“frustration of trying to operate in a commercial manner in a restrictive public sector”

Will the Northern Ireland Regional Development Minister’s sacking of the Chairman and a number of Non-Executive Directors from the Board of NI Water – following the identification of 21 contracts, worth £8.4million, where appropriate governance procedures “had not been followed” – prompt a rethink of the minister’s apparent over-ruling of the independent Utility Regulator’s final determination on NI Water’s Price Control 2010-2013 (PC10)? Or has he already brought his proposals to the NI Executive? And despite the ministerial statement, that the report “stated that this was a serious matter for those responsible, namely the NIW Board and Executives responsible for ensuring compliance”, is this an attempt to deflect criticism from the Department itself? From the internal review report [pdf file]

We note that in May 2008 the DRD Permanent Secretary issued revised governance arrangements which dealt inter-alia with timely delivery of NIW’s Assurance Statements and audit matters and including a request to provide minutes of Audit Committee meeting which we understand is not being complied with to date. It was August 2008 before DRD received copies of NIW’s internal audit reports. Also the NIW’s bi-annual representations on internal control have consistently from July 2008 to date reported only ‘partial compliance’ with the requirement to actively follow up internal and external audit recommendations.

DRD was therefore aware that there was an inherent weakness in NIW’s internal control framework and the matter was raised from time to time at QSM meetings and in correspondence. However, it was only recently agreed that the Chair of NIW’s Audit Committee would have a bi-annual meeting with DRD’s Senior Finance Director and Head of the Shareholder Unit which would review assurance on the work of NIW’s Audit Committee and identify and escalate any issues as necessary. DRD told us that at the February 2010 QSM meeting with NIW an internal audit report tracking all ‘red’ recommendations and the improvements which have been made was tabled for the first time. We were informed by DRD that the issue of NIW’s internal audit reports to the Northern Ireland Audit Office was the subject of correspondence with NIW’s Chair of the Audit Committee.

And from Section 4 of the report – “Analysis of Failures by DRD as Shareholder”

4.1 Background

The Shareholder Unit (SU) in DRD was originally established as one element of the overall governance model appropriate to NIW as a government owned company. As noted previously, from 2008-09 NIW was categorised as an NDPB for public expenditure purposes. This was an indirect result of the deferral of domestic water charging which necessitated the continuation of funding by DRD. This change in status coupled with the overall desire of the DRD Accounting Officer to improve public accountability led to the governance architecture for NIW being strengthened in May 2008. [added emphasis]

And

4.3 Findings

A key issue for NIW has been and continues to be the confusion over organisational strategy and the status of the organisation as both a GoCo and an NDPB. This has created an incredibly complex governance and stakeholder environment involving the Utility Regulator, the SU; and from 2008-09, the additional overlay of NDPB accountability requirements. In addition to the complexity of the model, evidence presented to the IRT has highlighted the significant resource commitment required across the entire governance system to maintain the model. This governance structure is heavily demanding on both DRD and NIW and is reflective of the increased public accountability. [added emphasis]

IRT’s key finding for DRD, as Shareholder, relates the slow speed of response to the following events:

• strengthening NED capacity and ensuring this was in line with good governance;
• appointing a new CEO following the Chair’s appointment into dual role; and
• appointing the CEO of NIW as Accounting Officer immediately following reclassification of the organisation as an NDPB.

The IRT recognises that the delays outlined above were in part due to the complex political environment surrounding the Water Reform programme and in part due to the timeline required to secure inter-Departmental approvals and clarification with DFP. That said, these delays contributed to the creation of a governance environment that has led to the circumstances in which the governance failures noted in the previous section have occurred. However, this is no excuse for the failures in procurement which have been identified within NIW.

In terms of DRD’s role in the Internal Audit environment of NIW we consider that prior to May 2008 DRD was slow to act to ensure that NIW was taking internal audit matters seriously. Recent events have demonstrated that the DRD has given enhanced attention to NIW’s performance in following up audit recommendations. The Department has been encouraged by the increased attention this matter has received under the direction of the current CEO to whom it has given strong support and encouragement.

Update As Nevin notes in the comments zone, the Chairman and two of the three non-Executive directors sacked had been re-appointed to the Board of NI Water by the Minister in April 2009.