Select Committee on Public Accounts Minutes of Evidence


Examination of Witnesses (Questions 140 - 159)

MONDAY 2 MARCH 1998

MR ROBIN MOUNTFIELD, CB and MR MICHAEL HERRON

  140.  Can I move on to the restructuring into 14 units? You mentioned earlier that it was due to consultancy advice, yet in the Report I was a little confused as to whether it was Binder Hamlyn or the management of HMSO themselves who had suggested the restructuring into 14 units. Can you just tell us how that decision was actually made?
  (Mr Mountfield)  The decisions were taken by the ministers on the advice of HMSO management who had had substantial consultancy by BDO, who were the consultancy wing of the Binder Hamlyn firm. The BDO advice covered a range of options and the one that the management chose as a result of that was actually a little less devolved than the more extreme versions that BDO proposed.

  141.  The reason I ask that of course is that because of the inaccurate information which did not become available due to the restructuring, certain risk factors came into account that I think became important when the final negotiations were taking place with the NPG. I want to refer you to paragraph 3.30 in the Report where it lists out all of those accounting standards where there was a disagreement between yourselves and the NPG. That amounted in the end to £17 million. Can you tell us what the accounting standards would suggest should be the appropriate valuation and whether you were forced to change those accounting standards because of the inaccurate information?
  (Mr Mountfield)  I do not think the £17 million reduction that is referred to in that paragraph was so much a result of the inaccurate information as of different accounting conventions and a more cautious estimation which in the course of the negotiation NPG wanted to impose. Now, it could be perfectly natural in negotiation that the potential purchaser will argue that assets are over-valued in the accounts. Many of these are not arithmetical sums, but they are estimates and so on, and the extent of liabilities we have discussed in another context and one can never be precise what value should be set on those.

  142.  But your Department must have thought that you had put forward an initial valuation based on accounting standards and they came back to you and suggested, if you like, a more measured, a more prudent valuation. Presumably their rationale or justification for that was the risk inherent in the inaccurate information which was given to them.
  (Mr Mountfield)  Well, the valuation of the assets that was being disputed related to asset values which had been audited by Ernst & Young as the NAO's auditors the previous year, or at least they were involved, they were elements of the audited accounts, so I think the idea of inaccurate information is not quite apt. It is more a question of a more cautious accounting convention which NPG negotiated in the course of that final part of the deal.

  143.  Can I just ask you again at 3.33, the £15 million figure, how was that calculated?
  (Mr Mountfield)  The £15 million figure was calculated in this way: the normal expectation in this sale, as in some others and it was certainly the stated intention, was that a number of what one might loosely call "working capital items" would be left to be settled in completion accounts after the deal was done. Because both parties wanted to complete quickly, and indeed there was a lot of sense from everybody's point of view in completing quickly, including the staff to resolve the uncertainty and so on, the NPG offered in effect to compound for those uncertainties in a single transaction. We all recognised that if it went the completion account route, there would be a net reduction in the proceeds.

  144.  Is that a long way of telling us that because of all the problems inherent in the restructuring, you in effect had a write-down of £15 million?
  (Mr Mountfield)  No, the particular balance be tween payments and receivables at the point of sale, which would have crystallised if it had been done by the completion account route, was bound in the nature of the beast to be negative at that point. The question was how much that negative would be and what was done in effect was to cut through that by having an agreement on a particular sum, no completion accounts and an understanding that we would trade normally. Of course as we discussed previously in relation to the £3.8 million, we were not in the last few days before the deal able to trade normally, HMSO were not, so there was a second side agreement on the £3.8 million.

  145.  Could I refer you to paragraph 3.9 of the Report where in the figures that have been calculated there was a figure for potential corporation tax receipts and could I ask you two questions in relation to that? First of all, do you have any estimate of what those corporation tax receipts were? Secondly, you talked earlier on about unemployment consequent either on the restructuring or indeed on the trade sale, but why was there no estimate of unemployment costs included within those figures?
  (Mr Mountfield)  If I may, I would like to ask my colleague if he is able to answer the corporation tax point because I am afraid I am not and if we are not able to, we will certainly let you know[7].
  (Mr Herron)  No.
  (Mr Mountfield)  On the question of redundancy costs, there were no outstanding redundancy costs from redundancies or voluntary retirements that had been put into effect before the sale. Those were all kept within the public sector. In effect the expectation of the purchaser that a substantial further reduction in staff was necessary in order to maintain profitability was one of the key factors in reducing their indicative bid down to the price at which we actually sold. Indeed, as you know, they made provision for £65 million immediately after the sale to take account of those costs.

  146.  But you indicated earlier that either under the continuation of ownership in public hands or on a trade sale, there would be a significant shedding of labour.
  (Mr Mountfield)  Yes.

  147.  Even if you only took the most marginal figure which would be the difference between your estimate of the numbers being made redundant by maintaining it in the public sector compared to those within the private sector, there should have been surely a figure in there about the costs that were likely to arise for the Government from increased unem ployment consequent upon that?
  (Mr Mountfield)  I see. You mean the costs of unemployment benefit and so on?

  148.  Absolutely.
  (Mr Mountfield)  No, I think the view would be consistent with normal government accounting on these matters, that those would be treated as two separate things.

  149.  Yes, I am aware of that. Can I move you on to the issue in paragraph 3.14 where it would appear that there were no trade buyers, only consortia of financial institutions, as it says. In paragraph 3.18 it comments that a number of trade buyers were excluded because of quality factors. Could you just tell us what those quality factors were?
  (Mr Mountfield)  Yes, there were four partial bids, and some of the details are set out in the Report. One of those four was excluded because it separated the print from the publishing and it had been one of the stated requirements from the start primarily because of the requirements of Parliament because parlia mentary activities combined both print and pub-lishing and Madam Speaker had expressly drawn attention to this in her letter to the Chancellor ofthe Duchy which is cited in the Report, so thatwas in effect a non-compliant bid. One was non- compliant because there was no business plan and they did not accept the principle of a contract, there was no acceptance of TUPE and there was no information or commitment on pensions. The third bidder stated a requirement to find a partner who was not part of the deal so that was a very loose-ended bid and there was very little knowledge displayed of HMSO's business and no knowledge of the United Kingdom public sector as a customer. The final bid failed to demonstrate understanding of the business, did not satisfy the pension require ments and did not address the needs of Parliament, all of which were pretty obvious requirements of sale. As it turned out, none of the trade bids were compliant or they were otherwise unacceptable for obvious reasons.

  150.  Can I move you on. The Report talks about the deterioration in the financial position. Looking at the graph at the beginning of the Report I estimate that there was in 1995 an £11 million loss. That is, excluding exceptional items, roughly an £11 million loss. Can you tell us how seriously you judged the financial position of the company, assuming that the exceptional items you mentioned earlier in your comments, were exceptional items and would not recur, although of course redundancy figures would recur.
  (Mr Herron)  Could I suggest the way in which we were looking at these figures as they emerged in the early stages of this process as we came through from the period October/November/December of 1996 [8] and into 1997[9], we had an emerging and worsening picture of the trading position in 1995 and, as you say, eventually that becomes an £11 million loss on trading. We looked for reasons for that to have occurred because it represents a sharp downturn even against the difficulties of the previous year which had not been acute. The difficulties in 1995 were set out and listed for some very specific areasto the extent that they were actually in excess of the £11 million[10].

  151.  Can I cut you short because I am going to be cut short soon. Could you just tell me whether you felt the situation would have deteriorated further than the £11 million in succeeding years? Was that your prediction?
  (Mr Mountfield)  At the early stages we had to give the benefit of the doubt in the sense that the turnover was improving. There were steps being taken to reduce the number of staff. The problems on the accounting had not yet come to light and againstthat background, whilst we had pushed management to reduce their forecasts for 1996 to 1998 we certainly did not feel we should push them any further because in a sense they were the business and they would be taking the business forward, so, no, not at that stage.

  152.  Can I ask one final question on that-I apologise to the Chairman for this. In Appendix 2 you said that not all of these figures have crystallised and you mentioned one in terms of the settlement in relation to the contract for Uzbekistan, but I count that the total liabilities there approach somewhere around £4 million. Perhaps you could tell us what you estimate the liability will be on Appendix 2. Do you think that overall you will actually recoup the £47 million that was your base figure when this process started?
  (Mr Mountfield)  Unfortunately, I have got to be a little bit hedged in my answer on Appendix 2 because we really do not know what some of these liabilities are going to crystallise at. That is why we judged it was better to accept those liabilities directly rather than try and have them discounted in sale price, particularly for example the liability to employees and third parties which runs until Sep tember of this year. It is very difficult at this point to estimate what that might be. For the others I think my guess is that the liabilities will now be relatively minor given that quite a number of them have been resolved slightly on the favourable side of these estimates. I am pretty clear that if one takes the £54 million and sets against that the cost of the sale process itself, the advisors and so on, and these liabilities, and the £3.8 million that we had to abandon at the point of sale, that we are still on the right side of that sum. I say that particularly because I am confident that had we reworked that floor price in relation to the forecasts that we judged in the summer of 1996 to be right, it would have been a lower figure anyway.

  153.  My estimate is that those liabilities add up to somewhere in the region of £4 million if you take the maximum in relation to the headquarters property. There is another property which the Stationery Office may well turn over to your Department, although that has not yet been decided by them. If that is the case surely the final figure for you will come down well below the £47 million?
  (Mr Mountfield)  I do not think so.

Chairman

  154.  I think we have got to limit the use of excessive charm over procedures. Can we have a note? And can we also have a note on any pre-sale redundancy costs[11]?
  (Mr Mountfield)  Might I just ask for clarity what you mean there. Is it Unemployment Benefit costs that would arise for the Department of Social Security?

  155.  No, the redundancy costs to HMSO during the pre-sale period.
  (Mr Mountfield)  Those are all allowed for in the final sale price. There is no overhang of those.

  Chairman:  If we could have a note explaining that exactly, that would be useful[12]. Mr Williams?

Mr Williams

  156.  Mr Mountfield, we worked together over 20 years ago, if I remember rightly.
  (Mr Mountfield)  If I may remind you, Mr Williams, my experience has been not only as a privatiser but as a nationaliser when you were Minister at the DTI.

  157.  That is getting a defence in first, I think! All I can say is I am glad to see that both of us have changed so little in that time! Let's get to this question of the advice you gave to Ministers. I know I cannot ask you what the a,dvice was, but did they accept it?
  (Mr Mountfield)  That is really housemaid's knee question, Mr Williams.

  158.  It is an easy answer.
  (Mr Mountfield)  I have described as honestly as I can that had Ministers taken decisions that I was not willing to support as accounting officer I would have had to seek instruction. The fact I did not do so is as far as I am willing to go.

  159.  What policy decision did they leave you with?
  (Mr Mountfield)  They took the decision first of all that they wanted to privatise it as part of their established policy. Secondly, in the summer of 1995, they decided that they wanted to proceed by trade sale rather than by flotation.


7   Note: See Evidence, Appendix 1, page 25 (PAC 227). Back

8   Note by Witness: The year should, in fact be 1995. Back

9   Note by Witness: The year should, in fact, be 1996. Back

10   Note: See Evidence, Appendix 1, page 25 (PAC 227). Back

11   Note: See Evidence, Appendix 1, page 25 (PAC 227). Back

12   Note: See Evidence, Appendix 1, page 25 (PAC 227). Back


 
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