Examination of witnesses (Questions 1 - 19)
WEDNESDAY 3 JUNE 1998
MR D MACKENZIE, MR D MASSIE and MR K ROBERTS
Chairman
1. Today the Committee is taking evidence
on the Comptroller and Auditor General's report on the privatisation
of the rolling stock leasing companies. We have the first three
witnesses in front of us. Good afternoon, gentlemen, welcome.
We have with us Mr MacKenzie, Managing Director, CVC Capital,
Mr Massie, Executive Chairman of the IAF Group and Mr Keith Roberts
of NatWest Markets, now Hawkpoint Partners Ltd. Welcome. This
will be a rather unknown process for you. Normally people who
appear before us are Accounting Officers who know this process
backwards. If there are any difficulties or a problem you need
to resolve just ask me a question. The mechanism is that I will
ask you some questions. I would ask you to be fairly brief in
your responses if you can. If we want you to elaborate we will
ask you to but brevity is important for all witnesses and I should
be grateful if you would abide by that. I shall start with a couple
of questions to get us warmed up and then I shall open things
up to the rest of the Committee. Welcome to all of you. My questions
are for all of you, so you can take them in any order. Do you
have the National Audit Office report with you?
(Mr MacKenzie) Yes.
2. My first question relates to paragraph
2.45 of the NAO report which says that the main reason why you
withdrew from the sale was uncertainty about the outcome of the
rail privatisation programme. What did you see as the main risks
for you from that uncertainty?
(Mr Roberts) I was representing
the National Westminster and GATX consortium and quite frankly
it was a combination of issues. It is very difficult to say one
was more material than the other. There was a general concern
about the structure of the privatised British Rail. Post privatisation
the ROSCOs were obviously the first companies to come into the
private sector. There were concerns about how the contractual
relationships which had been established from scratch would work
in practice, there were some concerns about the structure of the
industry relying ultimately on public subsidy through the TOCs.
It was a combination of those issues which ultimately the consortium
could not get comfortable with.
(Mr Massie) I do not think that
was a correct reflection of our own reasons. We were interested
in the process, we formed a consortium to make our bid and one
of the members of the consortium dropped out at a relatively late
stage, too late for us to replace him with the necessary equity.
3. My next question relates to paragraph
2.46 which shows that there was only one external bidder in the
final competition with the three MEBOs; all the other external
bidders had withdrawn. In your view did the management of each
of the ROSCOs give you, and by implication other external bidders,
a fair and balanced view of the ROSCOs' prospects or did they
say anything which discouraged you from making a bid?
(Mr Roberts) They did not say anything
to discourage us from making a bid. They clearly understood the
business far better than we did even after three or four months
of detailed due diligence. Quite a lot of the uncertainty was
in relation to the new relationships which were being established
between various entities which had been created out of British
Rail and clearly they had most familiarity with those relationships.
They had an advantage in terms of their knowledge but in terms
of information we had access to them. I believe Hambros and the
Department gave all potential parties the same access. We do not
have any particular complaints about the process.
4. I am curious because you did say that
you were concerned about this contractual relationship. As I remember,
some 80 per cent of the contractual revenue was guaranteed in
any event. Were you led to believe this was risky in some way?
(Mr Roberts) No, but there were
more contractual relationships. There were obligations under the
leases with the TOCs, these were very complicated documents, there
were contracts with the maintenance companies on the cost side
and these were complicated, untested contracts. Clearly with a
new contractual framework being established from scratch in a
relatively short period of time, there were clear uncertainties.
Actually reading the underlying documentation gave rise to a number
of uncertainties. The management were in a better position than
an outside party to form a view as to how material those uncertainties
were.
5. Would everybody agree with that? Any
differences of view?
(Mr Massie) Broadly speaking we
took the view that the management teams were running with other
potential investors and therefore were competitors. We decided
to form our own view rather than necessarily relying upon information
which they gave to us.
Mr Wardle
6. This is a little like Blind Date except
that at the end of it one of you does not go on holiday with the
Chairman. I should like you all to consider this question. If
the train operating companies had been privatised before the ROSCOs,
would that have made a difference to you so far as carrying on
on this front was concerned? Yes or no.
(Mr Roberts) It would have helped;
yes. The ownership was uncertain at that time so had the ownership
been known it would have helped.
7. The train companies knew their customers.
There is an argument that the ROSCOs at that juncture did not
know their customers.
(Mr Massie) It would have changed
the structure of the deal because it would probably have rendered
the need for the 80 per cent guarantees somewhat less important.
(Mr MacKenzie) It depends on who
the TOCs were, the customers were.
8. You are saying that might have made a
difference.
(Mr MacKenzie) Yes.
9. With hindsight, were you surprised, are
you now surprised, at the surge in value of the ROSCOs post privatisation?
Do you consider that you missed an opportunity?
(Mr MacKenzie) Certainly.
(Mr Massie) Definitely.
(Mr Roberts) Demonstrably.
10. Since Porterbrook and Eversholt went
for less than the indicative bid by CVC or IAF, do you feel you
were conned?
(Mr Massie) Certainly not. We dropped
out.
11. I know you did, but do you not feel
you were led to miss that opportunity in any way?
(Mr Massie) No.
(Mr Roberts) No.
Maria Eagle
12. Did any of you have any discussions
with the Department or their advisers, Hambros, in which the word
"clawback" was ever mentioned?
(Mr MacKenzie) No, we never got
to that stage.
(Mr Massie) No, it was not raised.
(Mr Roberts) I do not recall it
being mentioned.
13. Were you surprised that it was not raised
or do you think you dropped out at a stage too soon for that to
have been important?
(Mr Massie) It is very difficult
to see how clawback would work in the ROSCOs. It is not like in
the sale of another business which might have substantial property
assets which could then be realised relatively quickly and perhaps
book values may not reflect market values. The ROSCOs were not
that sort of business. It is difficult to see how clawback could
be structured.
14. What was your impression of the professionalism
of the Department's advisers, Hambros Bank? Were you impressed
by the way in which they dealt with you?
(Mr Massie) Yes.
(Mr MacKenzie) No complaints.
(Mr Roberts) They did a very difficult
job very well.
Mr Clifton-Brown
15. To what extent was the political risk
a factor in the withdrawal of your respective bids?
(Mr Roberts) The answer for us is
that whilst it was the first issue which was always debated in
terms of the risk assessment, it was one which we got comfortable
with pretty quickly. The risk was that the other parts of the
privatisation process would not proceed and clearly if one had
the Government as owner of the TOCs that was a rather better position
than having the private sector as the owner of the operating companies.
It was an issue which always came up but one we got comfortable
with fairly quickly.
(Mr Massie) There were several unhelpful
statements in the process by various members of parliament in
our role of effectively trying to lead an investment consortium.
The statements made caused uncertainty amongst some of the universe
of investors we might have gone to and they perhaps perceived
the political risk more seriously than we did ourselves.
(Mr MacKenzie) Our answer is pretty
much the same. We were comfortable with the political risk but
some of our financiers were less comfortable and any comments
made on that point reduced the ability to finance the transaction.
16. What was the real reason you withdrew
each of your bids? What was the thing which finally caused you
to withdraw your bids?
(Mr Roberts) It does not work like
that. There was a combination of issues. We sat round a table
a few days before final bids went in and we could not resolve
them to our satisfaction. I have given an indication of the sort
of issues which caused us concern. It really is impossible to
say one issue above others.
(Mr Massie) I answered that in my
first reply. We were forming a consortium and one of the major
players in the consortium dropped out.
(Mr MacKenzie) The fact that we
did not have the support of the management team was the key reason
we withdrew.
Mr Hope
17. Did you feel you had sufficient information
available to make the choices you were making? Was the Department
giving you the kind of information you needed to make informed
choices?
(Mr Roberts) Yes, the problem was
that there was a huge amount of it and the information was actually
being added to through the due diligence process. On some of the
issues, for example the networker leases referred to in the report,
the information was made available simply because the arrangements
were entered into quite late in the day and from a standing start
it took time to assess the information and the impact it would
have on the bid. If anything there was too much information rather
than too little.
18. Was the timescale very tight under which
you were operating to digest that information and to make your
analyses and judgements?
(Mr Roberts) Reasonably tight. The
information changed during the due diligence process, which, from
memory, was about three or four months, which would have been
plenty of time, but the fact that the information itself was changing
during the period made it a little more difficult but certainly
not impossible. That was not the reason we did not put a bid in:
it was the analysis of the information we had seen and the judgement
we formed as a result of that.
19. The Department was operating to an imposed
timetable. If that had been slightly more relaxed you could have
had more time presumably to look at the information, to take a
more in-depth view and not have had to rush some of the information
you were receiving later on in the process. Might that have given
you more time and possibly changed your decision? I am not saying
it would have done, but might it have done?
(Mr Roberts) You always want more
time rather than less time but I do not think it would have changed
our decision quite frankly.
(Mr Massie) Except in our case with
hindsight I would rather it had been ten days less in which case
our investor would not have dropped out and our bid would have
been made.
(Mr MacKenzie) In normal auction
terms we had a pretty lengthy period to review information. The
difficulty CVC had was that we needed the help of management to
interpret it and we did not have that.
| 
