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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