Examination of Witnesses (Questions 160 - 179)
MONDAY 2 MARCH 1998
MR ROBIN
MOUNTFIELD, CB and MR
MICHAEL HERRON
160. Thank you. It was quite a dramatic
turn around, was it not, from the original bid to the final sum
that was paid? It fell to a third of what it had been, from £170
million to £54 million, a very dramatic turned around. That
£54 million really overstates what Government got as a result
of this decision to privatise, does it not? Let's take a couple
of factors. There were the three payments of £100,000 made
to the three unsuccessful bidders. There were the £3.8 million
cash balances that you gave them after they had bought it and
there was the £1.8 million you paid for advisors. So the
£54 million actually in terms of benefit to the nation overall
reduces to £38 million when we take into account those various
costs that were incurred as part of the process? Is that right?
(Mr Mountfield) May I make two comments. First
of all, on the final settlement, you will recall that the £3.8
million that we paid as part of the final settlement in the last
few days was actually in return for NPG accepting a further £2
million that we would otherwise have had to pay. In a sense the
£54 million is arguably a slight underestimate of our receipts.
Secondly, as far as the bid costs were concerned, the advisors
and so on, at the point at which the decision was taken to proceed
with this £54 million rather than the indicative bids at
an earlier stage, of course most of those costs were already sunk.
161. Then there was the £11 million
of redun dancy costs that you incurred literally at the last second
before privatisation?
(Mr Mountfield) No those costs were decided on
in 1995.
162. They came into effect coincidentally
on 30th September 1996.
(Mr Mountfield) But they are provided for in the
accounts of HMSO in 1995 because the decisions were taken in 1995.
Some of the redundancies took place in 1995 and some in 1996.
163. There was the £25 million as well.
That was an even bigger sum.
(Mr Mountfield) The £25 million includes
the effects of that final settlement of the £11 million.
It is a cash transaction. If I could explain the way that works.
The Civil Service early retirement or volun tary severance terms
provide for people over 50 for payment in effect of early pension-it
is called annual compensation payments-rather than a simple lump
sum. There is, therefore, a forward liability and the cash transactions
in the last days before the actual sale were following normal
practice for the Department which had incurred those costs, which
was HMSO, pre-sale to pay to the civil superannuation fund in
effect a capital composition in relation to its forward payments,
so that is not, as it were, a late cost suddenly incurred, but
it was simply a pre-sale cleaning-out of the decisions which had
already been taken.
164. A cost which was consequent on the
decision to sell?
(Mr Mountfield) No, sorry, no.
165. So of the £54 million, the Exchequer
really benefited to the total amount of £40 million?
(Mr Mountfield) Sorry, but if I could just qualify
that, it was not a cost consequent on the privatisation, but it
was a cost consequent on trying to improvethe profitability of
HMSO and had that not beendone, then the proceeds would have been
a great deal less.
166. I know it is maybe difficult to give
an average, but what would have been the average earnings of HMSO?
(Mr Mountfield) I am afraid I do not think I can
give a figure off the cuff. Perhaps I could give you an estimate.
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167. If it is possible to get some sort
of figure, I would very much welcome it because even if we take
the late redundancies, what you were doing was not just incurring
costs pre-sale, but you were building in a future profitability,
were you not, for the purchaser?
(Mr Mountfield) Indeed, and the justification
for that was of this kind: that it had been foreseen quite clearly
in 1994 --
168. I am not asking for a justification.
I am just asking whether it is a fact or not.
(Mr Mountfield) Indeed it is.
169. So even if the average earnings were
only, say, £10,000 a year, and I would like to think they
were considerably more than that, that would have built in an
extra £3.7 million a year to the profitability, just the
second tranche of redundancies.
(Mr Mountfield) I would not like on the spot to
endorse the number, but the principle is clearly right.
170. It is very, very close to that. The
company then, in addition, got rid of another 1,000 staff. Now,
this happened in the nine months between September/ October 1996
and the end of June 1997 and £54 million was incurred, and
in their half-yearly returns in the September of 1997, they still
revealed a profit of £8 million.
(Mr Herron) I think the new company had a set
of accounts at the 31st December 1996 in which they took a provision
of £65.1 million. That gave them an operating loss in that
period, including those excep tionals. The operating loss was
very small, but the exceptionals take it £65.1 million into
the red.
171. Which they voted off in that period?
(Mr Mountfield) They were taking account of the
payments that they knew that they would have to make at a later
point. Now, at some point they would have had to make those payments
and had to take that hit. Clearly they have made a commercial
decision about how best to present that.
172. And presumably they would have had,
I assume, a big tax benefit for doing it in that year.
(Mr Herron) They would have that in any case eventually.
173. Yes, but it helped considerably at
the time of the purchase. So in fact what you have is a business
that, clear of its redundancy costs, is already heading, if the
half-yearly reports are anything to go by, for a possible £16
million or so profit this year?
(Mr Mountfield) I think it is quite likely, though
I would not like to vouch for a particular number, but the principle
must be right. Indeed that was the basis on which the original
commercialisation plan had been drawn, that significant staff
reductions were necessary to reduce the cost base in order to
produce a commercial profit. Now, ministers chose to leave that
to the purchaser to do rather than doing it before privatisation
which had been the earlier intention.
174. So, despite the disasters spelt out
in this Report, what we actually have is what looks like being
a highly profitable business now in operation within months of
it being privatised?
(Mr Mountfield) As a result of the very heavy
investment that they put into reducing staff in the months after
the privatisation.
175. Yes, minus the tax benefit that they
got out of that of course which also has cost the taxpayer some
money. Let us then look at some of the advice you received and
I do not want to go trampling over old ground, but I am rather
puzzled by the role of Coopers. They had two-thirds of a million
pounds as their fee-is that correct-£696,000?
(Mr Mountfield) Yes.
176. And they produced the Information Memo
randum?
(Mr Mountfield) They certainly did that, or at
least they took control of that operation. As you know, it was
built on the forecasts that HMSO management had. Certainly they
were responsible for preparing the Information Memorandum and
for advising us throughout the process.
177. But on the same information, another
set of advisers, Binder Hamlyn, only got £¼ million,
or less than £¼ million, £223,000. They used the
same information for their report and their report came out eight
weeks after the Coopers' Report and they drew very different presumptions
or conclusions alto gether, did they not, on the profitability
of the business?
(Mr Mountfield) No, I do not think I would endorse
that. They cited the same management forecasts which the Information
Memorandum did not seek to do. The sensitivity analysis that the
HMSO manage ment --
178. Could we save a little bit of time?
You have seen this Report before, the NAO Report?
(Mr Mountfield) Yes, of course.
179. And you did agree it, did you not?
(Mr Mountfield) Indeed.
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