Examination of Witnesses (Questions 180 - 199)
MONDAY 2 MARCH 1998
MR ROBIN
MOUNTFIELD, CB and MR
MICHAEL HERRON
180. So you agreed paragraph 2.9 where it
points out that some of the bidders "were surprised...that
the Long Form Report provided to them in May 1996 had differed
in tone so markedly from the Information Memorandum which they
had seen only some eight weeks earlier". Now, you agreed
with the words "so markedly".
(Mr Mountfield) I always try to agree with the
National Audit Office. I have no reason to dissent from their
statement that it was the view of some of the bidders.
181. But you did not state any reservation
about that or it would have been recorded in the Report.
(Mr Mountfield) No, because I think as a statement
of the view of the bidders, that is absolutely unexceptionable.
182. But you think the bidders were wrong,
do you?
(Mr Mountfield) I think the bidders were overstat
ing the difference between the Long Form Report and the Information
Memorandum which was based onthe same basic numbers, but expressed
quite properly, because it was a different document for a different
purpose, more reservations about some of the control systems within
HMSO.
183. Now Coopers also, if we go to page
39, recommended, and I can understand the reasoning argued in
paragraph 3.27, but they argued that you were better staying with
National Publishing Group than going with the Capita Group which
were the almost equivalent bidders but in a different format,
and I recognise the uncertainty of their totally being dependent
on a flotation, but in the light of what you eventually did receive,
which was not the £86 million that we have in figure 12,
but £54 million, so it was £34 million less, and in
the light of the half-yearly profit figures of £8 million
that have already been made this year for the Office, do you feel
that the decision was a correct one to go for National Publishing
rather than Capita?
(Mr Mountfield) In the nature of the situation
I cannot prove a negative, but our belief was then and remains
now that the Capita bid would have been reduced by the same sort
of amount and for the same sort of reasons as NPG in the end negotiated
with us between that time and the final sale.
184. Then again if we look at figure 8 on
page 32 where Coopers gave you some guidance on the valuation
data. They are most optimistic that the valuation for a sale was
three times as much as that that was eventually achieved. Correct?
(Mr Mountfield) Yes.
185. Their central valuation, the one which
they obviously thought was most likely, was double that which
was eventually achieved, and even their worst pessimistic valuation
still showed a figure that was £17 million or 32 per cent
higher than the figure that was eventually achieved. Do you think
that Coopers proved to be value for money?
(Mr Mountfield) Yes, I think they demonstrated
to us their competence at all stages, but the forecaststhat were
made in May 1996 by Coopers were based on the same management
information as the indica tive bids were made by bidders. The
ten bidderswho put in values at that time covered very muchthe
same range as Coopers put in. £47 million to£174 million
was Coopers' valuation range and the corresponding indicative
bids in the same month ran from £25 million to £170
million on the same information.
Jane Griffiths
186. The remark in the National Audit Office
Report on page 38, 3.25, that has been referred to earlier that
there was a deterioration in the HMSO's performance due to poor
financial and management control and accounting difficulties.
I believe in an answer to one of my colleagues earlier you described
this as an exaggeration. Did I understand you correctly?
(Mr Mountfield) I am sorry, I am not quite sure
what the question is.
187. I am just checking whether I heard
or understood correctly that statement in the Report. Are you
there?
(Mr Mountfield) 3.25?
188. I believe you referred to it in an
answer to one of my colleagues as an exaggeration. Am I correct?
(Mr Mountfield) I think not quite.
What is said and what is recorded elsewhere in the Report is that
we accept that there was an adverse effect from the poor financial
and management control but that this was not as significant a
factor as the underlying deterioration in the business in the
same period.
189. So the business was deteriorating?
(Mr Mountfield) Indeed.
190. So it was only a bit out of control?
(Mr Mountfield) No, I do not want to minimise
the extent of the loss of control at the point of the restructuring
but rather say that I do not believe that the evidence that, for
example, particularly the failure to reconcile the accounting
results between the various parts of the organisation was in itself
a major part of the reduction. If you think of it in these terms
at the end of the calculation, as the NAO say, there was something
under half a million pounds of net unreconciled balances, on a
multiplier of eight or ten that probably accounts for £5
million or something of that kind in the deterioration. What I
think is true however is that bidders became clear during that
period and drew this as evidence, that the quality of the management
and the systems and the control was not what they would expect
in a well-run organisation of this kind.
191. You said in an answer to one of my
colleagues that non- executive directors ought to have been appointed
but they were not. I have really got two questions in relation
to that. Why do you believe they were not and what would have
been better if they had been?
(Mr Mountfield) As to why they were not, the formal
position laid down in the Framework Document was that it was for
the chief executive to make proposals to the Minister and for
the Minister to appoint. No such recommendation was made by either
the chief executive who retired in July 1995 or his successor.
Although the retiring chief executive had warned the Minister
that it would be desirable to make some appointments, he did not
actually make any nominations at that stage. I think, as I said
earlier, in retrospect it could well be that some independent
advice on the board during that process could have tautened up
controls on the management process during that period. I would
not want to put too much emphasis on that and this is why we did
not press this matter at the time. The possibility of finding
a businessman able to take on, as I said before, a very unappetising
appointment for a short time and able to get up to speed fast
enough to make an influence on the re-establishment of financial
control was quite a tall order. In retrospect I think it was a
pity that we did not do that. 22
192. I can see why you would think that.
The organisation was somewhat out of control. The non-executive
directors could have helped a bit to tighten up those controls
and they were not appointed and the reason was that it would have
been hard to find business people who wanted to go into an organisation
that was not really in control.
(Mr Mountfield) I am reluctant to accept the proposition
that this business being out of control was the primary factor.
What I believe was the position was that there was a long-term
deterioration in the trading position of HMSO because it was faced
with the acceleration of competition in the period. The effect
of that and the urgency of that did not become clear to us and
maybe not to the management until the second quarter of 1996 when
there was an acceleration of the poor trading results. We had
been through a period in 1995 where we had a series of what we
believed were one-off things which in retrospect may have been
more deeply rooted. I think there was a loss of control but I
think it is an exaggeration to imply that that was the main reason
why the proceeds were less good than we had originally hoped.
193. But you also referred in an answer
to one of my colleagues to one reason for the eventual purchase
price being lower than had been anticipated earlier. You outlined
a number of reasons for that and one of the reasons was that the
eventual purchaser basically promised to get rid of lots of staff
afterwards and therefore got it cheaper.
(Mr Mountfield) No, I think I would put it another
way. The original hope of the purchasers was that they would have
a profit stream in line with management's original forecasts.
They became progressively convinced that those were not realisable
and the only way to get back to those profit levels was by reducing
the costs of the organisation and therefore by reducing staffing.
In order to reduce staffing they had to spend as it proved nearly
£360 million[13].
That must be their estimate of what it will take to restore a
commercially viable profit stream. So the effect was they had
to discount the price to us because they had to incur an additional
investment cost to get back to the original profit stream.
Jane Griffiths: That is what I just
said. Thank you, Chairman.
Mr Page
194. Chairman, I shall be remarkably brief
as most of my questions, thankfully, have been answered. Just
one or two minor points. From the Report we can see the Cabinet
Office is responsible for monitoring the five-year corporate plans,
its annual business plan and monitoring against financial targets.
Was it also privy to the quarterly accounts that were sent to
the Controller?
(Mr Mountfield) Yes it was.
195. It was. Mr Herron in response to a
previous question said he really first had knowledge of the declining
situation in January 1996.
(Mr Herron) That was when we first had serious
concerns, as I recall.
196. I see. You, Mr Mountfield, mentioned
that the situation in the second quarter of 1996 was slipping
even further down. Were those quarterly reports in 1995 misleading
and inaccurate?
(Mr Herron) I do not have in fresh memory the
detail of the quarterly reports, I am sorry.
197. Mr Herron, I can refer you to the fact
that an audit took place and those accounts were audited on 26
April 1996. They showed a poor position and I want to know whether
those quarterly reports tie up anyway near the audited annual
accounts?
(Mr Herron) I recall that we had some adjustments
between the period 10 results and the period 13 results because
that was the period at which I arrived. I do not have to hand
or fresh in memory what the quarterly reports earlier in 1995
were showing, I am sorry.
(Mr Mountfield) If I might add, the 1995 results
in the end, when they were finally drawn up, had a trading loss
of, I think, £11 million, there were one-off adjustments
of some £16/17 million and provision for voluntary early
retirements and severance of £25 million[14],
down which is what I think would have emerged if the quarterly
reports were --
198. Mr Mountfield, I have actually been
responsible for a privatisation, so I know exactly the way in
which you prepare the accounts. What you do not prepare is for
trading losses if you do not know they are taking place, and what
you are saying to me, Mr Herron, is that you had no idea that
the situation was sliding away as badly as that, so I repeat to
you again my question: did those quarterly reports that you were
receiving like an analysis after the event prove to be highly
misleading?
(Mr Herron) I arrived in the project team at the
beginning of October of 1995. I was privy certainly to the figures
as they were emerging for periods 10, 11, 12 and 13 and we were
making adjustments or the business was making adjustments between
those periods.
199. Mr Herron, when you move something
into a sale, anybody buying that business will want to see a trend.
(Mr Herron) Yes.
13 Note by Witness: The figure Should, in fact, be
£60 million. Back
14
Note: See Evidence, Appendix 1, page 25 (PAC 227). Back
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