Official Report 394KB pdf
“The First ScotRail passenger rail franchise”
Agenda item 3 is our continuing inquiry into the extension of the First ScotRail passenger rail franchise. Mr Guy Houston is with us. I thank him for agreeing to give evidence to the committee. I am sure that what he says will be very helpful to us in our considerations.
Yes. This is just my opportunity to set the record straight.
Thank you. Before we take questions from the committee, perhaps you could help us to clarify a couple of points of fact. In paragraphs 2a, 2b and 2c of your letter of 14 March 2007 to Malcolm Reed, you refer to increases in your shareholding. At 2a, you say that you had 16,722 shares that you were able to buy at £2.751 of an option price. What was the share price at that date, roughly?
The date that I exercised them?
Yes.
I do not know. It was about £5 or £6. The figure in the letter should read "£2.75", not "£2,751".
Okay. We can get the exact figure later on.
Yes. On all those share options, you pay tax on whatever the value of the shares is on the date that you exercise them. If, when you exercise them, the value of the shares is £5, you pay 40 per cent tax on £5. In the case of the shares that are set out in paragraph 2a, you pay on the difference between £5 and the option price. So, I pay £2.75 for the shares that are set out in paragraphs 2a, 2b and 2c. The "£Nil option" relates to bonus payments; instead of receiving cash bonuses, you receive share bonuses. That was way back in 2003-04.
Was that income tax?
Yes.
So, it relates to your income for the year in which the share option is exercised.
Yes.
So, if you earned sufficient to trigger the 40 per cent band—which you did—you would pay that rate.
Yes.
I should clarify that you have not yet exercised the third option under paragraph 2c. Is that correct?
Correct.
In the second paragraph on page 3 of your letter to the committee, you say:
I do not know. I was involved in the discussions with Audit Scotland that took place round about June 2007. I do not remember the exact details, but Audit Scotland was shown that there was a letter that was dated March 2007. There was a letter. I remember it being shown to Audit Scotland—the team that was involved in the annual report at the time.
Right. For the purpose of clarification, and if we have an opportunity later, we might clarify that with Audit Scotland.
I should point out that the discussions that took place in June 2007 relating to the annual report for January 2007 were held specifically to talk about the paragraph on my shareholding that was to go into the annual report. It was quite clear to Audit Scotland that I had the shareholding and that I therefore had private interests. That is the bit that I find difficult to reconcile.
Okay. Thank you for that. We can clarify the matter with Audit Scotland.
I notified my line manager within weeks of starting—I do not know the exact date. As soon as I took up employment and read the civil service code, I recognised that I had an interest that should be disclosed and I did so in the one-to-one meetings that I had with my line manager. I ensured that the other directors were well aware of my interest as well.
Leaving aside the fact that you could not make decisions about individual aspects, you were aware during that period that discussions were taking place about extending the franchise that would be of benefit to FirstGroup. Is that correct?
I understood that a confidential project was taking place, and that we were looking into the possibility of an extension. However, that was happening along with a number of other improvements. Some of the directors, including me, had no idea of the content of the discussions.
Yes, but you were aware that discussions about extending the contract were taking place, and that they would be of benefit to FirstGroup.
Not necessarily.
You were not aware?
No, the discussions would not necessarily be of benefit to FirstGroup. As Audit Scotland pointed out, in and around June 2007, the discussions were about three options. One option was to extend and another was to not extend; I cannot remember the third option, but my point is that three options were on the table at that stage. Therefore, the discussions were not necessarily of advantage to FirstGroup.
So you were not aware that the discussions that were taking place were about an extension. We can clarify this with others, but am I right in understanding that you are saying that, during that period, the discussions included the option of not renewing or extending the contract?
I knew very little about it. All I knew was that there was a confidential project, called project golden key—very few projects in Transport Scotland had specific project names or were kept confidential. I was not aware of what the project was about in detail at that point.
You say that you notified your line manager at an early stage. Who was that?
Dr Malcolm Reed.
Why did you write to him in March 2007 after telling him about your interest at an early stage?
The first opportunity to publicly disclose my interest was in the annual accounts for the year to 31 January 2007. We decided to place the matter in writing for the purposes of Audit Scotland, among others. In the letter, I stated that I would continue to have no part in the franchise negotiations.
Did Dr Reed suggest that to you, or did you think that it would be a good idea at that time?
I do not know. Both of us knew that we would have to put it in writing. We were well aware of the consequences of not doing so. We both agreed that there had to be an audit trail.
Given that you knew of the discussions that were going on, and that you knew that at least one of the three options that were under discussion would not benefit FirstGroup, why did you decide to exercise your share options?
There is a specific window of opportunity, as I said in my letter to the committee. In my letter of March 2007 I had made clear what I had and the exercise dates, and my final comment in the letter, which was that I would not increase my shareholding beyond what was in the list, was given approval. I had approval for taking up those share options, and given that share options work only within a window of opportunity I had to take them up at that time. However, in relation to the Financial Services and Markets Act 2000 I knew that that was well away from any decision on anything—I was nine months away from any timescale on the issue, so I knew that I was not going to break any rules by exercising those options. I already had approval from my line manager, in line with the guidance. That is the simple reason why I took up the opportunity.
Malcolm Reed knew that you had those share options and that you intended to exercise them.
Yes. He approved the letter.
Although different options were being considered, you thought that it would be advantageous to exercise the options at the time.
I had no alternative but to exercise them. If I did not exercise them, I would lose them.
That was an alternative; you could have lost them. There was an element of choice. You decided to exercise the options rather than lose them.
Yes.
You will appreciate that the committee is concerned about a potential conflict of interest. The civil service management code says:
Excuse me, but I had a substantial shareholding in FirstGroup. First ScotRail is a subsidiary of FirstGroup. FirstGroup is a £6 billion business and the likelihood of an individual being able to manipulate in some way the FirstGroup share price for a contract that was worth £250 million a year—
You will appreciate that that is precisely the point that the committee is trying to understand. You were a shareholder in FirstGroup. You were present at meetings at which the extension to the First ScotRail franchise was discussed. Did it occur to you that there might be a conflict of interest? What steps, if any, did you take to draw the potential conflict of interest to the attention of the management in Transport Scotland?
To which meetings are you referring?
For example, we understand that you were present at meetings on 19 and 28 March 2008.
I am referring to my notes. The meeting on 19 March was about what the handling strategy would be if there was to be an announcement. As well as being director of finance, I was director of corporate services; media handling and communication were a main area of corporate services that I looked after.
Were you not present at any meetings prior to the meeting on 19 March at which the issue was discussed?
I was at lots of meetings at which the First ScotRail franchise was discussed in relation to performance, human resources, communications and all sorts of issues that related to First ScotRail. I was not involved in financial decision-making meetings.
However, you were present at meetings at which the possible extension of the franchise was discussed.
Yes, I was involved. The key thing to remember is that the onus was then on me, in knowing that there might be an extension, to do nothing with my shares and not to trade during that period. I certainly did not trade during that period; I have not dealt with my shares since July 2007, when the option was exercised.
With respect, the point that you did not trade in the shares is not the only relevant point. If you were involved and could influence decisions that might have affected the share price, the fact that you were a shareholder could have meant that you had a conflict of interest.
As far as I am aware, the only discussion that took place in which I received any detail on the franchise extension was the meeting on 19 March. By that time, Dr Reed—as he has said in evidence—had already agreed it with FirstGroup, around 5 March. The meeting was about handling if there was to be an extension. I could not influence the decision at that stage, because the decision had already been made to take the matter to ministers.
I understand your point. However, you said to me a moment ago that you had been involved in a series of previous meetings in which discussions had taken place on a wide range of subjects, including the possible extension of the franchise.
Yes—but on the "possible" extension. I am generalising—I am not denying that I was involved in a lot of First ScotRail meetings, but they were all on a range of areas. I could not influence any decision because I was not involved in decision-making meetings that related to the franchise. I may have been given progress updates, but there is a crucial difference between receiving information on progress, and receiving knowledge and using it.
I am not entirely convinced that your analysis of the situation is correct. As a shareholder, you do not have to deal in the shares to make a gain. If the share price had gone up as a result of decisions that were taken—for example, to extend the franchise—that would have been to your benefit. That is why I am concerned about a conflict of interest.
The meeting on 21 November took place around the time that I resigned. I have never seen the minutes of that meeting, other than when I was given a copy by the committee last week. I was not party to the minutes: I did not write them, I did not have a say in them and I never approved them. There is half a sentence missing from them, which is "transferred to wife". I was not party to the minutes after they were written.
I understand that, and I appreciate that you did not approve the minutes and may not have seen them before last week. However, I find it curious that the minutes of that board meeting specifically state that because you no longer held shares, the board agreed that you no longer had a conflict of interest. That suggests that, at the time when you did hold shares, there was a conflict of interest.
As I said, I cannot comment. I do not believe that those minutes are accurate; it is as simple as that. I did not approve the minutes. I was not there to approve them, so they cannot stand as a record of what I said on the day. It would be difficult for anyone at Transport Scotland to sign them off and say, "Yes, that's a true and accurate record, because that's what Guy Houston said and he confirms it." I do not believe that the minutes are accurate.
Okay. Thank you.
We can get further clarification on that. I will invite Nicol Stephen to ask a question in a minute, but I would like to stay on this issue for a moment. You said that there was no conflict of interest on 21 November because you had disposed of the shares. Sorry—they were trans—
No. That is not what I said.
I am sorry. The shares were transferred to your wife.
Yes.
Under the civil service code of conduct, shares owned by a spouse are a material issue. There was therefore still a potential conflict of interest because your wife held the shares. Is that correct?
Yes, but this is the point that I just made to Mr Fraser. The sentence in the minute is not whole. The reason that a conflict of interest did not arise was that the meeting was not a financial decision-making meeting; the reason was not that I had the shares or that my wife had the shares. The sentence is too short.
Okay. We can sort that out later.
Yes, and I believe that the permanent secretary has already commented specifically on that meeting. It was something to do with progress, and was a pre-meet with FirstGroup, or something like that. I cannot remember the full details but I saw the details and I said that, again, it was not a financial decision-making meeting. However, I must admit that I do not recall that specific meeting.
But you attended that meeting, which was called to discuss the franchise extension.
You say, straightforwardly, that the minute of the meeting on 21 November 2008 is inaccurate. You would contest the minute because it should have said that you had transferred your shares to your wife. Can you explain when and why you did that?
I will explain, but it was for personal reasons. The committee is going into a lot of detail about my personal affairs. I transferred—
I am not asking you about personal reasons. If the reasons are personal—
They are to do with tax efficiency.
I do not need to press you on that, but I need to understand why you chose to inform the board at that meeting that you had transferred the shares.
That was the first opportunity.
So the transfer had happened—
In November.
Yes, in November 2008. However, the decision was not related in any way to your knowledge of the issues that were about to arise in the context of the First ScotRail franchise.
The tax reasons are related to dividend payments. I do not really want to give this away, but—
No.
I just want to be clear.
If there are issues that relate to your personal tax situation, you are not obliged to disclose them to us.
Okay, but I just want to be clear that the transfer was for personal tax reasons.
The fact that all this happened within days of the First ScotRail franchise report, which raised this issue and which triggered your resignation, is coincidence. That is what you are telling us.
My transferring the shares to my wife was before the report came out.
Yes, but the report was coming out at the time. Was the meeting on 21 November before the report came out, or before you had knowledge of the report?
It was before the report came out.
So when was the phone call that you refer to in your letter to us?
It would have been five or six days before the print deadline, which I cannot remember—Audit Scotland might have the answer. It was a few days before 28 November.
You resigned on 28 November.
I did.
Five or six days before that is about 22 or 23 November. Is that right?
That is when I disclosed. It was the first opportunity to do so. I transferred the shares to my wife some time in the middle of November.
So it was earlier in November.
I have already explained that that was for personal tax reasons.
It was the week before, or two weeks before, everything that we are discussing occurred and, as you explained, coincidence. You went to the meeting on 21 November and explained about the transfer of shares to your wife. For some unexplained reason, the minute states:
I believe that it says at the end of that comment that there was no conflict of interest because it was not a financial decision-making meeting.
That sentence in the minute came as a complete surprise to you; you were unaware of it.
Yes. I was not present when the minute was agreed; I was not in the employment of Transport Scotland.
Okay.
I was involved in those two meetings.
But you attended more meetings than that. You attended additional meetings on the ScotRail franchise extension. Is that correct?
I am saying that I was involved in a lot of meetings to do with First ScotRail.
This is very important. Did you attend meetings to do with the project with the code name golden key prior to March 2008?
If I did, none was decision making or about influencing the decision.
That is not the question I am asking. The question is: did you attend meetings about project golden key prior to March 2008?
There was a rail policy board, which met monthly, had a group of directors and discussed the policy on rail. One of the topics in those discussions would have been ScotRail's performance, which may or may not have included an update on project golden key. I do not have paperwork with me, but I would not be surprised if there was an update to the meeting in 2008.
If project golden key was mentioned at any of the policy board meetings that you attended—such as April, May, June, August, September, November and December 2007 or meetings in 2008—did you remind those attending that you had a shareholding, or did you leave the meeting?
They were certainly reminded on a number of occasions, although I cannot confirm whether it was at every meeting. It was common knowledge, had been in our annual report for two years and was in the register of interests. We had received confirmation that the arrangements that we had put in place were suitable because they had gone into the annual report, which Audit Scotland had signed off.
We have a note of at least two meetings at which project golden key was discussed prior to March 2008. One was on 23 January 2008, which was the franchise extension meeting that has been referred to, and the other was back in August 2007. I assume that that is accurate and that you do not dispute those minutes.
I do not dispute anything. As the permanent secretary said, on 28 August, I had disappeared before that agenda item came up. I think that the January 2008 meeting was the meeting about which he said that I was on a train at half past 5. Therefore, the topic might have been on the agenda, but I was not there.
That must have been a different meeting. We were told that you had not been involved in any discussions or meetings on the franchise extension prior to March 2008 and that you were involved with only two meetings, neither of which involved financial negotiations. I am trying to establish that there were prior meetings that involved project golden key, but which you state did not involve financial negotiations. Over several months, there was a series of meetings. Is it fair to say that you were comfortable attending those meetings even though project golden key was being discussed, unless there were financial issues?
Yes—unless there was a financial decision to be made on the negotiations on the franchise. The letter of March 2007 said that I was not to be involved in financial decision making. The agreement and the procedures that were put in place did not set out that I was to have no knowledge of the issue. From an administrative point of view, that would have been virtually impossible.
So the financial negotiations in relation to project golden key were being conducted elsewhere and you, as the finance director of Transport Scotland, had no involvement in them.
Three senior directors—the chief executive, the head of the rail directorate and the director of strategy and investment—were closely involved. We should remember that they had support on financial issues from Ernst & Young and the Scottish Government. They had lots of financial help from people other than me. We were comfortable with that.
As you might know, I have pressed Transport Scotland fairly hard on confidentiality and market sensitivity. The main reason that Transport Scotland gave to the committee as to why it kept project golden key—the franchise extension project—confidential and did not at any point consult or involve external stakeholders was the market sensitivity of the project.
No—I was talking about one individual being able to make a difference to the FirstGroup share price and being able to guarantee that. That is subtly different from the statement that you have just made.
So you agree that, even in the context of a £6 billion business, the scale of the contract extension project was significant and was market sensitive.
Yes—I am sure that it was. Does anyone actually know the facts about what happened to the share price on the day that the franchise extension was announced?
That is really what I am asking you.
From what I understand, the share price went down on that day.
With respect, you cannot have it both ways: you cannot say that you personally feel that the issue was sufficiently important—
I am just saying that, in the context of a business that is worth £6 billion, one decision on its own does not necessarily make a huge difference to the share price. A number of issues could make a difference to the share price; this is just one of them.
I think that you tried to make that point in your letter when you said that the decision was not that substantial or significant within the context of FirstGroup. However, were you aware of how sensitive the project was regarded as being by people in the organisation and of the reasons for the strict confidentiality that surrounded it?
I was aware of that, yes. As I said earlier, the project was called project golden key, and the fact that it had such a name demonstrated the fact that it concerned confidential matters.
If you had been aware of another individual in Transport Scotland who was a substantial shareholder in FirstGroup and was involved in discussions around that project, what would you have felt?
As long as we had an audit trail that said what people could or could not do and we were all agreed on that, I would have had no issue with that. The onus is on that individual not to trade in sensitive areas, because they will be caught by the Financial Services and Markets Act 2000. The matter is not only to do with Parliament; it is to do with a load of other legal issues.
You have talked a lot about the issue of public disclosure and the fact that your interest was publicly disclosed in Transport Scotland's accounts. However, the onus on you, in terms of your contract of employment, had nothing to do with public disclosure, did it?
Sorry, what do you mean?
I mean that your contract of employment states that you should disclose such issues to your employer and that the matter does not have to go on the public record or be disclosed in the annual accounts of the organisation that you work for. It is a contractual matter between you and your employer.
Yes, and that is why I informed my employer.
And when you informed your employer—which you said you did verbally within the first few weeks of joining the organisation—you did not believe at that stage that there was any need to set down in any way the nature of your shareholding interest.
I knew that I had to put it in writing to my line manager.
Why was that not done for a period of 10 months?
There are no timescale requirements with regard to disclosure. In previous evidence-taking sessions, you have said that there was "late disclosure". That is not correct. The disclosure was within the guidelines and the rules. The fact is that Malcolm Reed and I had discussions about what action to take and how to put the matter in writing. At that time, I had no involvement in the franchise extension, so the matter was never an issue. The fact that I told everyone verbally—
So disclosure can take place at any time. It does not matter whether it takes place after 10 months, one year, two years or whatever. Is that right?
Disclosure should take place when it is appropriate. A set of annual reports was due, and my view was that the matter should be put on the public record at that time.
It is unusual for a civil servant to be subject to a set of annual accounts in which a disclosure of that nature needs to be made. Most civil servants do not work for an organisation that produces a set of annual accounts of that sort. Assuming that the issue should be handled in a manner that is appropriate for all civil servants, I would have thought that it would have been far better if you had sent a private letter to Malcolm Reed at a far earlier stage. That would have been the appropriate point for disclosure.
We discussed the matter on numerous occasions beforehand, and we formalised the matter in March 2007. It is as simple as that.
So, in your opinion, the arrangements that were followed in March 2007 reflected your previous discussions with Malcolm Reed. Your letter starts with the words, "As previously discussed".
Yes, and the letter also says:
But the only reason for formalising that in a letter was that the public accounts for Transport Scotland were being prepared.
I would not say that it was the only reason—
That was the reason for the timing of the letter, in March 2007. Is that correct?
The timing was related to when we would make the public disclosure. Malcolm Reed and I had decided that it would be best to publicly disclose the matter.
You have said a number of times that you did not trade in any shares during that period. However, did you obtain additional shares in that period?
What period are you referring to?
The period between your starting with Transport Scotland and your leaving Transport Scotland. Did you obtain additional shares in that time?
I exercised the share options up until a point in July 2007, which was many months before the franchise extension was crystallised in any way, shape or form. Audit Scotland has already stated that, around that time, there was a number of options, and any educated individual could work out what those options were.
During that period, you obtained additional shares.
Yes, and that was approved in the letter of March 2007. As far as I was concerned, I was allowed to do that.
I would like to clarify a point that you made in answer to one of the convener's questions. You joined Transport Scotland in May 2006 and you acknowledge that, at that time, you were aware of a confidential project called project golden key, which was considering three options relating to the ScotRail franchise extension, one of which was to extend that franchise. Do you acknowledge that, if the option to extend the franchise was pursued, that would be of benefit to FirstGroup?
Of course it would.
With regard to the contract extension—[Interruption.]
I think that Mr Houston needs to be given every opportunity to give evidence in ideal circumstances. However, the noise from outside the committee room does not make these circumstances ideal. I apologise for the interruption, but I suggest that we suspend the meeting until we can get the noise stopped.
Meeting suspended.
On resuming—
We have asked whether the work can be halted, but it might be happening beyond the Parliament's curtilage, so the matter might not be entirely within our control. I apologise, but we might just have to suffer through it.
Apologies for the interruption, Mr Houston.
At the time, the rail finance team was under the rail directorate. I do not want to appear flippant, but I was not involved so I do not know what its involvement was. As a result, I cannot actually answer your question. I know that a rail franchise team—a rail finance team—sat under the rail directorate, and I assume that they would have provided the directorate with information. I do not know.
Are you saying that the role of the finance department was to provide clarification and support to the rail franchise team, which sat under a different directorate from your own?
Yes. That team sat under the rail directorate.
Who in the finance department provided and directed that support?
The team was under the director of rail at the time.
Yes, you have already made it clear that the rail franchise team is under a separate directorate. However, from what you have said, it required some support from the finance department, so who—
The rail finance department was under the rail directorate.
Just to be clear, what role did the finance department that you were finance director of have?
I do not believe that it played any part.
So the finance department—
I cannot confirm either way. If information was asked for that I was not knowledgeable about or if key decisions were to be made, my team would not be involved. We did not have the expertise; rather, the rail finance team had the expertise.
So you cannot state whether the finance department had a role in considering the financial implications of the ScotRail franchise.
I do not believe that my central team had a role. We would simply consolidate information that we had been given. We would get information from rail, concessionary fares and roads teams that we would consolidate. We would then send information up the line.
Can you be clear about whether the department that you were director of had a role?
Only to consolidate numbers and send them up the line.
Right. So staff in your department had a role in providing analysis and passing that on to the rail franchise team.
No; things were the other way around. The rail finance team would provide forecasts for a number of years. We would consolidate those into a future forecast.
Just to be clear, staff in the department that you were finance director of had a role in liaising and helping to provide information to the rail franchise team.
Yes, but that was not to do with the franchise extension.
Okay. So who was responsible for that in the department?
I am sorry, but you are being too general. Templates and spreadsheets and so on to fill out would go from my team to the rail finance team, which was under the instructions of the rail directorate at the time.
I think that we are all clear that the rail franchise team was under a directorate that was separate from the department that you were finance director of. I am trying to establish and be clear about the involvement that the department that you were director of had in analysing the financial implications of the ScotRail franchise extension.
It had none.
Okay. That is clear.
No. I said that I had been involved in many meetings to do with the ScotRail franchise.
Okay. You said that HR and communications were discussed in those meetings, but none of them was on financial decision making.
Correct.
I assume that there were meetings on financial decision making. Who deputised for you in them?
There would not necessarily be a deputy. There was a set of governing rules that said that people up to certain levels could make certain decisions. The rail directorate was entitled to make decisions with the approval of the chief executive. Financial decisions did not have to be taken through me.
So you are telling us that in your role as director of corporate services, you had, as your department had, input on HR and communications in discussions on the ScotRail franchise, but your department had no finance input in any discussions or meetings on the ScotRail franchise.
We had no input on its extension.
Good morning. I would like clarity on two matters, one of which James Kelly has just covered a wee bit. Murdo Fraser talked about the meeting on 19 March and asked whether you had attended meetings in which the franchise extension, or project golden key, if we must call it that, was discussed. We have talked about that matter subsequently, and you said that you had. Like James Kelly, I want clarity. Did you ever attend a meeting at which you said, "Shall we or shan't we award the franchise extension contract?"
No. It was not about that; it was about saying, "Here's the progress: we are working with First Group; we still have the options on the table; and this is where we have got to."
Okay. On the meeting on 19 March, you said that your role was multifaceted and that you covered lots of different areas. On that occasion, the purpose of the meeting was to discuss any communications issues, should the franchise be extended. It would be helpful to the committee if you could give examples. Initially, it sounded like you were saying, "Yes, we were discussing the franchise extension." However, I now understand that what you meant was that you were discussing not whether to extend the franchise, but the implications of a franchise extension—something that one has to do in a normal business.
Those were very much rail policy meetings, and if the franchise extension was brought up, it was by way of a progress update. Other than listening, my input would be minimal. On 19 March, on media handling in particular, we discussed who to tell, when we should tell them and how we should tell them. Basically, we put together a communications strategy around an announcement on the extension. Is that the sort of thing that you were looking for?
Yes.
The whole discussion was around which MSPs to phone, and when and how to inform the Department for Transport, Network Rail and all the major stakeholders. It was all on the specific announcement of an extension.
And you would not be able to do your job without discussing the franchise extension—I mean not whether to have an extension, but the franchise extension itself. The example was a good one.
No. All that I ever did was to exercise the options. When say in evidence "additional shares", I mean the exercising of those options. From my scribbles on the letter of 14 March 2007, you can see my notes in reconciling my total current shareholding to the exact share. When the shares under 2a, 2b and 2c are added up, that is our total shareholding. There were no additional shares over and above that.
I understand that. I will make it clear why I asked you for clarification on the point. I did so because the Official Report of the meeting will record that you said yes in answer to the question whether you obtained additional shares. What you meant by that was that you had exercised the existing share options that you had been given between 2003 and 2005.
I appreciate you clarifying that.
It is important that the point is clarified. I return to the question that I asked earlier. During the period that you were at Transport Scotland, did you not increase your shareholding?
Yes, but only through ordinary options.
Yes, but by whatever route, during that period, you took a decision to increase your shareholding.
I took a decision in line with the guidance—
And your managers were aware of that.
Yes.
And they expressed no concern.
Yes.
That is fine.
Why were you at meetings at which project golden key was discussed? What decision making were you involved in regarding golden key?
I was not involved in any decision making for golden key.
Were you involved in any decision making? Were you involved in giving advice?
The rail policy group provides a good example. That group discusses lots of issues to do with railways and the policies around them. On project golden key, any discussions that took place at the rail policy group were few and far between, from what I can remember. They were succinct and short, with statements such as, "We are still in discussions with FirstGroup," or, "We are still looking at options." That went on for a number of months. It was no more than that, and the minutes simply showed that progress was noted.
But the end product was to be the franchise decision, for or against. You were present at those meetings. Why? What was your input to them?
The rail policy group was involved in various decisions on the future of the railways of Scotland—it was more to do with providing advice to ministers.
Therefore your advice was part of the decision-making process.
No. You are confusing two issues. The rail policy group had a number of agenda items, one of which was project golden key. That particular agenda item was simply to note progress.
Did you have any involvement—giving advice or otherwise—in the decision making?
On the franchise extension, no.
The franchise extension, whether it was agreed to or disagreed to, would obviously have financial consequences, and you had a pecuniary interest. I find it strange that, if you had a direct pecuniary interest, you were even present at meetings. I know that, in other organisations, one would have to declare an interest and leave. However, you were at those meetings. I presume that you were aware of a process going on. Why were you there? You must have been there to do something and to contribute.
I was there to contribute to a number of agenda items covering all manner of things. Project golden key was one specific element. All those who were present at those meetings were directors, who were well aware that I had disclosed my interest. We were working in an environment such that, at internal meetings, everyone was well aware of my shareholding. They knew that I was ex-finance director of the bus division of FirstGroup. I am sure that one of the reasons why I was employed was because of the market intelligence that I could bring to the organisation, for example on what was happening in the bus and rail industries.
You obviously were not there just as a spectator. How did your input affect or lead to the final decision?
On the franchise extension, in no way. I did not provide advice.
So you were in no way involved in the decision making. The rules are quite clear: civil servants should not be involved in taking any decision that could affect the value of their private investments.
And I made sure that I did not trade. If I gained any knowledge—which I did—I made sure that I did not trade when I gained that knowledge. Most of that knowledge was gained around March 2008, when the matter was being crystallised.
You have indicated that you gained knowledge during the process.
Yes, but most of the knowledge that made any difference was not gained in June 2007. It would only have taken an educated guess to work out what options were available. Any knowledge that I gained was gained around 19 March 2008—I refer to the detail that we were given at that time.
Andrew Welsh's question takes me back to what Anne McLaughlin said. You say that you were not involved in making any decisions about whether the franchise should be extended. That is not the issue under the code of conduct; it is whether you attended meetings at which you gained any knowledge or information that could have been beneficial to you in determining whether to exercise options to increase your shareholding. You have indicated that you got knowledge at some of the meetings.
Round about March 2008, I received knowledge. It is clear from the FirstGroup share register that I did not use any of that knowledge for personal gain.
March 2008.
Yes. Round about then—19 March, for example. I did not trade in any of the shares and I still have not traded in any of them. It is not possible to make a gain or loss without trading in the shares and I made sure that I made no personal gain. I simply held on to what I had because I knew that it was too sensitive to do anything—not that I was going to do anything anyway, because I am holding the shares for long-term investment.
During that period, you increased your shareholding.
I did not.
At a time when you were attending meetings at which project golden key was mentioned, you exercised your share options.
July 2007 was the last time that I exercised a share option.
Yes, but you attended meetings prior to that. I read out the dates that you attended meetings.
No, I attended meetings to do with the rail franchise. I do not have the details of all the minutes, but that does not necessarily mean that they concerned the franchise extension and, even if they did, Transport Scotland was not even close to a decision. Audit Scotland has already said that, at that time, a number of options were on the table. Some of those would have benefited FirstGroup and some would not have done. The decision was taken round about March 2008—it may have been a month or two before then—and it is clear that there is no link between me increasing my shareholding in July 2007 and the awarding of the extension. You cannot link it.
Will you clarify for the record when you exercised your share options? I presume that you did so more than once. Is that right?
The detail that I have shows that July 2007 was the last time that I did so.
What about previously?
I do not have the detail, but it would have been some time in 2006, some time in 2007.
Which was during the term of your employment with Transport Scotland.
I think that the letter states exactly when.
I want to clarify something, Mr Houston. As far as you are concerned, in all your dealings, you adhered to the agreement that you had with Dr Reed, the chief executive of Transport Scotland, as set out in the letter of 14 March 2007. Is that correct?
Yes.
The agreement that you had with your employer was that you would be able to discuss the rail franchise and involve yourself in meetings on it but not to take part in any meetings on the franchise extension. Is that correct?
The remedy—of which you have a copy—said:
My colleague Anne McLaughlin asked some questions about your input at the meetings. You said that you were there to listen.
On the specific example of discussions on project golden key—the rail franchise extension—in the rail policy group meetings, my role was simply to note progress, for example, "The rail team has a handle on this. They are discussing it with FirstGroup. There are a number of options." I am talking about that specific example alone.
There is an industry in meetings—we all attend lots of them. You have told the committee that you were at lots of meetings. Was there ever an occasion when you felt that it would be right to withdraw from a meeting, for example when discussions moved on a wee bit too much from the franchise to the extension?
I do not remember removing myself from any meetings. I remember saying on a number of occasions, "Guys, remember I have shares; let's have a quick discussion. Is this meeting going to lead to financial decisions?" Because the directors were aware of the situation, they would not invite me to meetings at which they thought that a financial decision would be made. I was quite good at avoiding meetings that were to do with the issue, for the simple reason that all the directors were aware of the situation and would not compromise their positions.
You do not remember being in a meeting at which you felt personally compromised.
No. As I said, I might have gained knowledge, but the onus was on me to ensure that I did not use that knowledge for my personal gain. I was well aware of that.
Did you gain knowledge—
Sorry to interrupt. Mr Houston, you said that there were meetings at which the franchise was discussed, in which you did not participate. We asked Transport Scotland for a list of all the meetings that related to the franchise, and we understand that there was only one meeting that you did not attend, which took place on 29 February 2008—I beg your pardon, Mr Houston; the clerks are telling me that the list refers to meetings that you attended. I hope that we can get the information that I was seeking.
Mr Houston, did you gain knowledge that you were uncomfortable with?
No. In March 2008, I gained knowledge that there would be an extension of the franchise, or rather that that decision was likely to be made. I knew fine well then that I could not trade and must not do anything that would jeopardise my position, so I held fire.
It is quite right that there are strict rules for civil servants, which operate in their interest and in the public interest. You attended all the meetings that you mentioned and you said that your attendance meant that you acquired knowledge. When we are talking about shares, knowing something does not necessarily mean that one takes action; it might mean that one takes no action. That is the difficulty. As a civil servant, you attended meetings that gave you access to information that no one else had, because it was kept inside your organisation. You said that you did not sell your shares or make any movement on them, but I put it to you that the knowledge that you gained might have encouraged you to take no action.
My letter of March 2007 set out guidelines, which were approved, and I stayed within them. For example, I was not allowed to make a decision and my shareholding was to increase only in line with the options that I had. It is as simple as that. I really do not understand where you are coming from. I knew that I had to stick to the guidelines and procedures that I was given and I did so.
Civil servants
I know a number of senior transport operators who now work in the public sector, not necessarily in Scotland. They will have had large shareholdings, but I have no idea what they have done with them.
Following this situation, would you recommend any change in the rules?
I do not think that that is a fair question to ask. We can take that up with the permanent secretary.
I would make sure that we minuted every single meeting with every single detail.
I want to move on to ask about Mr Houston's departure, if that is okay, convener.
The paragraph in the report came out around about the 20-something of November—I do not know the exact date. That is when I was informed. The key thing for me was that I was told that it was going to print. That was the first knowledge that I had of it. I had a matter of days to consider my position. It was all rather quick. The discussions generally were not with Dr Reed; they were with the central HR team that deals with all pay and rations. It is the team that deals with all such matters.
Who was leading that?
It was the director of HR.
Paul Gray?
Yes.
What contractual notice would you normally have to give in the position that you held? I note from your letter that in your previous job as finance director with the bus division of FirstGroup, you gave six months' notice.
I believe that my contract was to give three months' notice.
How did the discussions go? I realise that there are issues that you might not be able to discuss.
The discussions were around the fact that the paragraph was to go into Audit Scotland's report. The report was on a high-profile event in the first place. I felt that I did not have a right to reply to the comments, which I felt were unjust. Were they unjust? I felt that they were out of context, quite simply. Factually, was the paragraph correct? Absolutely, but it was completely out of context. I just felt that this was going to cause an embarrassment to ministers. At the end of the day, my job was to serve ministers and the Scottish Government.
It hardly seems to be an acceptable way for an employer to behave, if an employee has followed the rules that are laid down by the code.
This was my decision. I cannot comment on how the Scottish Government feels about it. That is all that I will say about that.
It was your decision entirely; you were not pushed.
No, I was not pushed.
You decided that you would leave, you handed in your notice, you told your employer that you believed that it was in everyone's best interests for you to leave immediately, and it agreed. If that is the case, why is there a confidentiality clause?
That is standard in every compromise agreement. I do not want people to know my personal information.
But what compromise agreement was there? You said that you took the decision to leave, and your employer agreed that you could go. How was there a compromise?
It is standard practice, when somebody leaves and they do not give three month's notice, that a compromise agreement is put in place to cover both sides. That is standard employment practice.
Is it? I am aware of other situations in which people walk out the door and there is no compromise; they simply get paid up to the date on which they left, including payment for their holiday entitlement, and that is an end of it. However, you are suggesting that, having taken a decision on your own behalf to walk out the door, there was somehow a compromise agreement that required a confidentiality clause. If you just decided to leave, what is there to hide? You have left and you will get everything to which you are legally entitled. That is it.
There are a number of areas in an agreement that is made when you leave. I really do not want to go into details of the contract that I signed with my employer. Those are the details that I worked within.
The contract that you signed with the employer would be the standard civil service contract, which is a matter of public record. We know what was required of you and what was required of the employer.
Yes, but I am talking about the compromise agreement, which was a contract.
So there was a compromise agreement over and above what was contractually set out.
Yes.
In your letter, you say that you are adhering to the confidentiality agreement because not doing so
I do not have the contract with me and I do not want to go into the details. However, the view from my lawyer was that there would be a financial repercussion if I broke the confidentiality agreement.
Why would there be a—
I want that confidentiality agreement to work both ways. I do not want the Scottish Government to disclose what my terms of departure were.
That is correct, but I am concerned with the issue of financial repercussions. Did civil servants introduce into that compromise agreement a penalty that could have financial repercussions for you if you broke the confidentiality agreement?
If you break a confidentiality clause, there will automatically be a repercussion.
Did you suggest that there would be a financial repercussion if you broke it?
I am not quite sure where this line of argument is going.
I am just trying to find out who suggested that there would be a financial repercussion for you if you broke the confidentiality agreement. Did the civil servants insert that clause?
It is something that is standard in a compromise agreement. There will be repercussions on both sides if the confidentiality clause is broken. That is standard practice.
But could there have been financial repercussions on the civil service?
I do not know how I would get the benefit of any such financial repercussions but, yes, there would be repercussions on both sides if the confidentiality agreement were broken.
You took the decision to leave—you went out the door at your own behest. A compromise agreement was reached, over and above that to which you were contractually entitled, and someone inserted into it a confidentiality agreement—whether or not that is standard—that could have financial repercussions for you.
You used the words "over and above", but, just to clarify, the compromise agreement takes everything into account—it states, "You had three months' notice, and, as of this date, this is everything." It is not necessarily over and above the contractual entitlement.
But if you were simply getting that to which you were contractually entitled, there would be no need for a confidentiality clause or the threat of financial repercussions.
There was a need for a confidentiality agreement because I do not want people to know what my terms of departure were—that is fairly standard. Confidentiality works both ways.
No—the point that I am making is that if you only got that to which you were contractually entitled, it would be a matter of public record—we could get that information from the standard contract. Therefore, there would not be an issue of confidentiality, because everyone would know.
The confidentiality clause does not necessarily cover financial information—it can cover reasons for leaving, speaking to the press and all sorts of things. It covers the whole agreement.
So—just for argument's sake—if it covered that range of issues, there could be a financial penalty on you for talking to the press.
If I disclose issues that are covered by the compromise agreement, there could be. In this arena, I am covered by the Official Secrets Act, data protection legislation, employment law, the Scotland Act 1998 and the Financial Services and Markets Act 2000. There are a number of acts and rules, and all the rest of it.
I appreciate the potential vulnerability of your situation, in that you do not have the support that others do when they appear before a committee. I appreciate that you have made the effort to come and give us advice—thank you.
I hope you do not mind, convener, but I have been waiting patiently for an opportunity to ask a couple of questions, and I would like to take the train back a couple of stations.
No. A franchise extension was never mentioned. It was in the contract already, but I was not aware—I did not have a clue—that discussions would be held on the franchise extension.
It seems odd that a senior director would be brought in when the contract was about to be negotiated but would play no role in that. That is perhaps hard for the public to understand. You have on a number of occasions made it clear in answer to committee members' questions that you played no part in the financial decision-making that related to the franchise extension. Who, being financially qualified to do so, ultimately signed off the extension?
I was not involved in that, so I do not know who signed it off. I cannot tell you, as I do not know that detail.
Okay. It might have to be picked up after this meeting, but the question has to be answered. Which financially competent person signed off the extension?
We can pursue the matter elsewhere.
I am interested in the timing of various events around your resignation. You say that you cannot recall when the phone call came through from Audit Scotland, but you think it was four or five days before your resignation.
It would have been about a week before it.
The Transport Scotland directors board meeting, with its curious minute, took place on Friday 21 November. I believe that you resigned on the following Friday, which was 28 November. Can you recall whether, at that board meeting, you had information on this issue from Audit Scotland?
I honestly do not know.
You cannot recall.
I cannot recall. I would just be guessing. I honestly do not know.
We will probably be able to find out more information from Audit Scotland, from you or from the civil service. I would certainly be interested in getting that information.
I am sorry, but I do not understand the relevance of the 21 November board meeting.
I am just trying to clarify when the minute was put in. I remind you that it says:
As I said, I do not think that there was anything to resolve. There was no conflict of interest—I had followed the guidelines that I worked within. I did nothing wrong, so there was nothing to resolve.
But you chose to resign from the organisation.
Yes.
When I talk about resolving the issue, I am asking whether there could have been some way forward for you within Transport Scotland or the civil service.
That would have involved disclosing what?
For example, if you had sold all your shares in FirstGroup and if you had indicated that—
But the minute does not mention the word "sold".
I was talking about if you had taken steps to sell your shares.
I still do not believe that I have done anything wrong, so why would I take that sort of action?
You chose to resign from a senior job in Transport Scotland, which was quite a profound action.
Yes. I resigned because I have personal pride. There was the potential for embarrassment to the employer that I served.
I wonder whether I can come to that. Did you inform Malcolm Reed of your decision to resign?
Yes, I would have done.
How was that done?
It was certainly done verbally, because all the writing was through the senior human resources team that deals with all such matters.
Was the discussion with Malcolm Reed the first discussion that you had, or was your first discussion with Paul Gray?
The first discussion would have been with Paul Gray. After I had taken the decision, I would have told Malcolm Reed.
Can you recall when that first discussion—
Actually, I do not think that I did tell Malcolm Reed. I did not, I believe, on making the decision subsequently phone Malcolm and say, "I've resigned." The discussions were with the HR team—specifically, Paul Gray—literally on the day itself. I do not remember a telephone call with Malcolm to tell him that I had resigned. In the civil service, you deal with the HR team in such matters.
I am trying to clarify the facts, to get some dates in place and to understand who was contacted. You are telling us that your decision was to phone the head of the central HR team, Paul Gray, to inform him verbally that you had decided to resign.
I wanted to meet him.
You wanted to meet him?
And when I met him, I said that, subject to a compromise agreement, I would want to resign.
At that point, none of the issues was in the public domain.
That is correct.
Before the story broke, you decided to resign. You did not contact your line manager or have any contact with him. Is that correct?
During that week I had discussions with Malcolm Reed. You are asking whether I said to him that I was going to resign. I do not think that I did. I do not quite understand the relevance—
It is quite unusual not to inform one's line manager that one intends to resign.
I would not say that. Transport Scotland is a Scottish Government agency and we were Scottish Government employees, so we dealt with such matters through the Scottish Government's specialist team.
It is unusual in my experience, and I have reasonable experience of such matters. Perhaps you are aware of other examples, about which you can tell us.
I took a decision and I thought that Paul Gray was the best person to talk to. I went through that process.
How long did it take you to negotiate the terms of your departure?
Fewer than two or three days. I knew that the report would come out on 28 November.
Was your resignation effective as of Friday 28 November?
Yes.
When was the agreement struck?
Some time around 27 or 28 November.
On the day of or the day before your departure.
Yes.
Did the negotiations take place in the days prior to that?
Yes.
On 25 November, for example, there was no agreement that you were going to leave. Is that correct?
There was no agreement on 25 November.
If we had been told that there was such an agreement on 25 November, that would be inaccurate.
Yes.
Okay. We fully understand that you do not want to disclose the terms of the agreement. However, will you say what issues had to be agreed?
Simply the terms of my departure and references—I do not know whether I am allowed to disclose that under the confidentiality agreement. I will try to be open and I hope that I will not be shot down in flames. There were issues to do with ensuring that I had a reference, what lines to take with the press—what I could say and what others could say—and the financial terms. I think that other people would say that such matters are fairly standard in most compromise agreements.
Did any civil servant contact you at any point to say that they thought that it would be a good idea if you resigned or to suggest that you might cause embarrassment to ministers?
No. The decision was mine and mine only.
Thank you.
In all the fog around what can and cannot be said, one startling revelation is that the agreement was reached by civil servants within days. In our dealings with civil servants during the past few years, we have not known them to move as quickly as that on anything. There are signs of progress, if nothing else.
I cannot say. I would have been in a sticky position if my employers had said that I could not have a compromise agreement. I wanted to ensure that there was full closure on the issue, so that I would not have to say anything to anyone and the terms of my departure would not be known and so on. If you are asking who asked for a compromise agreement, I am pretty sure that it was me.
Did Malcolm Reed try to talk you out of leaving?
No. I do not think that I had a discussion with him. As I said, the decision was mine and all my discussions were with Paul Gray during those two or three days.
Is there anything that you want to clarify, rectify or put on the record before we conclude this part of the meeting?
All I would add is that the permanent secretary and the Minister for Transport, Infrastructure and Climate Change have both confirmed in evidence that there was no suggestion of wrongdoing. One paragraph in a report of 20-plus pages outlined that best practice should be to minute everything. In my opinion, if any issue had arisen relating to the part that I played, Audit Scotland would not have signed off annual reports or the report on the franchise extension with a press headline along the lines of "Transport Scotland is managing the franchise effectively". The level of scrutiny of that one paragraph about best practice has seriously outweighed other considerations, and, to be quite honest, the impact on my family has been unbearable.
I can imagine the stress involved.
We will be happy to clarify it. If the convener agrees, I will ask Barbara Hurst to explain the details. She is closer to the issue than I am.
Thank you, convener and Auditor General. Goodness, the wisdom of Solomon is needed here. I will take the committee back to the beginning and to the disclosure in the accounts in 2006-07. The local audit team had discussions with Transport Scotland about what required to be disclosed in the accounts in relation to any potential conflicts of interest. The team has told me that it has no recollection of seeing the letter that Mr Houston has shared with the committee; the team has no evidence of it being in any audit working paper.
Mr Houston says that it is difficult for him to reconcile the statement from the Auditor General that
Barbara Hurst has given you a full and accurate background. If we put that phrase in the context of my discussion with the committee at that point, "we" refers to the team that did the study. Perhaps the use of "we" was inappropriate, because I did not distinguish clearly enough between the team that did the study and the Audit Scotland team that audited and signed off the accounts with the appropriate reference to the disclosure of Mr Houston's interests.
I very much appreciate the information that has just been given to us by Barbara Hurst. The information about the dates is very important. I am concerned about what has just been said in the context of the evidence that was given to us previously. We were told that Mr Houston was informed about the inclusion of the paragraph about a week or a few days prior to it going to print—the Official Report will confirm what was said. We were told that the shares were transferred to his wife in the middle of the month, before all of this happened, and that it was a matter of coincidence. We have now been told by Barbara Hurst that she informed Mr Houston on 13 or 14 November. It would be helpful if we could pin that down exactly.
It does seem to be a pattern in this inquiry that bits of information drip out piece by piece. We need to get to the bottom of that.
I want to confirm something that Barbara Hurst and Robert Black said. When you said,
The team probably had several conversations about what needed to be disclosed in the accounts, but not on the detail of what the management then needed to do. The audit team also reviewed corporate governance. This was in the early days of Transport Scotland being set up, so it was quite a high-level governance review, in which a number of issues were raised about where the organisation was not complying with best practice. I reiterate that none of us knew that the rail franchise extension was being negotiated at the time. In my view, if the audit team had known that, it would have looked in more detail at the management arrangements. However, it did not know that, and, as we have just said, neither did the study team.
It would also be helpful to know when the discussions with the audit team took place. I think that a report was produced in the summer—perhaps in June. I presume that the discussions took place significantly before then.
It would also be helpful to know whether the shares issue was discussed at any point. You can write to us about that; we do not necessarily need to know the answer to that question at the moment.
We have information about that, which Angela Cullen can talk the committee through.
The local audit team for Transport Scotland would have had initial discussions with Transport Scotland about its corporate governance review back in February to March 2007. That was the organisation's first corporate governance review in its initial year. In late March to early April, discussions started about the annual accounts process and disclosures that might need to go into the annual report and accounts. There were then discussions about the register of interests and further discussions with internal auditors who were also reviewing corporate governance around June. In August, the internal audit team finalised the work on corporate governance. The Audit Scotland team picked up its review of corporate governance in October 2007 and reported on the review to Transport Scotland's Audit Committee in November 2007. The annual report and accounts would have been signed off by that time too.
When was the first reference to the shares?
Disclosure was discussed in late March to early April 2007. Initial discussions would have taken place around then about any disclosures that needed to go into the annual accounts for the first year.
You asked about that, but were you given information at that point?
The audit team would have discussed a number of disclosures, including Mr Houston's, that had to go into Transport Scotland's register of interests.
We will ponder that and come back to you on it if necessary.
I am sorry, but I would like to reiterate something, if members will bear with me. The disclosure was appropriately recorded in the accounts and appropriately referred to in my report to the committee. There is an internal issue from which we need to learn. The attention of the study team was not drawn to the matter, but it was picked up in time to make the report to the audit committee, therefore I have full confidence in what the team did with the report and I stand by every word in it.
Thank you for that.
I am director of change and corporate services in the Scottish Government.
Do your responsibilities include human resources?
They do.
I think that Sir John Elvidge wishes to make an opening statement.
No. For understandable reasons, the committee is pressed for time, and I do not want to use that up.
Okay. Thank you.
I first became aware of it through the passage in the 2006-07 accounts that referred to it. I could not accurately say when in the middle of 2007 that was.
So neither Transport Scotland nor Dr Reed specifically drew the matter to your attention.
No.
Were you informed about Mr Houston contacting Paul Gray to say that he wished to leave his post?
Yes.
Were there discussions with you about the terms under which Mr Houston would leave?
No.
So you did not sanction any compromise agreement.
When the discussions were complete, I was told what the broad content of the agreement was.
You could have refused to sign off that agreement.
Yes, I could have.
But you chose to allow it to proceed.
I think that he was making a general point. I suppose that I ought to say that it is inherently difficult for me to know why someone else feels or thinks anything but, having listened to Mr Houston's evidence, I think that he was making a general statement that, when someone breaches a contract, they are automatically exposed to financial consequences.
If he were to give this committee any information relating to the circumstances of his departure, would there—from your perspective—be any financial repercussions?
That would depend on whether Mr Houston and his legal advisers chose to pursue the matter, but my assumption—
No, I am talking about your perspective. If Mr Houston disclosed information to us about the terms of his departure, would you, from a civil service perspective, pursue Mr Houston for financial compensation?
That would depend entirely on what Mr Houston said that breached the compromise agreement. Let me try to use an analogy here, as we will rapidly get into difficulty around the details regarding Mr Houston.
If Mr Houston chose to tell us the financial terms under which he left Transport Scotland—and nothing else—would you pursue him for financial redress?
If he were to do that in an entirely neutral way, without placing an interpretation on the information, it is less likely that we would wish to do that. As I think I said in my first evidence session, although the confidentiality obligations are symmetrical, the probability that we would pursue a remedy for breaching the confidentiality is less than the probability that we would be pursued for breaching it. It depends entirely on how information is conveyed.
If Mr Houston, in an objective and neutral way, simply stated the compensation package that he was given, there would be no repercussions from you for his doing that.
Broadly speaking, yes, that is the case.
Why was it felt necessary to have a compromise agreement when Mr Houston indicated that he wished to leave?
There are two things to say about that. First, as Mr Houston made clear, when senior people leave an organisation prematurely, compromise agreements are often a pretty standard part of the arrangements. It is not a particularly exceptional thing to have. If it would help the committee at all, we can make available a standard template for compromise agreements, so that it is a bit clearer what kind of ground such an agreement tends to cover.
That would be helpful.
Secondly, as I think Mr Houston said to you, he did not say that he was walking out the door, but that he was minded to resign subject to the completion of a compromise agreement. That would be entirely normal. As he brought out, compromise agreements are often more about reputation than financial issues.
To stick with the financial issues for a moment, you indicated previously that you could not provide information on certain aspects of Mr Houston's departure—payment in lieu of notice or anything of that nature—for data protection reasons. In answer to a freedom of information request last week, the Scottish Government indicated that £83,000 was paid in severance and for other matters in 2007 and 2008. However, it also indicated that that did not refer to senior civil servants, so Mr Houston would not be included in those figures. Is that correct?
That must be an accurate logical inference.
It is important that we get that on record. Given that, under the FOI legislation, you are able to disclose what other grades of staff receive over and above their wages when they leave, would you be able to answer a similar question about senior civil servants if this committee asked one or if an FOI request for that information was submitted?
If the FOI request had led us to disclose information about an individual, we would not have been able to answer it.
However, if the FOI request were to ask you for totals for the year 2007 and separately for the year 2008—as the one that was answered last week did—would you be able to give that information?
We would, provided that it was not tantamount to giving information about an individual.
Okay. Can you tell us how much was paid out in such circumstances to senior officials during 2008?
The answer to the FOI request was intended to convey that nothing was paid out in the relevant categories to members of the senior civil service in those years. It was not a statement that we had given information only for certain grades; it was a statement that we had given information for everybody but, to help you make the inference that you have made, we added the information that none of them was a senior civil servant.
Despite my years of involvement in politics, I was not aware of that nuance and it is my fault for misreading the answer. I apologise.
I will try to tease that apart. Information can be provided only if it is at a level of aggregation that does not allow inferences about individuals to be drawn.
So, if there were 10 people, you might be able to provide the information but, if one person left, you would not provide it.
That is correct. We would, in effect, be disclosing information about the individual. It is disingenuous to disguise information as anonymised information if it is not, in reality, anonymised.
So it is better for the public interest if a lot of people leave under compromise agreements than if a few do, because you could tell us about a lot of people but not about a few.
I think I have said to the committee before that putting information about people into the public domain is not the only way of addressing legitimate public interests—Audit Scotland has access to data that we cannot share publicly. If it thinks that we are doing something wrong, there is a path for it to draw that to our attention. However, if what we do with individuals is clearly within the bounds of reasonable judgment, the public interest is in knowing what the general arrangements are, not in knowing how we treat specific individuals.
I have one further question before I open up questioning to the committee. What is your opinion of the procedures that Transport Scotland had in place to manage the declaration of interests? Were they sufficient and robust?
I will distinguish between the procedures and the practices—hindsight is very tempting here. What I can say is that, prompted by the issues that we have got into in this case, we have made some general changes to processes for handling this kind of situation—not that there are terribly many of them. However, it seems to me and to Mr Gray that the framework could have been better in this case.
Can you clarify what you, as the permanent secretary, would expect from any of your senior team when someone declared an interest to them? Notwithstanding what has happened and irrespective of hindsight, is it sufficient for an individual simply to declare an interest verbally, or are they expected to register something in writing?
We have, and have had since April 2008, elaborate processes requiring all senior civil servants to register their financial interests in writing—in fact, it is done electronically. Clearly, we feel that that is the right state of affairs.
Sure, but what was the required practice before that?
It is impossible, is it not, not to say that writing it down must always be a sensible thing to do.
I am asking what the procedures were if a senior member of your team, or of any team, had an interest to declare. Were they required to declare it in writing? Or would it have been sufficient just to have had a wee blether with somebody?
"Wee blether" is a bit of a pejorative term. Our guidance says that having financial interests is not illegitimate, but that they must be managed and that the individual concerned is not the right person to decide how their interests are to be managed. Their line manager must decide that. The substantive point is that the line manager must have the information that they need to make that decision. Provided that the line manager has that information, it is not a fundamental flaw that it is not written down. In my view, it is sensible to write it down.
So there is potentially more than one manager—there is certainly at least Dr Reed—who has not, in your terms, acted in a sensible way. We have no way of knowing whether, in fact, he was told, other than to take at face value what is said to us. Would that be correct?
You have the testimony of both Mr Houston and Dr Reed that they had conversations about the matter, but you do not have written evidence of those conversations. From where we are now, that does not look like a wonderful arrangement, does it?
No, it certainly does not. That is an understatement.
That is why my view is that, because one can never predict the circumstances that will arise, writing things down is generally a sensible thing to do. We are not, as an organisation, generally criticised for our reluctance to write things down.
That is certainly true.
Indeed, that is what makes it all the more curious that more information was not available when we asked for it.
Can you remind us of the first question? We will take the questions one by one.
My first question is about the fact that no protocol or agreement was in place in March 2007, given that the final paragraph of Mr Houston's letter suggests that a protocol needs to be agreed. Was that appropriate, given that his shareholdings existed from the date of his employment in May 2006?
It would have been better for a detailed protocol to be in place earlier. I am not sure that I would draw the inference that Dr Reed and Mr Houston did not have a broad understanding, but in the circumstances it would have been appropriate to have agreed, earlier than March 2007, a fully detailed protocol for managing those interests.
My second question is about Mr Houston's suggested protocol, which I understand—although I have no written evidence of this—was subsequently agreed to by Dr Reed. Was that, as I assume, the working protocol?
I see that you are indicating assent.
I am not worried about the ability of those arrangements to protect the public interest—that is not the dimension that bothers me. As a general principle, provided that people are not in a position to make decisions that further their own interests, I think that in most cases creating a situation in which such people must have no knowledge or information would be too extreme a restriction. That would place too many constraints on the operation of an organisation. The restrictions on what Mr Houston could do with his financial interests were sufficient to protect the public interest against any motivation on his part to behave improperly.
I have one final point at this stage. The last time you gave evidence to us, I asked:
I do not think that Dr Reed set out to mislead; I think that he was concentrating on the meetings that were mentioned in the Audit Scotland report.
It is important to be accurate when appearing before a committee of this Parliament.
I agree. I am not for a moment arguing that it would not have been better to go beyond the confines of the questioning and to say, "Oh, by the way, it's probably helpful if I also tell you that …"—I completely agree.
So, by implication, at that point Mr Houston knew that the franchise was going to be extended, because you said that the discussion was about the extra money that would flow from the franchise extension.
I am probably overinterpreting. Given the process of the negotiation, all that they could have said in January was, "It looks highly likely that we will do a deal that will be financially beneficial to the organisation. Let us plan ahead and think about what we will do with the money if that expectation is fulfilled."
So at that point Mr Houston was present, as a major shareholder, with the potential to increase his shareholding, at a meeting at which the extra money that would flow from the contract extension was being discussed. That is not to mention earlier meetings that he attended at which the issue may have been discussed.
Yes.
Did no one in senior management think that that was a problem?
Clearly not, or he would not have been at the meeting.
Do you accept that both the evidence that you gave and the question that I asked were based on inaccurate information?
I accept that, when I gave the answer, I did not know that Mr Houston was present at the discussion that took place on 23 January.
Nicol Stephen has dealt with the issues that I wanted to raise.
We heard Mr Houston give evidence to the committee under fairly stressful circumstances. We heard the point made on record several times that, in owning the shares, he was not doing anything illegitimate, that he declared them properly—although we can argue about whether he did so in time—and that he did not breach the code of conduct. However, despite all of that, Mr Houston felt compelled to resign from a post and a career in which he had been involved for a considerable number of years. Would you say that that casts a shadow more over procedures and processes and the code of conduct, which may need to be reviewed, than over Mr Houston's role in the contract extension process?
I would say two things. First, our processes could be stronger generally—we have strengthened them. Secondly, I do not believe that having stronger processes would have altered the judgment that someone in Guy Houston's position might have made. Rightly, he judged that he was facing trial by media, which would have done immense damage to his family. I do not think that any processes that we had would have protected him from that risk. The inclusion in the Audit Scotland report of the material in paragraph 71 carries with it the implication that Guy Houston's shareholding might have been material to the process of negotiating the franchise extension. If I had been in Mr Houston's shoes, I do not know what I would have been able to say to remove the inference that people would draw. For that reason, I understand absolutely the decision that he took.
I will put to you a question that I asked in the previous evidence session. Mr Houston was recruited in May 2006, at a time when Transport Scotland had embarked or was about to embark on negotiations on a fairly substantial contract. It seems unusual that he should be recruited not to be involved in that process, but he told the committee several times that he played no part in the detailed negotiations on the extension. Why did that happen? Did we not know about his interest when he was recruited? Who signed off the extension agreement—and was financially qualified to do so—if Mr Houston did not sign it off?
My starting point must be that I do not find it unusual. Transport Scotland is structured around a series of specialist teams for each area of its business—rail, bus and trunk roads. Those teams take the financial decisions in their businesses. Mr Houston's role, as he described, was to bring together the impact of all those aspects and to manage the aggregate finances of the business. I would not have expected the holder of that post, whether it was Mr Houston or someone else, to be actively engaged in the negotiation of the extension of the rail franchise. The financial advice on the matter was the job of the specialist rail finance team, which is embedded in the rail directorate. Therefore, I do not think that anything particularly unusual happened in the way in which the business was managed because of Guy Houston's interests.
Who signed off the financial aspects of the deal on behalf of Transport Scotland?
Signing off the deal was a matter for the chief executive. Verification of the financial advice was provided by a combination of the specialist rail finance team and the external advisers we were employing in the process.
According to the minutes of the Transport Scotland directors board meeting of 21 November 2008,
I thought that logic was on Mr Houston's side when he answered your questions on the matter. Because the transfer of shares to his wife made zero difference to the nature of his interest, in our terms, he was in effect in the same position as he had always been in. I think that I can understand what the sentence that you quoted is trying to say, although it is a bit clumsy. There was an interest, but it was implicit in the arrangements since they were put in place that Transport Scotland did not consider that there was an insuperable conflict of interest.
The issue is about more than whether the view was expressed in a clumsy way; it is that the board appears not to have understood the rules. According to the minutes, Mr Houston informed the board that he no longer held shares. That is a matter of fact. It does not say anything about transfer to his wife. I do not know whether Dr Reed knew of that or whether Mr Houston had just given the impression that he did not hold the shares. The statement is there as a matter of fact:
I have complete confidence that everybody fully understands the significance of these issues now.
But, Sir John, they must have understood the significance of them on 21 November 2008, because Audit Scotland had reported. The matter was getting into the public domain. Here we have a board of senior people who should know the code of conduct and who, apparently, knew of Mr Houston's shareholding, although I do not know whether they knew that it had been transferred, and they took a decision that there was no conflict of interest. How can you have confidence in people who are clearly incapable of applying your own code of conduct?
I was persuaded by Mr Houston's argument that two separate things had been put together in one sentence and that that created a misleading impression. There is a record that he told the board members that there had been a shift in the ownership of the shares. There is a record that they showed that they considered explicitly whether his presence at the meeting was okay and concluded that it was. I absolutely agree with you that, given how the sentence is written, it looks as if the first thing leads to the second. Mr Houston argues that that was not what happened. He was the one at the meeting. I have seen enough clumsy writing in my time not to regard it as particularly improbable that someone could construct a sentence that put together two things that happened one after the other and make it look as if there was a sequence.
You said that there is a record of the transfer of ownership of the shares.
I am saying that Mr Houston clearly told them at that meeting.
You said that there was a record.
Those words are the record that he told them.
Oh, right, so the words are the record. Okay.
Regardless of the clumsiness of the wording, Mr Houston has told us this morning that he does not believe the minute to be accurate. He was no longer with the organisation so he could not challenge that. He told us today that the minute should have recorded that the shares had been transferred to his wife. I find it incredible that we have a board made up of transport experts and senior civil servants who cannot understand the code of conduct that governs how they are employed, never mind anybody else in their employment. As the most senior civil servant, I would expect you to be really concerned that people who are working for you and are answerable to you do not even know the code, which should be basic to their employment.
I do not think that there is a basis for drawing the inference that those people did not understand that transferring your shares to your wife did not make any difference to the interest that you held. Mr Houston's argument was that it should have been clear from the minute that he had told the board members that. Assuming that he told them that, I think that it is absolutely right that it should have been clear from the minute. I do not think that one can infer from that that the people who were sitting round the table did not understand that transferring shares to a spouse makes no difference. I do not draw that inference.
But the board agreed that he could stay because there was no conflict of interest. If it said that there was no conflict of interest, it must have thought that that was acceptable.
No, because the board would have reached the same conclusion if it had believed that he still owned the shares. It had reached that conclusion repeatedly for two years. It would have been odd if it had reached any other conclusion.
So at least we have consistency. During the period, the board apparently knew and thought that there was no problem.
I find that, perhaps, the most curious thing about the minute. Given the circumstances as you have just described them, it is curious that the board chose to refer to the matter in those terms in the minute of the meeting on 21 November. When did Mr Houston first contact Paul Gray?
Paul Gray had better answer that.
It was on 25 March—sorry, I mean 25 November.
On 25 November.
Yes.
Was that in the morning or the afternoon of 25 November?
I could not say, Mr Stephen. I can—
Was it by telephone or by e-mail?
By telephone.
Given that the matter was made known to Mr Houston on 13 or 14 November, I wonder why he contacted you on Tuesday 25 November—I think that that is what you told us.
That is correct.
Did he tell you in that discussion that he wished to resign?
He said at that point that he wished to have a meeting with me to discuss his future. He did not give a particular indication about his intentions at that point.
He told us that you were the first person with whom he discussed the matter. Are you aware of that evidence?
Yes, I am aware of that.
Is that your understanding of the situation?
I have no basis on which to contradict that.
He was told on November 13 or 14 that the finding was going to be in the document "The First ScotRail passenger rail franchise". We have been told that Dr Reed was also informed about that on 13 or 14 November—indeed, he was informed before Mr Houston—yet we have been told that there was no discussion between Mr Houston and Dr Reed, his line manager, on the matter. Is that your understanding of the situation?
If that is what Mr Houston and Dr Reed are saying, again, I have no basis on which to contradict those points.
Then there was the board meeting of Transport Scotland directors on 21 November. At that board meeting, the directors would have been aware of the entry in "The First ScotRail passenger rail franchise", which was published the following week by Audit Scotland, but no reference is made to any intention by Mr Houston to resign. Indeed, the reverse is true. The minute of that meeting states that Mr Houston
Not beyond what Mr Houston has said about his considerations about the likely impact on his family.
Can you recall informing the permanent secretary of Mr Houston's intention to resign?
Yes.
When would that have been?
That would have been after the meeting that I had with Mr Houston on 26 November, because that was the first time that I had any basis for knowing his intention.
So that was the first time that you had any knowledge of Mr Houston's intention to resign.
That is correct.
If we had evidence that suggested that ministers had been told on 25 November that Mr Houston intended to resign, could you explain that?
I told you that Mr Houston called me on 25 November to indicate his intention to come and discuss the matter with me. He had not, at that stage, given me a clear indication of precisely what he wanted to do.
Had you relayed that information to the permanent secretary?
I am not trying to be in any way incoherent, Mr Stephen. These things happened in a fairly—
No, but these are important matters. We have been given inaccurate information during past evidence sessions; I am simply seeking accuracy now. I am not trying to be difficult or to trip you up; I am just asking for the facts. I am trying to understand the evidence, because it does not make sense to me at the moment.
My recollection clearly is that I was contacted by Mr Houston with a request to meet him. I met him on 26 November and he set out at that point, as he said in evidence, that he would wish to resign subject to a compromise agreement. I said to you that I thought I told the permanent secretary on 26 November—although I may have told him on 25 November—that Mr Houston was coming to see me. The matter was of concern to all of us.
I wonder whether the permanent secretary can shed any light on the confusion.
I cannot claim to give you precise information. The sequence may be exactly as Mr Gray has just described it.
It is not just one day, to be fair. I am confused and puzzled by the events from 13 or 14 November, whichever day it was, when Mr Houston and Dr Reed were informed that this paragraph was going to be in the Audit Scotland report on the First ScotRail franchise. I am genuinely confused about what occurred in that period of time. I am interested in when the transfer of shares occurred; I am interested in the meeting on 21 November; and I am very curious about the fact that we have been told by the Minister for Transport, Infrastructure and Climate Change that he was informed by you on 25 November that Guy Houston had resigned, with effect from 28 November, but we have also been told by Paul Gray that the very first contact from Mr Houston was on 25 November and the very first discussion on the issue of his resignation was on the following day, 26 November.
If I may, permanent secretary, I have looked at the notes that I took at the time and can respond to Mr Stephen's question. Mr Houston called me on the morning of 25 November. I informed Mr Elvidge on that day that Mr Houston had called me. I offered to meet Mr Houston on 25 November—and, I am sorry, this has clarified things in my own mind. I told the permanent secretary on the day that I was going to meet Mr Houston, but in fact that day moved to 26 November. I offered to meet Mr Houston on 25 November and he indicated to me that, after some consideration, he did not wish to meet me until 26 November. I told the permanent secretary on 25 November.
And therefore I think that it must be likely that, in the course of conversation that day, I mentioned to ministers that Mr Houston had made an approach of that kind. Of course, I would put only one interpretation on an approach of that kind, but I cannot possibly have conveyed that there was a firm decision on his resignation.
Sir John, two points arise from what you and Paul Gray have just said. Earlier, Nicol Stephen asked Paul Gray a specific question about whether the call was in the morning or the afternoon, and you could not recall and could not give Mr Stephen an answer. It was only after Mr Stephen pressed you that you suddenly remembered that you had a note in front of you that could confirm the time. That answer should have been given in the first instance.
I apologise to the committee. It was not my intention to withhold information. I simply wanted to try to answer Mr Stephen as quickly as I could, and I will not do so in future; I will ensure that I check my notes. I genuinely apologise to the committee. It was not my intention to withhold anything.
As far as the minister is concerned, what do we do about that? Sir John, did you or did you not tell him on 25 November that Mr Houston had resigned with effect from 28 November?
I do not see how I can have done because Mr Gray is telling us that he did not have the discussion until the next day.
So the minister was wrong when he wrote to us in those terms.
I do not see how that can be accurate. No doubt, it is our responsibility for allowing the minister to make an error in the detail of what he has sent to you. I very much doubt that the minister had in his mind a vivid recollection of the precise timing of these events. Any responsibility for misleading you—
But the minister would have a team of officials who would take specific notes of such communication between senior people. You are right—the minister would not remember, and he would not have to rely on his recollection. The minister would have written that letter on the basis of the information given to him by officials, who would have kept a note. Somewhere long the line, either the officials in the minister's office are compiling inaccurate information or we are being given inaccurate information.
I find it difficult to go further forward today. We need to get to the facts—it would be helpful if we were given honest and factually accurate answers in the first instance in relation to this matter. We need to pause to consider the seriousness of the issues, and what we should do further.
We should stick to the issues rather than personalities, but you can hear that deep concerns remain in the committee. Audit Scotland is the mechanism to protect the public interest after the event and to suggest remedies for the future. This particular issue raises a fundamental problem of a sensible balance between public and private interests, as well as issues of transparency in commercially sensitive situations.
I agree absolutely with your analysis of the problem, and I have alluded a couple of times to things that we have done.
This is my last question, Mr Gray. Was the compromise agreement that you reached with Mr Houston consistent with other compromise agreements that have been reached with senior civil servants?
I am mindful of the need to be completely accurate. Every compromise agreement is different, but the compromise agreement was one that I would regard as fairly standard in all the circumstances.
How did you work out what needed to be paid to conclude a satisfactory compromise agreement?
We did that by reference to Mr Houston's contract and to precedent.
Recent precedent or precedent over a number of years?
We would tend to find more on recent precedent, but we would look over a period of time.
Okay. Thanks.
I have two points. We have heard from Audit Scotland that it informed Dr Reed and Guy Houston on 13 or 14 November about the intention to insert the paragraph in the report on the First ScotRail franchise extension. Was anybody in the senior civil service, such as the permanent secretary, Paul Gray or anybody else, informed of that?
Dr Reed certainly informed me some time between that notification and publication.
Between 13 or 14 November and 28 November.
Being chastened by our experience earlier, I would need to try to find some way of checking the precise date. However, it was clearly some time between when Dr Reed knew about the matter and his communicating his concerns about it to me, which was well before the publication of the report.
It would be helpful if you could pin down the date. Can you tell us more about that discussion and any views that you expressed in it?
Yes, I can. Dr Reed expressed his concerns to me, which he has aired with the committee, about the lateness of the matter coming into the discussion process and his understanding that the publication timetable could not be extended. The time for discussing the matter was therefore very limited.
Did you express any opinions?
The only opinion that I expressed was that it would be worth while to seek further discussion with Audit Scotland. I could not sensibly have expressed a view one way or the other at that point on the merits of the issues, because they were fresh to me.
Was there any discussion of the media impact that there would be?
No. At that stage, the focus was on the relationship with Audit Scotland and trying to find an opportunity to have the discussion on the merits of the issues that Dr Reed strongly felt needed to take place.
Were there any other discussions with you or any other senior civil servant about the media impact or issues relating to the employment of Guy Houston?
At subsequent stages?
Yes.
Let me search my memory. I came into the employment issues but not via Dr Reed: the channel of communication on them was from Mr Gray to me. I do not recall discussing the media dimension, but the issue is tricky because the media dimension would naturally have been in my mind as I acquired more understanding of the matter. I doubt whether someone would have initiated a conversation with me about that dimension as I am the person who is most likely to worry about overall reputational issues; the others in the process—Dr Reed and Mr Gray—were more focused on dealing with their practical bits of the problem.
So your recollection is that, other than the discussion with Dr Reed, the first discussion was on 25 November, when Paul Gray informed you that Mr Houston had requested a meeting.
My recollection is of a sequence in which there was a discussion that was initiated by the phone call from Dr Reed about the substance of what the report would say. For a period of time, any interaction that I had with anybody purely concerned that issue, because it seemed to me to be the primary issue.
In doing that, was it ever suggested to you that the matter had been resolved—for example, by Mr Houston's transferring his shares?
No.
Because that is the minuted record that we have of the meeting of the Transport Scotland board of directors on the 21st.
I recall being told at some stage that Mr Houston had done something with his shareholding, but I regarded that as wholly irrelevant to the issues. We were dealing with an Audit Scotland report on historical events. From my point of view, what Mr Houston did in November was neither here nor there.
It was not the point—I understand. Finally, when was the compromise agreement signed?
It was signed on 28 November.
It was signed on 28 November and effective from that date.
Yes.
So nobody would have been able to say that Mr Houston had resigned until 28 November. Until then, it would have been only an intention or a matter of negotiation. Is that correct?
That is the effective date of his resignation. His intention was definitely known to us on 26 November, but given that he contacted me on 25 November, as the permanent secretary said, one would assume that that was his intention then.
But that was purely an assumption.
That would be an assumption.
It was not something that Mr Houston said to you on that date.
Because I know that you are fitting this into the jigsaw puzzle with ministers, I add that it would be natural for me to say to ministers, "I think you need to be ready for the prospect that you're not going to have Guy Houston as finance director at Transport Scotland. There are signs that he wants a discussion about leaving the organisation."
But it was more than signs. It was something specific—that he would resign with effect from 28 November.
I could not have known that on the 25th. It is just not possible for me to—
Paul Gray also clearly told us that Mr Houston had requested a discussion—a meeting—but did not indicate what it was about. That is already on the record.
On who told who what and when, when we bring guests to the committee they are reliant on their memory or instant access to their case notes, which can sometimes be substantial. I feel that we occasionally put them under undue pressure to give us instant reactions and responses. On occasions, that is a wee bit discourteous to our guests, who are operating in a fairly stressful environment.
It is also important to put it on record that, for example, when Mr Gray was asked about a specific issue, he told Nicol Stephen that he could not recollect, but when he was pressed, he referred to his notes and was able to recollect. Frankly, that is unacceptable. There are issues—not just today but in preceding weeks—about what we have been told and what has dripped out bit by bit, and there have been inconsistencies in what different people have said at different times. We need to get to the bottom of that.
But, convener—
No. I am drawing the meeting to a conclusion.
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