Examination of Witnesses (Questions 20 - 39)
MONDAY 2 MARCH 1998
MR ROBIN
MOUNTFIELD, CB and MR
MICHAEL HERRON
20. Mr Mountfield, I have only been on this
Committee since the General Election and this seems to me to be
the worst catalogue of events that I have come across in any of
our hearings. At what stage did you give ministers a written note
that things were going seriously wrong with this organisation?
(Mr Mountfield) I do not think I am in a position
to inform you of the exact date. The contact between ministers
and officials at this time was frequent, it was certainly several
times a week, and they were very closely involved at every stage
in the process so they will have known at very much the same time
as we did.
Mr Clifton-Brown: Chairman, I think
this merits a written note to the Committee as to when the Permanent
Secretary did give a written explanation to ministers[2],
a warning, if you like, of what was going wrong.
Chairman
21. Can you manage that, Mr Mountfield?
(Mr Mountfield) I obviously wish to be as helpful
as I can to the Committee. There is a difficulty, which I hope
you will be sympathetic to, in that the nature of the advice is
a thing that officials, following the normal provisions of the
code of practice on access to official information, do not reveal
to the Committee. There is an exemption, as you know, for advice
--
22. You are being asked for when you gave
advice.
(Mr Mountfield) Yes, I recognise that and, if
I may, I would like to take that away and give you as precise
advice as I can.
Mr Hope
23. We start off with an organisation (HMSO)
which according to the Report is quite clearly on a downward trend.
We see a disastrous restructuring. We then see an "excessively
over optimistic" valuation of that organisation which is
then sold for a knock down price, only a few million above that
which you would have refused to sell it for. As a result 1,000
staff were made redundant and the company that bought it is now
making £8 million a year profit. Why did you not stop this
in its tracks much earlier on and allow this farrago to continue?
(Mr Mountfield) First of all, the redundancies
following the sale were predicted at the time and the Chief Executive
of HMSO in 1994, at the time of the commercialisation programme,
had warned not only ministers but staff that some 900 staff would
be likely to need to leave between that time and the later years
of the decade. What actually happened was a few hundred more than
that and it was brought forward in time by the privatised management
and, of course, the reason that they are now making a profit is
that their cost base was significantly reduced as a result of
that. They have had to provide £65 million in order to invest
in that reduction in staff, which is the basis for the reduced
cost base on which they have made their profit.
24. You have just picked up one of the items
I mentioned which was the treatment of staff and Objective 2 was
that they should ensure that staff were treated fairly, that their
rights were respected in the sale process. Paragraph 2.15 talks
about the trade 6unions being aware that redundancy levels would
be around 500-600 over two to three years. Instead we see 1,000
being made redundant within one year. I do not think Objective
2 appears to have been kept to from my reading of the Report and
I dare say the staff have a similar view. Can I then turn to page
38 which describes the fact that during the dividends process
the business was unable to correct unreconciled balances of the
order of £19 million between the new business units. Can
you explain that?
(Mr Mountfield) The figure of £19 million
is a little deceptive because that is not the net imbalance but
the gross imbalance, that is to say the sum of pluses and minuses.
The net imbalance at that time was considerably less. By the time
the preferred bidder was chosen in July that number was believed
to be considerably less than that. We believe that the net imbalance
at that time was about £1/2 million. At the point
of sale the net imbalance was about £400,000. So that in
itself is not, as we are recorded as saying in the Report, a major
part of the reduction in the bids. What I think that does do,
however, is to illustrate the lack of confidence that bidders
quite reasonably had in the quality of financial information and
therefore there was an uncertainty factor built in which undoubtedly
must have had some influence in their reduction in bids.
25. We have been given a figure by the NAO
that there were unreconciled balances of the order of £19
million. You brought before us a new figure of £1/2
million. Can you point to where you have made that clear in this
Report? If not, I would certainly like to see a note on how £19
million has been transformed to £1/2 million.
(Mr Herron) During the course of the negotiations,
in particular the negotiations with a preferred bidder, we had
encouraged the management of HMSO to take advice to assist in
trying to reconcile the intercompany balances. The intercompany
balances are made up of a collection of items that have not been
matched, some of them pluses, some minuses. To produce the £19
million unreconciled figure you take all of those pluses and all
of those minuses and irrespective of whether they are a plus or
a minus you add them up and produce a gross figure and, indeed,
the gross figure of £19 million was one that was made known
to us and to the bidders and was known to the management. The
accountants involved in the reconciling exercise then tried to
marry up various pluses and minuses to get an idea of what the
net impact on the profit statement was likely to be. When that
exercise had been done in the summer of 1996 the outcome of that
exercise was that we were talking of a sum in the region of £1/2
million and that was the basis on which we were discussing with
bidders during the negotiations. I think, if my memory serves
me correctly, the 1996 accounts showed the net imbalance and the
charge against profit as being some £400,000 and that is
the result of matching up all of those entries which had not been
matched up before.
(Mr Mountfield) May I just add one point? I am
not seeking to dispute for a moment the figure that the NAO put
in the Report but that is a statement of a position at a particular
point and later on, as a result of pressure which we put on HMSO
to reconcile the figures, we invited Binder Hamlyn to take part
in that in May and again in July and those numbers were reduced.
Indeed, this is referred to in paragraph 1.27 of the NAO Report
which refers to the net imbalance of £482,000 at point of
sale.
26. On pages 39-41 it describes the negotiations
with NPG. We see the bidding coming down from £86 million
first to £69 million on the basis of provision in respect
of particular items and again down by another £15 million.
The negotiations look a little one way because you were only bidding
with one preferred bidder. Would you like to say something about
why you got yourself into a poor negotiating position?
(Mr Mountfield) It is normal-and as recommended
in Treasury guidance-that the process should start with an Information
Memorandum, go on to a Long Form Report, a reduction of the initial
indicative bidders to a short-list, where there are enough bidders
to produce that, which happened in this case as a result of the
efforts we had made to establish a wide field. Four bidders were
still in the field by the end of the due diligence period. Of
those four, one was clearly non-compliant and effectively voted
themselves out of the process. Another left as we decided that
there was not sufficient reason to keep them in the bidding because
the bid was significantly lower than either of the other two.
We would have wished to keep the remaining two, that is to say
the NPG and the Capita-led bid, in the process throughout but
the bidding costs of a bidding consortium are very high indeed
and Capita made representations to us at that stage that they
would only be willing to stay in the bid if they were given exclusive
negotiating rights. Therefore, we had in effect to choose at that
point between the two frontrunners. We tried to keep in touch
with Capita during that period so that if the NPG bid had fallen
through we would have had a second string to our bow, but it was
not possible to keep them both in. We had, however, taken quite
deliberate steps before that on professional advice to keep four
bidders in the short-list field by offering to pay up to £100,000
each of the bidding costs of the three unsuccessful short-listed
bidders. We did that on the basis of very careful advice, recording
our reasons for doing so and I think that was instrumental in
keeping a real bidding process going during that period. It is
undeniably true that from the time when Capita left the stage
we were locked in to either accepting the NPG position or of pulling
out and the pulling out option was always a live one, it was considered
right up to the last stage and addressed against the floor price
that we had established with Coopers at an early stage. I believe
that there is inevitably in a process of this kind some period
where you will have to have that choice between either accepting
the offer of the preferred bidder or pulling out.
27. Why did you not at that point say to
the minister, "Despite your enthusiasm for wanting to proceed
with this sale, holding a gun to their head"-which is what
Capita did and then you made a choice to go to NPG-"would
leave you at a significant disadvantage?" Why did you not
say then that to have this position would be unacceptable and
would lead to the situation we now find ourselves in?
(Mr Mountfield) If I had believed that to be the
case then I would have had to seek an instruction to proceed.
I did not believe, and still do not, that that was the position.
Coopers had given us at a much earlier stage their estimate of
the floor value, that is to say the net present value on a pessimistic
assumption of retention in the public sector and that was a figure
of £47 million. As the NAO Report correctly records, that
was drawn up at a time when the forecast profitability of the
business was considerably higher than proved later to be the case
and that floor price might reasonably have been reduced significantly
had we needed to do that. However, since the proceeds were £54
million, that is to say significantly above the floor price-albeit
a rather optimistic floor price that had been established-we did
not need to address that question. The decision of whether or
not to proceed, given that there was a positive value for money
in proceeding, was one for ministers and not for officials.
Mr Hope: I would be interested to
see the total sums added up in one column, i.e. the total costs
of the sale including fees to consultants, including extra monies
that you paid to keep bidders in and including the liability costs
of retained liabilities. I would like to see all of that matched
against what you have described as the most pessimistic view you
would take of how much the business was worth, £47 million.
I would like to see whether or not those two add up. Is it possible
to ask for a note, Chairman, on the total sale value against the
total costs of all of this?
Chairman
28. Can we have a note on that, please,
Mr Mountfield[3]?
(Mr Mountfield) Yes, you can. I would like to
say that there will be some footnotes to that table because it
is by no means straightforward to draw up that kind of calculation.
Mr Hope
29. I look forward to reading the footnotes,
Chairman. Just a final point on the liabilities. Paragraph 3.37
mentions that in the sale of the HMSO a number of liabilities
had been retained. Are you able to say what they are and what
kind of value or level of liability we are currently incurring
whilst this company is making its £8 million a year profit?
(Mr Mountfield) The liabilities retained by the
Cabinet Office are set out in Appendix 2 of the Report. If I could
split that table into two categories, those which are related
to real estate and those which were not. Firstly, those that are
not related to real estate. At the moment a number of those have
been settled rather more favourably than we had forecast at the
time Appendix 2 was drawn up and at the moment we are some £400,000
on the upside of that. That is because a number of these specific
liabilities have already been settled. That said, however, there
are some that have not been resolved and indeed cannot be for
some time. Of the two real estate liabilities, the major one relates
to Sovereign House which is a big office block in Norwich where
commercial negotiations are at present under way and I cannot
give a clear view of the outcome of that. There is a clawback
provision in our favour as a result of the contracts that we entered
into, which again follows Treasury guidance endorsed by this Committee,
that wherever possible there should be a clawback in relation
to the sale of real estate and there is such a provision which
allows for 50 per cent of any planning benefit resulting from
the sale of freeholds in the first five years to be returned to
us.
30. Presumably we will be able to get a
note on that point of detail [4]
because I think that has a significant effect on figures as we
look at them. One final question about the fees that we have been
paying to all of the consultants in all of this. Page 43 mentions
under paragraph 3.41 that fees rose from £382,500 to £679,000
and we were lucky to avoid an additional £140,000 on top
of that. Presumably that figure has come from Coopers. Why did
we get that so badly wrong? Why did we end up paying so much more?
How are we going to ensure that this does not happen again under
your responsibilities?
(Mr Mountfield) First of all, I would not accept
that we were lucky to avoid £140,000. It resulted from a
hard nosed negotiation which we conducted and for which I think
the NAO Report congratulates the Department. On the question of
the original estimate, the NAO Report very fairly sets out the
sequence which was that the initial estimate was before the scale
of the work necessary to get to the bottom of HMSO's figures was
established. The budget which was established in early 1996, which
is set out in the NAO Report, was £1.7 million and we exceeded
that by 11 per cent. In the light of some other precedents I think
that is actually a rather good result.
Maria Eagle
31. Before you start congratulating yourself
too much, Mr Mountfield, I just want to explore your role in this
shambles that we have got in front of us today. You were not,
as you said at the start, the accounting officer for HMSO, fortunately
for you, but you are the accounting officer of OPS. I want to
explore a little quite when you should have been realising because
of your own responsibilities the shambles that was unfolding in
front of you. We had the restructuring starting in September of
1994 at HMSO that would have been the responsibility of the Controller,
is that right?
(Mr Mountfield) Yes.
32. Between that time and the decision to
privatise, which was a year later in September of 1995, the role
of your Department was to give ministers advice when they asked
for it, effectively, or that is how you interpreted it. Did you
see anything during that year that should have concerned you or
that did concern you about the way in which the restructuring
was 8being conducted which you felt it necessary to pass on to
ministers to warn them?
(Mr Mountfield) No, I do not think we did.
33. Do you think you should have done, because
it seems to me that this restructuring exercise was a complete
mess?
(Mr Mountfield) I think all I can say is that
up to early 1996 there was no clear evidence to us that things
were going seriously wrong. The evidence that came to us in early
1996 was of three kinds. First of all, the emerging results for
the 1995 financial year showed there were a number of supposedly
non- recurring, specific items which are set out in the Report
which arguably were in part the result of loss of control through
the restructuring. Secondly, there was the Uzbekistan affair which
I think clearly was a loss of central control.
34. And precisely when did that come to
your notice?
(Mr Mountfield) February 1996. Thirdly, the process
of due diligence and the preparation of the Long Form Report by
Binder Hamlyn's which was started around January but not really
coming into serious results until February began to reveal that
numbers were not as clear as they should have been. So that was
the point at which it became increasingly clear to us that all
was not well.
35. Are you telling me that you realised
that restructuring was going on but before that time you had no
idea whatsoever that it was a complete shambles and a disaster?
(Mr Mountfield) I am not sure if I would agree
that it was a complete shambles and a disaster.
36. Do you think it is sensible to restructure
a business from three units to 14?
(Mr Mountfield) Yes, I think that could well be
the case.
37. And do you think it is sensible, therefore,
to multiply the number of senior managers, to change and diversify
the accounting systems between these units when they have to be
reconciled at the top and to allow that to go on at the whim of
managers who have just taken on their duties with who knows what
delusions of grandeur?
(Mr Mountfield) First of all, these decisions
were taken in 1994 under the previous Chef Executive, not under
the new one. Secondly, they were taken on the advice of consultants.
38. I hope the consultants were not paid.
(Mr Mountfield) Thirdly, they were approved by
ministers.
39. In September of 1995 you became responsible
and we move into this grey area which you have referred to earlier
where you have responsibility in respect of the sale but where
you might expect as the accounting officer having that responsibility
to become much more aware of the state of the business, is that
right?
(Mr Mountfield) Yes.
2 Note: See Evidence, Appendix 1, page 25 (PAC 227). Back
3 Note:
See Evidence, Appendix 1, page 25 (PAC 227). Back
4 Note:
See Evidence, Appendix 1, page 25 (PAC 227) and (PAC 228) not
reported. Back
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