Examination of Witnesses (Questions 1 - 19)
MONDAY 2 MARCH 1998
MR ROBIN
MOUNTFIELD, CB and MR
MICHAEL HERRON
Chairman
1. This afternoon we welcome Mr Robin Mountfield
to the Committee to discuss the C&AG's report on the sale
of the Stationery Office. Would you like to introduce your colleague,
Mr Mountfield?
(Mr Mountfield) Yes. I have with me Michael Herron
who led the HMSO privatisation team within the OPS's Agencies
Group in 1995-96. He is now a Deputy Director in the OPS and heads
one of the divisions dealing with better regulation.
2. Thank you very much. I will go straight
into the questions. The opening paragraph of the report shows
that you sold The Stationery Office for £54 million: £50
million of that purchase consideration was used to repay debt
owed by HMSO, and the sale price was far below even the most pessimistic
sale valuation of £71 million. Why?
(Mr Mountfield) First of all, the valuations that
were placed on the business by our advisers- Coopers-at the outset
were based on forecasts of profit which were made by the HMSO
management in the late months of 1995, early months of 1996. The
experience in the early months of 1996 demonstrated that those
forecasts were too optimistic. The result was that not only the
figures that Coopers prepared but the indicative bids made by
the ten bidders at the indicative bid stage on the basis of the
Information Memorandum were based in effect on excessively optimistic
views of the profitability of the business. As the process of
due diligence examination proceeded and the bidders came to realise
that the business was not as sound as they had concluded, their
bids came down and the expectation of the proceeds also came down.
3. That is very interesting. The Stationery
Office's interim results for the first six months of 1997 show
an £8.1 million pre-tax profit after interest charges. Does
that suggest that if you had ensured the business was managed
properly, better value for money could have been achieved?
(Mr Mountfield) First of all, if I may, I would
like to establish my own status as Accounting Officer for the
sale but not for the HMSO business. HMSO, as you will recall,
was an independent department and it answered directly to the
Chancellor of the Duchy of Lancaster and the framework document
made plain that the Chief Executive was the principal Accounting
Officer responsible for the sale. Similarly the guidance on the
sale of Government activities, the Treasury's guidance, always
established the need to have a separate chain of accountability
for the sale from that of the business. I do not feel in a position
to answer comprehensively for the management of the business certainly
in the period up to the start of the sale process. From the start
of the sale process onwards, of course, there is something of
a grey area between the responsibility for running the business
as an ongoing business and my responsibility as Accounting Officer
for making sure the sale process is well done and that maximum
proceeds are received. We took such steps as we could during that
time to make sure that all was done that needed to be done. 2
4. That is very interesting, Mr Mountfield,
I am sure that other Members of the Committee will come back on
that. In passing judgment I will just say that I would have thought
that judgment on the question of the management of the business
was part of the sale but, never mind, let us move on. Paragraph
1.9 of the report says that before you became responsible for
the sale you saw your role in relation to HMSO as being limited
to providing high level advice when requested, the implication
being only when requested. How can you justify that?
(Mr Mountfield) First of all, the framework document
which was prepared when HMSO became an executive agency and remained
in existence throughout this period set out quite clearly the
responsibilities of the various parties. It established, for example,
that HMSO was a separate department, that the Controller and Chief
Executive was the Accounting Officer and as regards the responsibilities
of officials, which initially in 1988 were Treasury officials
because HMSO was responsible until 1992 to Treasury Ministers
rather than the Chancellor of the Duchy, but was transferred to
the OPS officials at the time it was transferred to the Chancellor
of the Duchy, that responsibility was to provide independent advice
to Ministers on certain strategic matters: the corporate plan,
the annual business plan, achievements against financial and performance
targets, the HMSO Trading Fund accounts, parliamentary estimates,
and changes required in the framework document. It stated quite
clearly that to the greatest extent possible HMSO was to be free
to conduct its affairs within the corporate and business plans
as approved by Ministers. It also said that the Treasury, that
is to say in this case the Chancellor of the Duchy Ministers or
OPS officials, would not normally intervene in day-to-day management.
5. I am quite sure we will come back on
that. I may come back on that at the end. Let us press on. Paragraph
16 shows that the Information Memorandum sent out to bidders on
26 March 1996 contained over-optimistic assumptions about business
prospects. You have mentioned this already. Yet paragraph 2.7
shows that Binder Hamlyn were warning you as early as January
1996 that HMSO management were being over-optimistic. Why were
more realistic assumptions not used?
(Mr Mountfield) First of all, if I could recount
a little bit of the history. Up to about 1994 HMSO had been a
rather traditional Civil Service operation. Indeed, up to 1980
it did not even charge for its supplies. From 1982 onwards it
was open to competition, in other words departments could seek
supplies and publishing and printing from other suppliers, but
it was not really until the beginning of the 1990s that increased
concern about Government procurement policies led to a much more
competitive position. There was, in fact, a lot of inertia in
the system. Throughout that period HMSO was making a small profit.
Indeed, 1995 was the first year since it was established as a
Trading Fund in 1980 that it did not make a profit. During that
time its turnover declined in real terms as its market declined.
It was constrained, remember, to the public sector which was declining
in size and it was increasingly open to competition. Nevertheless,
it cut its manpower in that time from something over 6,000 to
about 3,000 in early 1994. In 1994 it formed the view itself that
it would need to commercialise itself very considerably if it
was to survive as a viable operation and eventually to move into
private ownership. It then set out a change programme with the
help of Binder Hamlyn, or at least Binder Hamlyn's consultancy
side who had been retained separately by HMSO, and that change
programme included a significant reduction and further reduction
in manpower over the remaining years of the decade and a process
of commercialisation by restructuring, particularly to break the
business up into 14, or originally 15, self-contained businesses
with highly devolved management, more market focussed and commercially
focussed. The forecasts that were made in 1994 were actually considerably
higher than those in the Information Memorandum, perhaps £10
million to £15 million a year higher for the profit forecasts.
When we began the process of sale we ourselves in OPS urged the
HMSO management, as we were required to do by the Treasury guidance
on privatisation at that time, to make sure that their forecasts
were as realistic as possible. Not, if I may say, to press them
down because there was no interest in presenting an Information
Memorandum which depressed the likely value of the sale, we would
only have been accused of trying to undersell the business, but
clearly, and as the guidance properly advised us, to avoid over-optimism
in the forecasts. For that reason we asked HMSO to consider using
consultants at the stage of preparing the Business Plan which
formed the basis of the Information Memorandum. As a result their
forecasts were brought down from a higher level to the levels
that were in the Information Memorandum. We had taken some steps
to try to ensure that realistic forecasts were included. It is
clear from the subsequent events that those forecasts were still
too optimistic but I do not think it was clearly visible at the
time that the Information Memorandum was drawn up. Indeed, the
trading performance of HMSO in the first months of 1996 were actually
well up to the forecasts in the Information Memorandum, at least
at first sight. It was for that reason that the Information Memorandum
and the long form report stuck with the business's own forecasts.
It became clear subsequently from about June or so on as the due
diligence process started and as the April results began to come
through that the business was falling back into loss whereas the
business had been in profit for the first three months, and indeed
if anything a little ahead of forecast for the first three months.
It then slipped into loss from April onwards. That I think was
instrumental in changing the view of quite a number of the bidders
as to how solid were the projections that were in the Information
Memorandum and the long form report.
6. So in effect Binder Hamlyn were right?
(Mr Mountfield) Binder Hamlyn were right in the
advice that they gave us. It would be too strong, I think, to
say it was advice. They warned us, as they warned in the long
form report, in presenting the management's own forecasts and
the management's own assessment of downward sensitivities that
there were risks involved. They stressed particularly some weaknesses
in financial control which of course were also becoming very clear
to us in the early months of 1996, not least as a result of the
unfortunate events in Uzbekistan which this Committee has already
examined.
7. Paragraph 1.30 of the report states that
where a business to be sold is engaged in restructuring vendors
should inform themselves fully about the consequences of the exercise.
When the decision to privatise HMSO was taken in September 1995
what consideration did you give to the possible impact of that
restructuring? Can you talk a bit about that?
(Mr Mountfield) I do not think we did take a very
clear view in 1995. If I could again recount a little bit of the
history. In 1994 when the OPS Ministers concerned approved the
so- called commercialisation plan which included particularly
the restructuring of the business into a large number of small
units, that decision was seen as something that would take between
three and five years to realise. The intention from early 1995
onwards was that the business should eventually be moved towards
a flotation, possibly 1997 or beyond. That decision was never
announced but it was explicit and clearly recorded.
8. Sorry, what was that again?
(Mr Mountfield) That was in the very early months
of 1995.
9. Go on.
(Mr Mountfield) Then there were changes in Ministers
in the OPS in the summer of 1995 and they quite properly took
the decision that they thought it was preferable to sell by trade
sale at once, that is to say as soon as possible which was in
1996, recognising that would produce lower proceeds than waiting
to complete the commercialisation process which would have involved
a lot of investment in reduction in staffing and so on and also
the retention within the public sector of a high degree of risk
that might have held out the prospect of higher proceeds. That
was a judgment that Ministers took quite legitimately between
selling something now for a low price without risk, or with relatively
reduced risk, or retaining it in the public sector in the hope
of higher proceeds after heavy investment.
10. Right, now I will move on. Paragraph
2.5 states that you decided not to recruit a permanent Chief Executive.
Obviously a permanent appointment would not have made sense since
you were about to sell the business. Given the severe problems
that the business was facing, why did you not bring in a company
doctor or a trouble shooter?
(Mr Mountfield) I think the judgment that was
taken, again by Ministers, was that-- First of all I should have
said that the Chief Executive retired in the normal process on
reaching 60 in July 1995, June or July 1995. There had been some
uncertainty for a few months about the likely timing of decisions
on privatisation but when the moment came it was clear that Ministers
wished to have a privatisation in 1996. As you say, there was
then a limited range of possibilities. I do not think we seriously
considered the possibility of bringing in company doctors at that
stage. Our view was that if the intention of Ministers was to
have the business sold as soon as possible it was best to leave
incumbent second tier management in charge of the business and
to try and keep it on an even keel while we got on with selling
it.
11. Before I open the questioning up to
everybody else, on pages six and seven of the report the National
Audit Office make a number of recommendations. Do you agree with
those recommendations?
(Mr Mountfield) If I may take them by turn. The
first recommendation is about the future restructuring programme.
I think it is clearly right that some judgment should be made
about the state of the business. I do not think I would necessarily
agree in all circumstances that it would be right to contemplate,
indeed I do not think the NAO are suggesting this, actually stopping
the restructuring process. By the time the decisions were taken
to proceed with the sale in December 1995 the restructuring in
the sense of the actual devolution of power to units was already
virtually complete. There was no question in my mind of going
back at that stage. On the question of budgets being established
and recorded, I do not think I quite agree with it in this form
for this reason: it implies that the restructuring programme was
a self-contained group of decisions whereas in fact they were
part of a broader commercialisation programme; a change programme,
indeed it was called a change programme, a change director had
been appointed, and the main elements of that were the so-called
reorganisation and devolution of power to the heads of the 14
business units; secondly, the decision to proceed with a lot of
redundancy; and, third, the IT and other support that was necessary
to sustain the accounting systems of the broken down devolved
system. The IT and similar investment were of course built into
budgets but not separately identified. Nor did I particularly
see the reason why they should be, I think they had to be justified
independently. Some units chose to do that and others did not.
The redundancies, or voluntary early retirements in most cases,
were of course budgeted for and provided for and separately accounted
for. On the proposition that vendors should impress upon the management
the need for realistic assumptions I certainly agree with that
and I believe we did that, which was why we invited HMSO to put
Binder Hamlyn in to help them with the business plan. On the question
of monitoring major decisions, I agree with that proposition if
what is meant by it is that vendors should know of decisions to
be able to take them into account in judging what the effect on
the sale process would be and to adjust the sale process accordingly.
I do not think it is intended to mean that vendors should try
and take control of the business, and indeed the 1990 Treasury
guidance rather clearly distinguishes the role of the vendor team
from the management team and indicates that those should be kept
reasonably separate. On the question of non-executive directors,
I do indeed agree that non-executive directors are desirable.
I think in retrospect we perhaps put too much emphasis on the
difficulty of persuading at very short notice suitably qualified
and able non-executive directors to accept what was a rather unappetising
4appointment for rather a short time. I think if we had tried
a little harder it may be that would have helped a little to inform
the management. On the other hand, I would say that the Chancellor
of the Duchy's own adviser on agencies, himself the Chairman of
a listed company and a very experienced businessman, did sit in
on quite a number of HMSO board meetings, about half a dozen meetings
over this period, and his advice was always available. I agree
very much with recommendation five that we should always in these
situations commission a valuation of the businesses to act as
a sort of floor. I also agree that from here, and indeed from
the sale on, both parliamentary and departmental officials in
OPS and other contracting departments should monitor very carefully
the performance of the privatised Stationery Office.
Chairman: Thank you. Let us widen
it out. Mr Geoffrey Clifton-Brown.
Mr Clifton-Brown
12. Good afternoon. Can you tell us in view
of your earlier statement about the inter-relationship between
the OPS responsibility for HMSO and the Controller of HMSO. I
think I heard you say that you were involved in day-to-day decisions
and yet in the report it makes it quite clear that you were only
involved in exceptional decisions.
(Mr Mountfield) I am sorry, I was not wishing
at all to imply that we were involved in day-to- day decisions.
Could I distinguish first of all the sale period from the normal
situation before the sale began. At that time OPS officials had
no formal responsibility other than an advice function to the
Chancellor of the Duchy of the day. There was no accounting officer
responsibility. This was not akin either to an agency which was
part of the department nor, for example, to the sale of a non-departmental
public body, which would be funded by the department. In that
case there is clearly an accounting officer responsibility. That
was not the case here. This was an independent department which
happened to report to the same Ministers as the OPS, who looked
under a framework document at OPS officials to provide them with
advice at a strategic level and not on day-to-day management.
During the sale process that position inevitably became a little
more ambiguous because we clearly needed to ensure that we knew
as best we could what was going on inside the business and to
take appropriate steps to tailor the sale process to that situation.
For example, at an early stage we asked HMSO to inform us, indeed
to consult us, about any investments, which included de- manning
activities, in excess of £50,000 to make sure that the cost
of any such activity could be fully recovered in the sale proceeds.
The implication of that must be that if we had judged that they
were not likely to be fully recovered in the sale proceeds we
would have invited the management to stop it. There was an inter-action
during the sale process. There were, as I think I have indicated,
a number of instances where we did, I think intervene is too strong
a word but we certainly inter-acted in some detail with the management.
13. So the clear line of responsibility
was from the Controller to Ministers directly?
(Mr Mountfield) Yes.
14. But, on the other hand, you were advising
Ministers.
(Mr Mountfield) Yes.
15. So what was your role in that?
(Mr Mountfield) Our role in that was an ordinary
advice function like any other Civil Service advice function,
not one covered directly by my Accounting Officer responsibilities
to this House.
16. But you must have realised fairly early
on when a decision was being made whether or not to privatise
HMSO that you had insufficient evidence on which to make that
decision?
(Mr Mountfield) No. I think the position on privatisation
was that it had been the clearly established policy of Ministers
for some time that activities of this kind should be privatised
whenever possible. You will recall that the Financial Secretary
of the day had said that the issue was no longer what could be
sold but what must be kept. It was a clearly established policy
of the Government of the day and I regarded it as an entirely
proper decision for Ministers to take to proceed with that privatisation.
If they had wished to sell it at what I believed was less than
its net present value of retention that would have been a different
matter and, in my capacity as Accounting Officer for the sale,
I might have wanted to seek an instruction. I did not do so because
I did not believe that situation arose.
17. In 1994 a decision was taken to break
the business up from three units to 14. Are you aware that in
the 1995 accounts, can I just quote you this-this is the Chief
Executive, Mike Lynn, in the foreword to those accounts in 1995-it
says: "It is very disappointing to me to have to report that
1995 produced HMSO's first ever trading loss[1].
At face value this may suggest a downturn in our fortunes but"
and this is the significant bit, "I believe history will
show that 1995 was a major turning point of modern times".
It sounds a bit like Chamberlain, does it not! I go on: "Overall
sales actually improved upon the 1994 performance reversing the
previous five year downward trend" and it goes on "This,
I believe, demonstrates that HMSO's underlying business is sound
and we are now well positioned to capitalise on recent investments."
(Mr Mountfield) It is indeed true that the turnover
turned up a little in 1995, not, I think enough, to offset the
effects of inflation but certainly it was a little higher in pounds
sterling. What also happened in 1995 regrettably were two things.
First, this in a sense was not regrettable, the management decided
deliberately that they had to reduce the manning levels within
HMSO and they provided £25 million or thereabouts in the
accounts of that year for voluntary early redundancy payments.
They also provided separately, and this is identified in the accounts,
for some £15 million worth of exceptional items which they
regarded at the time as one-off events and they were identified.
For example, there were some serious delays in installing a press
for one particular important contract. Their view was that those
were individual events which did not falsify the upward trend.
I think in retrospect that was an optimistic judgment. Although
there was some sign in the early months of 1996 that Mr Lynn's
confidence was justified, that certainly ceased to be so from
about April onwards when the business fell back into loss. Indeed,
if the results are disaggregated between businesses the rather
pessimistic impression that one gets from the April monthly results
onwards reinforced the view that was an optimistic position. In
other words, I think it would be fair to say that at the time
Mr Lynn was writing that account it was possible to interpret
1995 as a blip, a downward blip. Subsequent events proved that
it was not a blip but rather the indication of a distinct downward
trend in the commercial prospects of business.
18. I find that extraordinary because in
your own report and accounts, the OPS Report and Accounts 1996-97
to 1998-99, it shows that HMSO had a book value at the end of
1994 of £75 million, yet effectively when you sold it it
was almost a bankrupt business because you sold it for £54
million, you had a loan of £50 million and you made a cash
repayment of £3.8 million which left a balance of £200,000.
So from a business that was worth £75 million in December
1994 we had almost a bankrupt business. What had gone wrong?
(Mr Mountfield) I do not think that is comparing
like with like for a start. In any case the book value of a company
as compared with the value realised in an open sale will very
often differ by very substantial amounts. The accounting figures,
for example, for assets will be based on accounting conventions
rather than on an open market assessment of what they are actually
worth.
19. Is it not the case that the decision
to divide the business into 14 units with different accounting
systems, different computer systems, actually rendered the business
totally out of control? If I refer you to paragraph 1.28 it really
seems that between June 1995 and January 1996 the accountants
had not got a clue what was going on.
(Mr Mountfield) I think I would not agree to that
extent. I think it is clear that there was a regrettable loss
of control and of financial clarity in that period. We have stated
our view and the NAO record that view that although this must
clearly have been a factor in the fall in the valuation between
the indicative bids and the price actually received we believed
that was not a major factor and that indeed it was the growing
realisation of the underlying commercial weakness of business
which led to that fall in value.
1 Note: See Evidence, Appendix 1, page 25 (PAC 227). Back
|
