Examination of witnesses (Questions 1
- 19)
MONDAY 18 MAY 1998
MR MICHAEL
C SCHOLAR, CB,
MR NEIL
HIRST and MR
RICHARD LAZARUS
Chairman
1. This afternoon the Committee is hearing
evidence on the C&AG's investigation of the sale of AEA Technology.
The Accounting Officer is Michael Scholar from the Department
of Trade and Industry. Welcome to the first time in front of this
Committee, Mr Scholar. Perhaps you could introduce your two colleagues
to us before we start the questions.
(Mr Scholar) Thank you very much, Mr Chairman.
On my left is Neil Hirst, who is the Director, Nuclear Industries,
DTI, and on my right is Richard Lazarus who is a Director of Schroders,
one of our advisers.
2. Thank you. We will go straight into the
questions. Paragraph 12 of the Report says that if you held on
to 40 per cent of AEA Technology's shares they would now be worth
over £100 million more than you sold them for. I think actually
in today's money that is something like £130 million. I see
from paragraph 3.5 that you did not investigate the case for phasing
the sale in July 1996 when you decided to proceed with floatation.
Paragraph 3.4 gives some reasons for not selling the shares in
stages. Were these not rationalisations after the event?
(Mr Scholar) No, I do not think they were. It
was a fixed policy for the Government at the time that we should
sell AEA Technology in one go cleanly. It was well understood
by officials that that was Ministers' intention and therefore
the possibility of phasing was not explicitly considered by the
Department.
3. As the Accounting Officer did the Accounting
Officer consider the value for money implications of that and
seek a direction?
(Mr Scholar) The view at the time was that no
value for money implications arose because it was felt that a
phased sale would not offer any significant advantages, as the
Report makes clear, and, indeed, that a phased sale might be to
the disadvantage of the Exchequer.
4. There were a number of Committee of Public
Accounts Reports prior to that date saying somewhat different
but I think others will pick that up. Paragraphs 3.21 to 3.23
show that even though the company was difficult to value the Department
sought indications of demand over a range of prices that were
narrower than average. Paragraphs 3.26 to 3.29 show that the market
valued the shares at 323.5p on the first day of trading but you
only took soundings as to demand at a range of prices up to 280p.
Why was that?
(Mr Scholar) The view that we took at the time
based on the advice that we had from our advisers was that we
would get better value from the sale if we worked on the basis
of a 30 pence range which was a 12 and a half per cent range.
A number of other issues at that time were sold in roughly that
range. Before that British Energy had been sold with a much wider
range and the feeling in the market at the time was that that
had not assisted in the market reception to that sale, so we decided
to operate on the basis of a narrower range. There was, as you
said Mr Chairman, a larger premium in the first day's trading
than we had expected.
5. Others may well come back on why that
does not indicate that selling the shares all at once was a strategic
error but I will leave that. Paragraph 14 says that the Department
did not monitor the allocation by Cazenove of shares to institutions
(including companies owned by Cazenove). Why was that?
(Mr Scholar) The Department discussed with Cazenove
before the allocation the criteria for the allocation. Cazenove's
practice in the allocation was its normal practice and was best
market practice in relation to an offering of this size so the
Department did not involve itself in the actual allocation process.
Subsequently, we reviewed the process and satisfied ourselves
that it had been done fairly. We saw after the sale that there
was a Committee of Public Accounts conclusion, which was actually
published after the sale, which recommended that departments should
involve themselves in the allocation process so we recognise that
in the light of that recommendation we should have been involved
in the allocation process and we so said in the Report.
6. Right. What safeguards were there to
ensure the advice that you received from Cazenove and Schroders
on setting the original share price at 280p was free from any
conflict of interest?
(Mr Scholar) Well, we had a steering committee
which involved the management of AEAT; it involved our colleagues
in the Treasury; it involved people in the DTI who had experience
of previous privatisations. They scrutinised the arguments that
were advanced very carefully and came to the conclusions to which
they came.
7. I will come back to the team in a minute.
Paragraphs 2.23 to 2.28 show that Schroders received a success
fee of £1.8 million on the extent to which proceeds exceeded
a valuation of £176 million made by Schroders themselves.
Why did you not obtain an independent check on the reasonableness
of Schroders' valuation?
(Mr Scholar) We chose Schroders as our advisers
at the end of a competitive process. There were five competitors
including Schroders. Each of them suggested a methodology for
valuing the company. We compared those methodologies. We compared
them in the Committee which I have just described and we did not
think it necessary to seek an independent view of that.
8. Even though Schroders were both valuers
and potential beneficiaries?
(Mr Scholar) Their valuation was very similar
to the valuation of the four other contenders.
9. You talk about the steering committee
but nobody on the Department's team managing this sale had any
previous experience, as far as I can tell, of handling a flotation.
That is paragraph 1.10 in the Report. Do you think that problems
such as the failure to consider phasing and oversee the allocation
of shares are more likely to be avoided if the team includes experienced
people?
(Mr Scholar) I do not accept that there was a
failure to consider phasing. As I explained beforehand, it was
the set policy of the Government and had in fact been subject
to debate on the floor of this House. So I cannot accept that
there was a failure there. I do not believe that there were considerable
failures at any point in this process. In fact, in my view the
sale of AEA Technology was a success so I find the question a
difficult one to answer. In fact, Mr Hirst, who was the Chairman
of the two committees concerned, had extensive previous experience
of privatisations. He had been involved I think in Britoil, British
Coal and the National Engineering Laboratory privatisations.
(Mr Hirst) That is correct.
10. Others may well want to come back on
that point of experience of the team. Finally before I open questions
up, paragraph 2.12 shows that very serious shortcomings in AEA
Technology's financial management information delayed the sale.
Why did the Department not recognise these problems before December
1995?
(Mr Scholar) The Department was aware of these
problems but it was not aware of their seriousness until the Long
Form Report was delivered to it in December 1995. It then took
rapid action to remedy the deficiencies which had been revealed
in that Report and the privatisation was postponed only by six
months[1]
as a result, but it was postponed.
Chairman: Mr Alan
Williams?
Mr Williams
11. Hello again, Mr Scholar. You are an
accident-prone man, are you not? You wandered into the Treasury
job straight on the trail of Mr Hayden Phillips who left you with
Forward Catering to defend which to be fair was never your job.
Then you wandered into the Welsh Office where you were very welcome
but again you inherited a government problem which was none of
your fault. Now you seem to have one of your own making this time.
This is a bit of a mess, is it not?
(Mr Scholar) As I explained to the Chairman Mr
Williams, I do not think this was a mess. I think this sale was
a success.
12. Let's try and look at it from the poor
taxpayers' point of view. You sold this for £224 million
and you got a dividend of three and bit million pounds so altogether
you got a total of £228 million, let's say, let's round it
up. Out of that there was £8 million for the advisers and
£121 million for restructuring. That restructuring was not
envisaged before the decision for the sale took place. So the
taxpayer actually only got £99 million out of this project.
That does not sound very good to me.
(Mr Scholar) I do not accept that analysis.
13. Why not?
(Mr Scholar) The restructuring costs were bound
to be met in any event even if there had been no privatisation.
The Government's policy was to divide the purchasing——
14. No, that came after the decision to
sell. The decisions on restructuring came after the decision had
been taken that it was to be sold and sold in a hurry so I would
argue, and I think many of this Committee would argue, that it
was the decision to sell that precipitated the restructuring rather
than the other way round.
(Mr Scholar) Perhaps if I can comment on that.
15. Briefly, if you will.
(Mr Scholar) The restructuring you are talking
about was the tail end of a very massive restructuring that had
taken place over many years. In the 1960s UK AEA had over 40,000
people working in it. In 1993/94 it was down to 8,000 because
the whole nature of the enterprise had changed during that time
and it was necessary greatly to reduce the size of AEA. This was
the end of that process.
16. You also make the point made in the
Report that it was intended the company should not have to incur
any of the costs of this slim down. Bear with my £99 million
which I am afraid I am going to stick by anyhow because I do not
accept your interpretation of the restructuring and there is nothing
in what the NAO says to endorse your point of view. Having sold
it for a nett £99 million, on day one it was worth £34
million more and at the end of April when it was worth 720 pence
a share it was worth £682 million. The taxpayer got £99
million, one seventh of the amount that it is now worth. That
is why I call it a blunder, Mr Scholar.
(Mr Scholar) I do not think it was a blunder,
Mr Williams. The company was quite different. It was a different
company at the end of the period you have just described. It had
made eight significant acquisitions. Most of the growth of the
company's shares arose through those acquisitions not through
the business which it had before. The other point to make is if
you look at the market analogues to this company they too have
increased by roughly the same amount as the company has increased
its value.
17. This is dealt with and I have made allowance
for the FT 64 per cent increase in its index and I have made allowance
for the £58 million acquisition and even then there has been
a gain of £144 million, far more than the taxpayer got.
(Mr Scholar) The reference to the FT index is
out of date. The 64 per cent in the Report should now be 95 per
cent. If you want to compare it with most of the latest valuations,
as you did in your observation there, you should compare it with
a 95 per cent rise in that index. So there has been a much greater——
18. It still leaves a more than healthy
profit.
(Mr Scholar) The company has been a very successful
company since it was privatised.
19. Let's look a bit more at what happened
when it was sold. I want to look at Schroders and I want to look
at Cazenove. What did Schroders initially have as a shareholding?
They had a relatively small shareholding, did they not, at the
start, just a few per cent?
(Mr Scholar) Just over four per cent I think.
1 Note by Witness: The privatisation was, in
fact, postponed by three months, not six months Back
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