2008 put forward options which can be summarised as follows:

• transfer an amount equal to the expected euro element of the contract into a euro account or

• obtain an option to purchase euros equal to the contract amount at a point in the future. 36

15. Deloitte's advice was considered, but never executed.

"At the time of our advice regarding currency hedging, neither bidder was offering  a  fixed  price  in  sterling  from  the  time  of  preferred  bidder appointment. We identified the options for hedging ... TRD  [Treasury and Resources Department] decided not to take any action at that time. We were informed that the decision would be revisited in the period leading up to contract close, at which point TRD would review the options again and make a decision as to whether to hedge the risk. We understand that the options were revisited but received no further requests for advice on the matter."37

16. Following  the  departure  of  the  Strategic  Investment  Manager  from  the Treasury and Resources Department on 3rd October 2008, Deloitte was not asked to provide any further advice relating to currency hedging and advice was instead sought from other organisations. As a result, the only specific issues Deloitte advised the Funding Group on were:

• the appropriate method of funding for the energy from waste plant (e.g. from reserves, bank funding, Private Finance Initiative, etc.);

• the options for currency hedging, as outlined above.

17. Deloitte appears to have been under the impression that the Treasury would provide the ownership of ensuring that the currency was hedged on the date of signing of the contract:

"In our evaluation of the bidders we noted that neither bidder was offering a fixed price in Sterling from the time of preferred bidder appointment. We therefore factored into our evaluation the impact that a potential change in exchange  rates  would  have  on  each  bidder's  price.  The  purpose  of  this analysis was, however, to assist in the decision of selecting the preferred bidder rather than hedging against the risk. We understood that subsequent to the appointment of the preferred bidder, the decision on currency hedging would  be  revisited  by  the  TRD  prior  to  contract  close  with  a  view  to

35 Deloitte's written submission to the Committee dated 1st June 2009, page 1. 36 Ibid, page 3.

37 Ibid, page 2.

considering risk mitigation at that point, although as indicated above we were never asked for further advice on this matter beyond that already outlined."[20]

18. It is perhaps surprising that advice was not requested by the Treasury from Deloitte given their understanding of the contract. Instead, the Treasury preferred to take generic advice from Royal London Asset Management, HSBC and Hewitt, as outlined below.

ROYAL LONDON ASSET MANAGEMENT

19. Royal London Asset Management were initially contacted on the afternoon of 29th October 2008, when they were informed that some of the money they were managing would be used to fund an incinerator, and that part of the funding would be in euros.

"Mr. J. Pope:

We were managing money in sterling and there were various options that were being looked at to raise those euros. We were given 3 options. Firstly, just raise the euros as they were required; secondly, they were looking at forward foreign exchange contracts; and, thirdly, buying the euros in one block and paying the euros as they were required by fixed payments to the contractor. We were asked whether we could help in any of those. The email said that option 1, just taking the exchange rate was probably not going to be pursued but could we help with the other 2 options. Our reply was, yes, we could help with the other options. We have the facilities to be able to offer that service but at no point did we advise on the suitability of those options for the situation." [21]

20. Royal London Asset Management was aware that there was a requirement to buy euros, but, as the managing director of their Guernsey office said: "the decision was not ours and we were not giving advice as to whether to do that"[22]. The company was never made aware of the advice contained in the report to the States which said that the exchange risk would be eliminated when the contract was signed[23].
21. Royal London Asset Management provided the Treasury with generic advice, but nothing specific to the funding of the payments of the incinerator.

"Senator B.E. Shenton:

what you were saying is that you could help out on an execution only basis?

Mr. J. Pope: Yes, exactly."[24]

22. The Treasury took only generic advice on this issue – albeit they argued that advice had been taken. The advice asked for and received was not specific in the context of hedging.

"Mr. P. Paul:

I think the use of the word "advice" in the report is probably used a little bit too liberally now that we have been called to this hearing. It was more that our opinion was being given as opposed to our advice was being given. As you say, it was generic."43

HEWITT

23. On 24th October 2008 the Head of Decision Support, Treasury and Resources, sent an e-mail to the States strategic investment adviser, Hewitt, asking what the best approach might be to making contract payments in euros. The e-mail outlined that one option would be to fix the exchange rate as at the date of signing, and that other options being considered were to deposit the full sum in a euro account or take a chance on the prevailing rates on the payment due dates44.
24. The response given by Hewitt that the States would be ill advised to expose themselves to the risk of short-term currency exchange rate movements, and that the purchase of forward currency contracts would be the normal way of achieving certainty45; was described by Mr. D. Hager of Hewitt as "incredibly generic"46, and was provided without possession of all the facts.

"Mr. D. Hager

Given I had not been involved in the contract it is difficult to give this sort of advice when you do not know who else has been advising in the same territory and you do not know all the facts."47

KEY FINDING

25. The  Treasury  never  requested  or  secured  specific  advice  on  funding  the payments for the energy from waste plant.
26. Hewitt's advice was not taken48, and the exchange rate was not fixed. Instead, the approach eventually arrived at envisaged that all of the euros required would be purchased at a time of favourable rate' prior to January 2009 when

the first payments in euros would be made49. 4.27  Even  if  the  companies  asked  to  provide  input  had  been  aware  of  the requirement to eliminate exchange risk, the Committee believes that there was

43 Ibid, page 6.

44 Report of the C&AG entitled "Energy from waste Plant: management of foreign currency

exchange risks", page 37, paragraph 135.

45 Ibid, page 70, paragraph 268.

46 Transcript of hearing with Hewitt, page 3.

47 Transcript of hearing with Hewitt, page 4.

48 Ibid, page 4.

49 Report of the C&AG entitled "Energy from waste Plant: management of foreign currency

exchange risks", page 82, paragraph 320.

a flaw in the initial policy outlined in P.73/2008 to fix the exchange rate on an arbitrary date.

Senator B.E. Shenton:

It is a bit like saying: "Buy me some Barclay's shares on 12th December at 2.00 p.m." and you do not know what on earth the risk is or what the price would be or anything else?

Mr. D. Hager:

my guess is there was a wish – and I am only guessing here – by the States to fix the contract and somehow in the proposition it got to be the date of signing the contract, but they did not mean that really, I think. They meant they wanted the exchange rate risk taken out and did not perhaps accept or understand, or it was not made clear – I do not know – that there was a huge risk between saying: "Let us go ahead" in July and signing a contract some months later when all you were really arguing about is a number of minor contractual terms.""[25]

28. Work should have been undertaken earlier on in the project life-cycle in order to mitigate the foreign currency exchange risk.
29. "Mr. D. Hager:

For me the lessons for the future are how it is one can take into account exchange rates and projects at a much earlier phase, maybe even when the States has not agreed to go ahead, but one knows there is some likelihood of going ahead."[26]

TAKING ADVICE

30. It is evident that there was a lack of specific advice given in relation to how best to manage the foreign currency exchange risk, and that this led to mistakes being made.

" Connétable of St. Peter :

It has almost been called death by management advice because we appear to have had several different financial experts advising either the steering group and then yourselves within Treasury, and coming up with different forms of advice. How much did that conflicting advice cause the doubt in the minds of the responsible officers, or the accounting officer in this particular instance,  which  stalled  him  from  making  that  vital  decision  to  hedge  the funds?

Treasurer of the States:

Yes. Certainly, if one of these people had come out with a clear understanding that they are required to give unequivocal advice, I think that would have made it it would have been I am not saying it is the cause of what went wrong but it would have been less likely to happen."[27]

31. The advisers were not asked to provide specific foreign currency exchange advice, and didn't.

"Treasurer of the States:

Neither of the advisers specifically had mandates to do with foreign exchange, although Hewitts, to be fair, foreign exchanges were part of the investments we were dealing with so they did have expertise in these areas. To deal with this specific event was not in the particular mandate. I believe that they were expert in doing this and they were competent to do so."53

32. It  is  also  apparent  that  the  advice  that  was  given  was  provided  without complete understanding of the States as a client:

Mr. D. Hager

"I am not in any sense wanting you to take risk, I am merely saying I do not know what your tolerance for risk is."54

33. One of the fundamental aspects of regulation is due diligence and the Public Accounts  Committee  is  particularly  concerned  by  the  apparent  lack  of understanding between the States and Hewitt in this regard. The Committee feels that the adviser should have known the risk tolerance, and ideally the fact that the States had requested a "no risk" policy.55

"Senator B.E. Shenton:

You are giving advice here and by your own admission you do not know the risk to your client.

Mr. D. Hager:

You never know any client's risk tolerance how ever much you ask them. At the end of the day it can only be the client that takes the decision whether to run that risk or not. The adviser can advise, but at the end of the day I just do not know what is acceptable to any client. As I say, I can ask all the right questions, but it is extremely hard to know. You do the best job you can, but at the end of the day I just go back to my standard statement Ask yourself the question: "Can you accept those tolerances?" If you can then you go ahead and you do not put a hedge out; if your view is you can do better than the position, do that.

Senator B.E. Shenton:

So  the  decision  ultimately  lies  with  the  client  which  in  this  case  is  the Treasurer of the States of Jersey?

Mr. D. Hager:

It can only be, in my view, with the client. I am sorry, but that is the way I see it. It is not a question of me not asking enough questions; it is that I just cannot understand at the end of the day exactly the risk tolerance that person

53 Ibid, page 26.

54 Transcript of hearing with Hewitt, page 17.

55 The States were of the understanding, when they approved P.73/2008, that the element of risk would be removed when the currency was hedged on the date of signing the contract.

has. He can tell me the best he can, but only really he can decide; I cannot decide."[28]

KEY FINDING

34. States advisers do not have an in-depth profile of their client and are unaware of the level of risk the States is able to take or their preferred investment options.
35. The Committee is pleased to note that the foreign exchange issue is being considered at a higher level now, however it would wish to see more clarity in the engagement of Hewitt, especially the removal of the apparent indemnity[29].

INTERDEPARTMENTAL ADVICE

36. There also appears to be a weakness in the current system of procuring advice if that advice is given by another States department.
37. Where advice is given by an external provider there should be clearly defined engagement letters setting out exactly what advice is required. This was not done when Transport and Technical Services engaged the Treasury to handle the financial funding of the incinerator contract[30]. Nor, incidentally, was it done  by  Treasury  when  taking  hedging  advice –  generic  advice  that  was interpreted as specific advice.

" Connétable of St. Peter :

From  your  point  of  view  as  the  Accounting  Officer  at  the  time  of  the signature,  were  you  aware  of  what  was  going  on  regarding  the  hedging element then or did you assume that was being dealt with by other parties?

Former Chief Officer, Transport and Technical Services:

We knew it was being recommended. That was the recommendation of the professionals who were managing that element of it. If I draw a line as to exactly where responsibilities rest here, if I have a technical consultant, they advise me on technical matters. If I had a financial consultant, Deloittes, they advise me on financial matters that were very clearly defined. If I have a legal adviser they advise my legal matters. They are all under contract and they are all under very strict terms and conditions of contract and liability. In exactly the same way I would see the Treasury under those same terms and conditions although they were not formally engaged as consultants." [31]

38. As the former Chief Officer, Transport and Technical Services points out, had the Treasury advised that it was not able to undertake the management of the

foreign currency exchange risk associated with the project, the outcome would have been rather different.

"Former Chief Officer, Transport and Technical Services:

if I was sitting here in a different forum today where the Treasury had said they could not for whatever reason manage the funding element we in T.T.S. (Transport  and  Technical  Services)  would  have  appointed  an  investment adviser or extended a brief for one of the other advisers. Now if I was sitting here today in a different format, because we are still talking about the same subject,  but  it  was  very  different,  I  would  be  looking  at  the  P.I.  (public indemnity) insurance of that adviser because clearly they had given me the wrong advice. I see no difference between how I classify the Treasurer and the Treasury giving me that advice as I would of employing a separate investment adviser."60

39. Once again, the problems return to ineffective project management and a failure to recognise the weaknesses which result.
40. The risk mitigants one would normally expect to see with inexperienced, unqualified, or junior staff do not appear to have been in place for the project. Specifically:

• the sourcing and receipt of professional advice was sought and the provision of alternative hedging strategies was identified;

• however, the responsibility for the conversion of this advice into a key paper  fell  upon  the  Head  of  Decision  Support,  Treasury  and Resources, who had already advised of his lack of foreign currency management (27thOctober 2008)61;

• Further,  the  incorporation  of  costs  for  the  various  options  and identification of all types of instrument (including American versus European  options)  appears  to  have  confused  the  decision  making process, not taking into account of the potential additional costs of the euro moving significantly against sterling. There also appears to be no evidence of costs of the different hedging strategies being challenged.

41. The paper which the Head of Decision Support, Treasury and Resources, prepared relating to the alternative hedging strategies and discussed at the meeting on 6th November 2008 does not appear to have been checked prior to the  presentation.  Further,  none  of  the  assumptions  appear  to  have  been discussed.62 For a key decision milestone it would be expected that this would have been run by at least the department head and also the project manager. Finally there appears to have been no validation of the advice received from both HSBC and Hewitt.

60 Transcript of hearing with the former Chief Officer, Transport and Technical Services,

page 5.

61 Report of the C&AG entitled "Energy from waste Plant: management of foreign currency

exchange risks", page 74, paragraph 284.

62 Ibid, page 77, paragraph 295.

CONCLUSIONS

42. The Committee considers it normal market practice for advice to be given in relation to projects such as this. The States had suitable agreements in place for the provision of advice, and, had suitably qualified personnel been able to outline the requirement to the parties providing the advice, the downside risks would have been identified and addressed, avoiding the losses' incurred by having an uncovered exposure to euros.
43. The Committee would expect there to be three general groupings of market information to be sought and provided, to allow a formal hedging strategy to be put in place:

Macro Economic Advice

There is no apparent infrastructure in place to allow for an understanding of the  macro  economic  situation  and  its  impact  on  markets,  economies  and instrument  volatility.  This  would  have  avoided  the  surprise'  at  the  well flagged decline of sterling during the second half of 2008 and early 2009.

Foreign Exchange Advice

There is no specific arrangement in place with any party, be it Royal London Asset Management, Hewitt or HSBC, for the provision of foreign exchange advice. Under normal circumstances, any party with a major foreign currency exposure would be expected to have this in place. In the financial markets, names such as Hewitt and Royal London Asset Management are not normally associated with the provision of foreign exchange advice.

Foreign Exchange Market Views

As part of daily monitoring, there appears to be no mechanism in place to take feedback on the market views on currency movements, market events and announcements,  and  associated  volatility.  The  Committee  would  have expected regular updates to be sought and obtained from either the States' cash managers or bankers.

RECOMMENDATIONS

44. Exchange rate considerations should be analysed, the appropriate policy put in place, and consideration given to the proper use of advisers, at a far earlier stage  when  managing  projects  in  future,  and  before  the  project  has  been approved by the States.
45. Careful consideration should always be given to the appropriate time to sign up  to  high-worth  contracts  and  to  the  possible  financial  consequences  of variations in timetables.
46. States' advisers should be provided with an in-depth profile of the States as a client which outlines the level of risk the States is able to take and its preferred investment options.
47. Terms of engagement with Hewitt should be reviewed.

5. CURRENT POLICY

1. As a result of the failure to eliminate the exchange risk associated with the procurement  of  the  energy  from  waste  plant,  the  States  appears  to  have embarked upon a policy of currency speculation that anticipates sterling will recover against the euro.
2. This has partly been possible because the reports accompanying P.72/2008 Energy  from  waste  facility:  establishment  and  acceptance  of  tender'  and P.73/2008, Energy from waste facility: funding', have no influence on the proposition itself:

"Mr. W.D. Ogley:

the report itself was not decided upon by the States. The States did not adopt the report in total and I think the point has been made, therefore, that the statement about exchange risk was a statement of intent as opposed to a final  decision.  So,  I  just  come  back  to  that  because  you  said  the  States proposition; indeed, it is not the States proposition."

3. The  States'  decision  is  held  within  the  content  of  the  proposition.  The accompanying report is just the background information and cannot be relied on  later  as  anything  other  than  an  indication  of  what  was  explained  to members when they adopted the proposition.
4. Therefore, any intention to eliminate exchange risk, or otherwise, as outlined in the accompanying report, was never voted upon by the States, enabling the decision of the States to be enacted in whichever manner seemed appropriate at the time.
5. An e-mail sent by Hewitt to the Head of Decision Support on 15th December 2008 appears to encourage the Treasury to speculate on the exchange rate using taxpayers' money, rather than to eliminate risk:

"my inclination would be to take a chance on the exchange rate and not translate all the necessary future payments from sterling into euros at this time."63

6. On 17th December 2008, a policy was agreed by which euros would be acquired as and when needed to meet payments under the contract, save that if the exchange rate passed various triggers' the opportunity would be taken to buy euros in advance of the contractual requirement64.
7. A revised policy for scheduled euro payments was drawn up by Hewitt on 9th April 2009 and approved by the Treasury Investment Sub Committee on 14th April  200965.  Under  both  the  original  and  revised  policies,  the  Treasury Department appears to have given itself a remit to speculate on currency by not mitigating the downside risk.

63 Transcript of hearing with Hewitt, page 8.

64 Report of the C&AG entitled "Energy from waste plant: management of foreign currency exchange risks", page 89,

paragraph 353.

65 The revised policy on scheduled euro payments is included at Appendix D.

"Treasurer of the States:

If the euro rate goes down, then it will end up costing us money."[32]

8. The Committee has serious concerns regarding the current strategy as it does not guard against a drop in the exchange rate.

"Senator B.E. Shenton:

Going back to the strategy it seems to say we will deal with it if it hits 1.05 so, as I said, what will you do if the rate hits 1.05? You will have another meeting?

Treasurer of the States:

We will seek the advice of our investment advisers. So far the strategy has been more successful than just locking out on 17th December, which would have been our alternative.

Senator B.E. Shenton:

Well, I agree with you that sterling has strengthened against the euro over recent weeks. That may continue, it may not, who knows, but the strategy at the moment is if it hits 1.05, panic. Is that what the strategy is at the moment?

Treasurer of the States:

No, we would seek further advice at that time."[33]

9. This is not considered by the Committee to be an effective risk management strategy.

"Senator B.E. Shenton:

We have got this chunk of money unhedged at the moment, so can you just reiterate what the strategy is in the department and whether this has the full political backing now, because obviously concerning the previous policy there was a lack of political input there?

Treasurer of the States:

Yes. On advice from Hewitts, we have this stepped strategy now which is to get the best result we can for the States. The revised strategy is we have purchased 5 million euros at 1.15. We will purchase another 5 million euros when the rate is 1.15; 5 million euros at 1.175; 5 million euros at 1.20 and the balance at 1.25; and at each step we will review the strategy."[34]

10. The Committee considers that one of the basic rules of investment is that you do not cut your profits and run your losses – the approach currently adopted by the Treasury.
11. Measured against the cost of acting in the spot market in mid December 2008, it is clear that the current policy has realised substantial financial benefits as there has been an improvement in the sterling rate against the euro. However,

the Committee notes that it could easily have shifted the other way, increasing the loss substantially.

12. One strategy would have been to have a rise in stop loss, which would have provided  the  States  with  a  level  of  certainty.  This  point  has  since  been accepted by Hewitt:

"Mr. D. Hager:

I accept that moving forward without cover brings a chance of a worse outcome, but it does seem to me that on the balance of probabilities that it is a risk worth taking providing, of course, you can afford to take that risk and that is what this is all about. If you cannot afford to take the risk you take it all out at the spot rate."69

13. A  fundamental  issue  is  that  the  Treasurer,  while  admitting  to  a  lack  of expertise in his Department70, has permitted a policy of un-hedged currency

exposure which continues to this date, as a material portion of the contract is still un-hedged. 5.14  This is a situation which Hewitt is content with:

"Senator B.E. Shenton:

are you comfortable with that?

Mr. D. Hager:

It comes back to the issue that it is not my capital at risk. I am merely saying to you if you do not have the capital at risk behind that contract and you cannot tolerate this sterling fluctuation you have to go into the market and do something.  There  is  no  doubt  if  you  do  not  want  any  more  sterling fluctuation, you want to know what the sterling cost is then the best thing to do is go straight on the spot market and buy all the euros we need; not take any more risk at all. I am not in any sense wanting you to take risk, I am merely saying I do not know what your tolerance for risk is, but as the sums get smaller the overall fluctuation obviously, for the total project, gets smaller."71

15. Senator P.F.C. Ozouf , Minister for Treasury and Resources, has also stated that he is happy with the current approach72.
16. However, the Committee considers the policy to be one of rate aspiration and not one of risk management. To have upward only' trigger points for the purchase of euros, albeit one that is periodically reviewed, still leaves the States fully exposed to downward movements in the sterling/euro exchange rate  on  what  the  Committee  is  advised  is  33.5 million,  or  44%  of  the 75.7 million cost of the euro portion of the project.

69 Transcript of hearing with Hewitt, page 9.

70 Transcript of hearing with the Treasurer of the States, page 9. 71 Transcript of hearing with Hewitt, page 17.

72 Transcript of hearing with Senator P.F.C. Ozouf , page 16.

KEY FINDINGS

17. The current strategy employed by Treasury and Resources, and supported by the Minister, to manage the ongoing currency exchange risks in relation to the funding process for the procurement of the energy from waste plant, does not sufficiently  guard  against  further  strengthening  of  the  euro  and  further substantial losses.

CONTRACT PAYMENTS

18. As at 17th July 2009, the following euros had been purchased, at a mean average exchange rate of 1.101:

Schedule of Euros Purchased to 17 July 2009

18. As at 17th July 2009, payments totalling 28,385,010 had been made:

19. Euro payments over the course of the contract will total 75,690,671. Of those, payments totalling 47,305,661 remained outstanding as at 17th July 2009:

CONCLUSIONS

20. It has become apparent that the decision of the States to eliminate risk has been over-ridden and a policy of currency speculation has taken its place.
21. The  Committee  struggles  to  understand  the  rationale  of  this  approach, particularly given the political and public relation sensitivities surrounding any  such  project,  but  especially  one  where  the  lack  of  appropriate  risk management is already so high profile.
22. The first priority the Committee would wish to see would be for the overall cost of the project to be managed. The next issue is to consider what the consequences  are  of  the  different  approaches  to  hedging,  given  different outcomes in the average prevailing exchange rate on payment dates.
23. The  Committee  would  make  the  case  that  decisions  on  risk  management should not be made by the States (or indeed any corporate) based on either expectation or forecast of exchange rates. This is tantamount to speculation on the foreign exchange markets, something which should not be core to the States' role. Therefore some form of hedging to insure the cost of the project would seem to be an appropriate approach, protecting both the reputation and economic interests of all involved.
24. In the current context the Committee considers that, having been criticised for not fixing the cost, to do so now and risk the rate improving in the future could well be seen as two badly-timed decisions as opposed to one.

25. The Committee can therefore see a rationale for a policy that:

1. protects (or fixes) the worst case cost of the project, based on an agreed floor level if sterling suddenly weakens;
2. allows  full,  or  partial,  participation  in  favourable  exchange  rate movements.

26. The Committee does not see how the current policy meets objective one, as if the exchange rate falls there is no protection available. Arguably objective 2 is being met, but this is very much a secondary consideration.
27. The only way in which the Committee sees the policy as providing protection is that it is being periodically reviewed, but, as everyone is acutely aware, exchange rates can move a long way in a very short time, and just a 10% fall in the rate equates to significant change to the overall cost.

KEY FINDING

28. The current policy does not meet the objectives as the Committee understands them and the risk is still not being appropriately managed, despite the focus in this area over the past few months.

RECOMMENDATIONS

29. The  Privileges  and  Procedures  Committee  and  Council  of  Ministers  are requested  to  ensure  that,  going  forward,  reports  and  propositions  are structured so that key undertakings are clearly stated and are binding.
30. The Treasury and Resources Department should include a stop loss in its policy on the ongoing management of currency exchange risks with regard to the funding process for the procurement of the energy from waste plant.

6. ACCOUNTABILITY

1. The apparent lack of effective project management with regard to financing the purchase of the energy from waste plant begs the question of who was accountable.
2. A dictionary definition of the term accountability' is:

"The state of being accountable; liability to be called on to render an account;  the  obligation  to  bear  the  consequences  for  failure  to perform as expected; accountableness."

3. The phrase: "the obligation to bear the consequences for failure to perform as expected"  is  the  definition  of  accountability  as  perceived  by  the  Public Accounts Committee. Compare this with the Chief Minister's definition:

"Senator B.E. Shenton:

You  have  used  the  word  "accountability"  a  lot.  What  does accountability actually mean?

Senator T.A. Le Sueur :

I suppose you could say the person with whom the buck stops. It is the person who takes responsibility for carrying out decisions made by the States or the Minister.

Senator B.E. Shenton:

The  person  where  the  buck  stops  that  is  responsibility.  What  is accountability?

Senator T.A. Le Sueur :

Accountability is being able to demonstrate how that work has been carried out."73

4. The  Chief  Minister  appears  not  to  understand  the  true  meaning  of accountability, but confuses the word with responsibility. Accountability is not where the buck stops and it is not the ability to demonstrate whether the work has been carried out.
5. The preamble to the States of Jersey Law 2005 states that "Jersey wishes to enhance and promote democratic, accountable and responsive governance". It is with regard to this statement that the Committee considers that someone should be held accountable for the mistakes made in relation to financing this project.

THE STATES

6. The States were responsible for approving P.72/2008 Energy from waste facility: establishment and acceptance of tender' and P.73/2008, Energy from waste facility: funding.'

73 Transcript of hearing with the Chief Minister, page 15.

7. The  report  accompanying  P.72/2008  indicates  a  total  capital  cost  of £106.31 million, and includes the following statement:

"10.2  This cost is exclusive of fluctuations in currency during, and any

delay  beyond  the  six  month  period  from  30th  April  2008,  during which the Preferred Bidder's tender is fixed. Allowance has been made within the funding for the project for appropriate contingencies to deal with these possibilities."

8. During  the  States'  debate  on  P.73/2008,  no  mention  was  made  of  the management  of  the  foreign  currency  exchange  risks[35],  even  though  the statements in the report accompanying the proposition could be interpreted as being conflicting:

"3.2  This exchange risk will be eliminated upon the signing of the contract

with the preferred bidder at which time the euro/sterling rate will be deemed  to  freeze  for  the  purposes  of  the  contract  payments.  All contract payments will be made in Sterling.

3.3  The Treasury has conducted a sensitivity analysis of the currency exposure  and  obtained  expert  advice  on  anticipated  currency fluctuations.  As  with  all  States  capital  projects  the  Treasury  will monitor and manage the fluctuations risk. The cost of any currency fluctuations will be met from the Capital Projects Reserve Vote in the event this increases the cost of the project."

9. The Committee believes that the States Assembly should be ready to question the  detail  of  reports  accompanying  propositions  and  to  clarify  statements made therein.

KEY FINDING

10. The States Assembly did not question or give full consideration to the risks associated with the management of foreign currency exchange when agreeing the funding for the energy from waste plant.

MINISTER FOR TREASURY AND RESOURCES

11. At the time the contract for the energy from waste plant was signed on 14th November 2008, the then Minister for Treasury and Resources, Senator T.A. Le Sueur , was apparently unaware of the exchange rate risks that the States had been left exposed to following the failure of the Treasury to eliminate the risk.

"Senator B.E. Shenton:

When did you first become aware that there was a problem with regard to the currency hedging issue?

Senator T.A. Le Sueur :

Some time early in December."75

12. Once aware of the problem, Senator Le Sueur took the view that this was an internal matter, even though it might make a material difference on the cost of a States decision:

"Senator T.A. Le Sueur :

I was concerned not so much that the problem had come about; I was just concerned that a policy which should have been implemented had not been implemented

The  ultimate  responsibility  for  ensuring  the  policy  is  acted  upon  must remain  with  the  accounting  officer  of  the  Treasury,  which  is  the  States Treasurer."76

13. In accordance with Article 28 of the Public Finances (Jersey) Law 2005, the Treasurer  is  "responsible  to  the  Minister  for  the  supervision  of  the administration of this Law and of the public finances of Jersey." As far as Senator Le Sueur was concerned, the Treasurer of the States was directly accountable to the States through the Minister.
14. As corporation sole77, the former Minister for Treasury and Resources could have been expected to take a greater interest in the financing of the project following the meeting held on 6th November 2008 regarding the rising costs of the contract78. As, in accordance with Article 26(6) of the States of Jersey Law 2005, "The senior officer in any administration of the States for which a Minister is assigned responsibility shall be accountable to that Minister in respect of policy direction."
15. The matter only became a political priority when Senator P.F.C. Ozouf was appointed  Minister  for  Treasury  and Resources  and  became  aware  of  the exchange risks:

"Senator B.E. Shenton:

When did you first become aware that there was a problem with regard to the currency hedging issue?

"Senator P.F.C. Ozouf :

I think it was within a matter of hours of me being appointed as Treasury Minister  that  I  became  aware,  because  of  direct  communication  with  the Treasurer, that there was an exposure to an exchange rate risk which was not envisaged  by,  I  think,  any  Minister  previously  and  certainly  not  by  the decision of the States which did indicate that the exchange rate would have been eliminated."79

75 Transcript of the hearing with the Chief Minister, page 2.

76 Ibid, page 3.

77 In accordance with Article 26(1) of the States of Jersey Law 2005, "each Minister shall be a

corporation sole".

78 See paragraph 3.14 of this report.

79 Transcript of the hearing with the Minister for Treasury and Resources, page 2.

16. The Committee is concerned that the exchange rate risk became a high priority at this point, but had not been previously.
17. With regard to who was accountable, Senator P.F.C. Ozouf felt the matter could have been better defined:

"Senator P.F.C. Ozouf :

For the avoidance of any doubt, we have set up a Public Finances Law and we now have the legal definition of accounting officer and accounting officers are ultimately responsible in the same way that a Minister cannot shift the responsibility on to an Assistant Minister. The department, read "accounting officer."

The Connétable of St. Helier :

Which this case was the Chief Executive of T.T.S. not the Treasurer. Is that right?"

Senator P.F.C. Ozouf :

There are real issues and I heard the evidence that the Treasurer gave you on ... there are some clear issues falling between 2 departmental stools there. That is absolutely clear and certainly corrective action going forward is that there should be absolute clarity of whose responsibility it is in terms of a particular capital project. On this occasion it is quite clear that there was a shared responsibility. I offer no criticism to the accounting officer of T.T.S. for this matter because clearly I think, as far as the exchange rate issues were concerned, that fell within the remit of the Treasury and Resources Department. But going forward there is a lesson that where there is a shared responsibility there needs to be absolute clarity for the avoidance of doubt."[36]

18. Senator Ozouf is critical of a serious flaw in the very structure of managerial responsibility within the civil service. And it is the ultimate responsibility of the Chief Executive of the States, and the Chief Minister politically, to ensure robust and professional structures are in place.

THE CHIEF EXECUTIVE

19. The Chief Executive felt he had a very clear role to play in respect of the energy from waste plant project.

"Chief Executive:

I personally think my role is very clear in this. My job as Chief Executive is to ensure that the proper arrangements are in place to manage the contract properly through all the stages of its growth, feasibility, planning, decision making, implementation. My job is to ensure that those management arrangements are in place, that the arrangements comply with the requirements set by the States through its financial directions and States decisions."[37]

20. The job of the Chief Executive is to ensure that senior staff have the necessary ability to carry out their role in a professional and efficient manner. The responsibility  for  hedging  the  contract  was,  in  the  opinion  of  the  Chief Executive, very clear:

"Chief Executive:

So I am very clear the responsibility rested with the Treasury and with the Treasurer, in that it was an operational matter, it was not a political matter or political decision and that report made it very clear to the States and to everyone involved who was responsible."82

21. Yet it is perhaps surprising that the Chief Executive did not take a greater interest in a project of this size and importance. He states:

"Chief Executive:

I think my role as Chief Executive is to ensure, as I have said, that the project is then properly managed, allocated and structured."83

22. It could be argued that the project, by the very failure to undertake the euro hedging, was not properly managed, and it draws questions in relation to overall management structure and accountability.
23. There  is  a  fundamental  difference  of  opinion  in  respect  of  the  Chief Executive's  concept  of  interaction  with  the  Treasurer  and  the  legal responsibilities as set out under the Public Finances (Jersey) Law 2005.

"Mr. K. Keen:

In Article 30 it says that the Treasurer may not be directed on how the function of the office of Treasurer is to be carried out ... would it be fair to say that the monitoring of the Treasurer is different to almost any other of your officers? From what I can see, you are not mentioned in the Public Finance Law.

Chief Executive:

Under the Public Finance Law I have no role. You are absolutely right. It is very clear that that is the Treasurer's role. I do not regard that as meaning that the monitoring and my responsibility in relation to the Treasury is any different to that of most other chief officers because most other chief officers will have specific roles and responsibilities under specific pieces of legislation that I will have no responsibility for, and nor should I."84

24. The Committee was concerned to note that the Chief Executive did not believe he needed to be involved on such a large project.

82 Transcript of hearing with the Chief Executive, page 2.

83 Ibid, page 3.

84 Transcript of hearing with the States of Jersey Chief Executive, pages 7 – 8.

25. However, it is difficult to place liability with the Chief Executive due to a structure that has clear lines of responsibility leading directly to the Treasurer of the States.[38]

"Senator B.E. Shenton:

Because ultimately under the Public Finance Law the Treasurer does not report to you.

Chief Executive: No.

Senator B.E. Shenton:

The responsibility for this was with him, 100 per cent with him.

Chief Executive: Yes."[39]

26. The Chief Executive is reliant on the abilities of his Chief Officers and other senior staff. The Public Accounts Committee has concerns in respect of the expertise within the Treasury and it appears that the Chief Executive shares these:

"Senator B.E. Shenton:

Are you confident as the Chief Executive that we have enough experience and expertise within the Treasury Department? Are you happy that we do have the expertise within Treasury given these failings?

Chief Executive: No. No.

Senator B.E. Shenton:

You are not happy that we have the expertise?

Chief Executive:

Well, it is quite clear, as the report says, these failures have occurred. Part of it is lack of experience, as was made clear." [40]

CHIEF OFFICER, TRANSPORT AND TECHNICAL SERVICES

27. The former Chief Officer of Transport and Technical Services is clear in his mind where responsibility lay:

"Now, I am absolutely clear that the responsibility for funding this project rested with the Treasurer, the responsibility for managing the contract, all aspects of it, including managing the expenditure on the contract, rest clearly with the Chief Officer for Transport and Technical Services. Now, in my opinion, that is absolute clarity. There is no question about it."88

28. However, the Treasurer believes ultimate responsibility lay with the former Chief Officer of Transport and Technical Services:

Treasurer of the States:

"if you read it under the law the accounting officer is responsible for the revenue and capital spend of their department."89

"So, the accounting officer for this project was clearly the Chief Officer of Transport and Technical Services and that is responsibility for all risks to do with that project. Now, I accept that a currency risk is an important issue and it ... will not be within the expertise of the Chief Officer of that department. So, what you do in those circumstances as accounting officer is bring in expertise to  deal  with  those  issues.  Clearly,  professional  accounting  advisers  were brought in to deal with it and we also had Treasury advisers in there, so they were advising him on those issues." 90

30. The Treasurer subsequently made the following clarification:

Treasurer of the States:

"I do not believe ultimate responsibility for hedging lay with the Chief Officer of Transport and Technical Services, nor did I say this. This quote has been taken out of context. The point I was making, immediately before this quote, and as acknowledged elsewhere in the Public Accounts Committee report, is that lack of clarity on responsibilities, such as the existence of the energy from waste Funding Group, was a contributing factor in what went wrong.

"The Chief Officer, Transport and Technical Services, was, and still is, the accounting officer for the energy from waste plant project, However, I also said in the hearing: "There certainly were mistakes made on this andthe Treasury has to take some responsibility for those things." Also later in the hearing I said: "I have to accept that by that time, because of the statement in that report, the responsibility was moving across to the Treasury." Senator Shenton: "What date was that? 11th July". Mr. I. Black: "Yes, it did."

"Hence I clearly stated that responsibility for hedging issues rested with the Treasury."91

31. When advised that the Treasurer did not feel it was within his remit to be involved in the financing of the project, the former Chief Officer, Transport and Technical Services, said:

88 Transcript of hearing with the former Chief Officer, Transport and Technical Services,

page 2.

89 Ibid, page 13.

90 Transcript of hearing with the Treasurer of the States, page 13.

91 Written  submission  of  the  Treasurer  of  the  States  in  relation  to  the  content  of  the

Committee's draft report.

"Former Chief Officer, Transport and Technical Services:

If that was the case then he should have made that very clear when his officers took responsibility for it on 21st August 2007. He did not."[41]

TREASURER OF THE STATES

32. The Treasurer of the States holds an exceedingly important position as he is responsible for managing the finances of the Island in a professional manner.
33. The Committee examined the role of the Treasurer, as set out in the Public Finances (Jersey) Law 2005, with particular regard to the following Articles:

"2 Functions of the Minister

The Minister must ensure that the public finances of Jersey are regulated, controlled and supervised in accordance with this Law and that the provisions of this Law are otherwise duly complied with."

"28 Establishment of the office of Treasurer of the States

(3)  It is the responsibility of the Treasurer to ensure the proper stewardship and administration of the public finances of Jersey and, in particular –

1. to set financial management standards for their administration and for monitoring compliance with those standards;
2. to ensure that professional practices are adhered to in their administration;
3. to advise on the key strategic controls that are necessary to secure their sound financial management;
4. to ensure that financial information is available to enable accurate and timely monitoring of their administration, and to advise on the appropriation and budget process for each financial year."

34. It is important to note that role of Treasurer is exceptional in that the personal responsibilities of the post-holder are defined in law in this way. The Law seems to indicate that the Minister for Treasury and Resources has a responsibility to monitor the Treasurer, and the statement on internal control in the 2007 accounts indicates that the Chief Executive has responsibility for ensuring an efficient system of internal control.

35. These responsibilities are also reinforced through Objective 4, paragraph (v) of the Treasury and Resources Department's section of the Annual Business Plan 2009, which reads as follows:

"Central  authority  and  responsibility  of  the  Treasurer  of  the  States  as corporate  head  of  finance  strengthened,  with  all  finance  officers  and accounting staff recognizing their direct responsibility and accountability to the Treasurer."

36. The Treasurer has an extremely wide mandate, and the current post-holder sees  himself  primarily  as  a  strategic  manager.  As  he  states,  "obviously  I cannot do everything."93 It is important that the department is run in a highly efficient way and it is of some concern to the Committee that the problems being  experienced  with  regard  to  the  management  of  foreign  currency exchange risks on such a high-worth project were not picked up at the time by those at a higher management level.

36. Now that these matters have been identified however, the Chief Executive has advised that they are being addressed.
37. The present Treasury Minister accepts that the failing lies within his own department:

"Senator P.F.C. Ozouf :

The C&AG's report is clear that there has been a failing within the Treasury Department  in  terms  of  implementing,  what  ...  was  clear  to  be,  a  clear political decision."94

38. Senator Ozouf stated that the Treasurer was aware of the problem in relation to the currency exchange risk, the politicians having made a decision that the exposure should be eliminated.95

"Senator P.F.C. Ozouf :

I would repeat very clearly that this was an issue of officer implementation. Even until a number of days after my tenure as Treasury Minister, I would not be  expected  to  make  decisions  which  were  clearly  a  matter  for  officer implementation."96

39. The  Ministers  have  given  a  clear  message  during  the  Committee's investigations that this is a matter of implementation – implementation by the senior civil servants who are remunerated to implement policy.

" Connétable of St. Helier :

a day before the signing, people were aware there was a problem but the signing took place the following day and there was a related Ministerial Decision by the Treasury and Resources Minister approving the necessary budget  and  giving  delegated  authority  to  you  to  approve  the  actual  sum

93 Transcript of hearing with the Treasurer of the States, page 3.

94 Transcript of hearing with the Minister for Treasury and Resources, page 3. 95 Ibid, page 4.

96 Ibid, page 12.

required. Did you feel uncomfortable with that position you were being placed in, in the sense that the Public Finances Law does not allow an accounting officer, which I appreciate you were not on this project ... but it does not allow a civil servant to spend money that the States have not approved. Did you feel that this was a

Treasurer of the States:

No. Admittedly, this was all done under huge pressure but what happened here is normal process."[42]

STAFFING

40. The Treasurer of the States appears to have concerns over the abilities of the staff within his department:

"Senator B.E. Shenton:

Given the size of the contract and the size of the possible liability to the States, did you not think it wise to take more of a hands-on approach yourself?

Treasurer of the States:

Clearly, with the benefit of hindsight, yes, it might have been, but at the time I believed that I had competent officers dealing with this."[43]

41. The Treasurer also raised concerns regarding staffing levels within the department:

Treasurer of the States:

"We are that tightly staffed that we have one person who dealt with this. When they left, we were exposed in that we did not have anybody with any expertise so I think there comes a point where you just must increase basic capacity."[44]

42. It was interesting to note that the Chief Minister was willing to take some responsibility for the under-resourcing of the Treasury Department during his tenure:

"Senator B.E. Shenton:

When you say under-resourced, when the word comes into your mind, do you think of more people or do you think of more qualified people, more efficient people? You could be under-resourced because you have got the wrong people as opposed to not enough people. Which one is it?

Senator T.A. Le Sueur :

I think it is that the senior management team had a shortage of numbers. If there were greater numbers you could probably also have a greater variety of expertise within that number. I point out that the Treasury in the time when I was Minister, the previous 3 years and before then, had gone through some fairly massive changes with things like moving to G.A.A.P. (Generally

Accepted Accounting Principles) accounting and the whole of fiscal strategy and implementation of the goods and services tax, set against the backdrop of reduced numbers.

Senator B.E. Shenton:

Where does responsibility for that lie?

Senator T.A. Le Sueur :

Responsibility for that lies initially with the Minister to ensure that there are sufficient resources and further to the States for setting a business plan which allows departments to be adequately resourced. You may not have been as well  aware  as  some  of  your  colleagues  of  the  pressures  of  fundamental spending reviews which have tended to transfer resources away from the central  departments  towards  the  social  departments  of  Health,  Society Security, Home Affairs and Education. That has reached a level now where the pendulum has possibly swung a bit too far and I think that is one of the reasons why in last year's business plan there was an amendment to give additional  resource  to  the  Chief  Minister's  Department,  and  indirectly  to Treasury as well, to strengthen that level of support at a senior level."100

43. The Committee has  concerns regarding the level of expertise  within, and organisation of, the Treasury Department.
44. However, it is the job of the management to manage – not to make excuses. The Treasurer of the States was aware that there were weaknesses in his department yet failed to take responsibility for filling these gaps, or take a more hands-on approach until the gaps were filled.

" Connétable of St. Peter :

do you consider looking back that you were competent to carry out all those tasks at the same time, given the outcome as we see it today?

Treasurer of the States:

I could not, I cannot, carry out all these tasks at the same time, which is the point I make. I must rely on my senior managers to do it."101

CONCLUSIONS

45. At the start of its investigations, the Committee had expected accountability for the mistakes made in relation to financing this project to be clear to all involved. However, this has not been the case.
46. When the Committee met with the Treasurer of the States he said:

"the accounting officer for the energy from waste scheme was the Chief Officer of Transport and Technical Services and yes, you are quite right, he appointed a project manager that was ultimately responsible for co-ordinating

100 Transcript of hearing with the Chief Minister, page 20.

101 Transcript of hearing with the Treasurer of the States, page 11.

all aspects of the project. One of the aspects of the project was the financing aspects, and there was a group set up to deal with that."[45]

47. It would appear that the lines of responsibility for the project were not clearly defined, and the Treasurer has acknowledged that this led to some confusion:

"Treasurer of the States:

There certainly were mistakes made on this and what is quite clear is that, at the end of the day, the Treasury has to take some responsibility for those things. The point I am trying to make is that we started off on this game not clear who was responsible. At some point, it shifted over and I think that was one of the reasons it went wrong. I think I am accountable for delivery of the Treasury's business plan. If you look in the Treasury's Business Plan for 2008, which is all my major projects, you will not see anything in there about energy from waste and currency issues and that is not surprising because when we wrote that business plan, there was not supposed to be a currency risk in the energy from waste project." [46]

48. Despite this, the Chief Executive and Chief Minister place the blame for the failure to eliminate the exchange risks with the Treasurer of the States:

"Chief Executive:

I am very clear the responsibility rested with the Treasury and with the Treasurer."[47]

"Senator T.A. Le Sueur :

The Treasury has overall financial responsibility for the project."[48]

49. There is no doubt in the mind of the Chief Executive where accountability and responsibility lies:

"Senator B.E. Shenton:

When we interviewed the Chief Officer of Treasury, he said basically that his remit was so wide that he could not be responsible for everything ... Chief Officers have to, surely, take full responsibility of everything that happens within their department.

Chief Executive:

They do. There is no doubt about that. If you are a Chief Officer in a department with responsibility, you accept that responsibility and you are accountable for it.

Senator B.E. Shenton:

Now with the knowledge that you have a Chief Officer that obviously believes that his department remit is too wide for him personally, do you intend to have a look at that?

Chief Executive:

Yes. That is already in hand."106

50. The Public Accounts Committee is concerned with what internal disciplinary action may or may not have taken place, and notes the wide remit of the Treasury and Resources Department, which should be addressed.
51. Senior roles demand persons of a calibre to not only be able to undertake these roles,  but  also  to  be  able  and  willing  to  accept  responsibility  and  be accountable.
52. The Chief Minister confirmed that the responsibility to implement the hedging policy lay 100% with the Treasurer:

"Senator T.A. Le Sueur :

The Treasurer as accounting officer has an obligation to deliver the policy which we have asked his department to enact and to be accountable for that and I would presume, at least in the first instance, he would do that through the Treasury Minister."107

53. Indeed,  his  opinion  was  that  this  was  a  fairy  simple  transaction –  a straightforward operational matter:

"Senator T.A. Le Sueur :

I may be naïve but I would have thought that a simple matter of converting sterling to euros or euros to sterling was an operational matter and probably a fairly straightforward operational matter."108

54. It is of grave concern that there was insufficient and ineffective managerial co- ordination of the contract and a silo mentality appeared to be operating. This weakness in managerial control is only just being addressed:

Treasurer of the States:

"We need to work these things through but I think clearly one of the learning points  from  this  is  to  have  a  policy  upfront  and  be  quite  clear  where responsibility lies so that those people can make sure they have ratings for that.

Senator B.E. Shenton:

Are you saying that no one had picked up the ball and taken full responsibility for hedging the euro contract?

Treasurer of the States:

There certainly were mistakes made on this and what is quite clear is that, at the end of the day, the Treasury has to take some responsibility for those things. The point I am trying to make is that we started off on this game not clear who was responsible. At some point, it shifted over and I think that was one of the reasons it went wrong. I think I am accountable for delivery of the

106 Ibid, page 12.

107 Transcript of hearing with the Chief Minister, page 4. 108 Ibid, page 4.

Treasury's business plan. If you look in the Treasury's Business Plan for 2008, which is all my major projects, you will not see anything in there about energy from waste and currency issues and that is not surprising because when we wrote that business plan, there was not supposed to be a currency risk in the energy from waste project." [49]

55. This statement is interesting on two counts:

1. that it was "not clear who was responsible" draws in wider issues of the structure of management of the role of the Chief Executive of the States to co-ordinate matters;
2. Treasury has to take "some responsibility."

56. The Committee also noted that the job description of the Treasurer of the States includes the requirement to "provide effective internal audit and risk management initiatives to ensure proper management of financial resources and the achievement of value for money."
57. Given the evidence received, the Committee has serious concerns about the management and operation of the Treasury function. The Committee also believes the department is not organised in a manner that allows the Treasurer to effectively manage all areas of operation.

KEY FINDING

58. The Committee is concerned that the Treasurer does not appear to have a sufficient balance between day to day accounting matters and the strategic requirements of his role, such as monitoring the funding of the largest ever capital project undertaken by the States of Jersey. (See 6.57)
59. This concern is echoed by the Comptroller and Auditor General in his report entitled:  Financial  Management  in  the  States:  review  June  2009'  (R.C 72/2009 refers):

"It is clear from oral evidence given over several years by the Treasurer of the States to the Public Accounts Committee that in his view the Treasurer is responsible for making information available to the States and that others were responsible for interpreting and acting on that information. In other words, the Department's view had not progressed beyond the first level of financial management."[50]

RECOMMENDATIONS

61. The  role  of  Treasurer  of  the  States  should  be  reviewed,  with  defined responsibility given in respect of overall financial control and responsibility.
62. The Treasurer should receive appropriate sanction for any failure in relation to the financial management of this project.

7. GOING FORWARD

FINANCIAL DIRECTION 3.8

1. As a result of the problems arising from the process of funding the energy from waste plant, a new Financial Direction has been drawn up. Financial Direction  No. 3.8  "Management  of  foreign  currency  transactions"  is  a welcome  step  in  the  right  direction;  however,  it  fails  to  deal  with  some fundamental basic flaws highlighted by the failure to hedge the Euro, such as the overlap of accounting officers (e.g. Treasury/Property Holdings/Transport and Technical Services, etc.).
2. Under the new Financial Direction the Treasury Investment Sub-Committee is "responsible" for the decision to hedge whilst the Treasurer is responsible for the hedging arrangements. This implies that ultimate responsibility for the Treasury Investment Sub-Committee does not lie with the Treasurer – yet it surely does, as detailed in Section 4 of Financial Direction 3.5: