Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 1 - 19)




  1. This afternoon the Committee is considering the report by the Comptroller and Auditor General on the Acquisition of German Parcel. We welcome Sir Michael Scholar to the Committee to discuss the report and also Mr John Roberts, Chief Executive of the Post Office. This is probably your first visit here.

  (Mr Roberts) It is my second.

  2. In that case you are familiar with the procedures we follow. My first question is on paragraph 6 but also paragraph 2.14. Paragraph 6 notes that a full assessment of the value for money of this acquisition will not be possible in isolation from the Post Office's overall strategy and programme of acquisitions. I understand you need to see how the acquisition fits into that. But we learn from paragraph 2.14 that the acquisition was agreed before overall financial targets for the new strategy were put in place. Does this not suggest rather a weakness in the Department's oversight?
  (Sir Michael Scholar) I do not think so. The Department began to review the Post Office's strategy quite soon after the 1997 election and that review proceeded for a considerable period. In the autumn of 1998 it was speeding up and that led to the statement by the then Secretary of State, Mr Mandelson, in December. The closing stages of that part of the strategy review coincided with the proposal which the Post Office put to us that they should acquire German Parcel and to some extent these two things went hand in hand.

  3. That was before the financial targets were set.
  (Sir Michael Scholar) A financial target was already in place for the year 1998-99 and for the year 1999-2000 a further financial target was set.

  4. For this strategy?
  (Sir Michael Scholar) For the Post Office as a whole and it also took account of the impact of the acquisition of German Parcel on the Post Office.

  5. I shall come back to this as it is very much the theme of the report. Let me turn to Mr Roberts. Paragraph 18 i) tell us that the information put to the Board about the proposed acquisition was not very detailed. Do you agree with the NAO's recommendation that Boards should provide assurance on their detailed knowledge, approval and accountability for the acquisition together with opinions from external advisers? If so, why did you not do this in the case of German Parcel?
  (Mr Roberts) I am not sure of the context of what was detailed. We were asked to let the Department have the final paper on which the Board took its decision. There were several papers before that. We had been briefing the Board over probably a two-month period. There were several papers both on the Board agenda and which were taken outside the Board. We also briefed all the non-executive directors individually on a face to face basis. So the Board had been receiving quite a lot of detailed information in the two months up to the eventual Board decision. The paper that comment is based on, was just one aspect of a fairly large intensive briefing process. I also checked back before coming today with our own external advisers and I asked them whether they felt that the information the Board had received was any more than or less than they would expect a comparable private sector company to receive. Their view was that what we put to the Board in total was exactly what they would have expected a normal private sector company to receive. The only other point I would make is that on the Board of the Post Office there are three external non-executive directors, one non-executive chairman, all of whom have had mergers and acquisitions experience in their private sector roles. Their judgement on the day and subsequently has been that they felt they had sufficient information both before the Board and at the Board to make the kind of decision they did. In terms of the second part of your question, certifying that the Board has been able to fulfil its role properly, I have no problem with that at all and I do not think the Board would have any trouble with anything we need to do to make that clear.

  6. The actual sentence I was referring to was, "The Department saw the documents the Board received and told us that they were not very detailed". You may tell us that is fleshed out a bit in oral briefing. At the end of the day a major acquisition is a major acquisition and most of the information relating to it would be financial in one form or another and therefore ought to be documentary rather than just oral. As to your advisers thinking it was right, I am not surprised: they would say that would they not? To coin an old phrase from another Davis in another place.
  (Mr Roberts) Yes; indeed.

  7. I just wanted to register the point with you at this stage. Let me move to paragraph 18 iii) which tell us that the Post Office disclosed a broad indication of the price paid for German Parcel. The C&AG's report recommends further disclosure of the profits attributable to the net assets being purchased, together with the expected impact on the Post Office's profit and loss account. This is in line with private sector practice to protect investors and to help to secure a transparent market. You accepted this point, are you putting it into effect?
  (Sir Michael Scholar) Yes, we have both accepted it and we are putting it into effect. We have made sure that it has been put into effect in the subsequent acquisitions which the Post Office has made.

  8. Will we know the effect for this acquisition as well in the next set of accounts?
  (Sir Michael Scholar) The accounts are unlikely to go into the kind of detail which the NAO's report suggests should be disclosed when an acquisition of this magnitude is made.

  9. Why not?
  (Sir Michael Scholar) The accounts will follow the normal practice enjoined by the accountancy standard body and the regulator when the regulator deals with the accounts. As to whether the accounts will go into that kind of detail, I am not clear.
  (Mr Roberts) The answer is that if we followed the normal accounting standards, no, it would not. The distinction, as I read it from the report, was that when we were making any future acquisition we should be making these statements up front about what is going to happen to earnings and everything else. It is slightly more difficult once you are two years into the acquisition. We are a group, we produce group accounts. In one sense German Parcel is a small part of the overall group and it is now in a very competitive market. To be giving that kind of detail in the accounts will be a problem for us and probably something our competitors are not doing. I do accept that if we were at the beginning of the acquisition and in line with the Stock Exchange best practice which the report has brought out, then we should be pushing out and we shall in future the kind of recommendations that the audit report has made.

  10. You will forgive me if I am a little sceptical about commercial confidentiality arguments on something as big as this, particularly when we are talking about public money. We shall come back to that. I am talking now about paragraph 1.16 primarily. In the case of a private company borrowing to fund a major acquisition, the lending bank will want to know about the track record of the company involved in running similar businesses. I should have thought that was pretty obvious. The Post Office already owned a parcel distribution business in the form of loss-making Parcelforce. What did the Department do to question the Post Office management on the losses of Parcelforce prior to this and on Post Office management's ability to deal with these UK-based losses at the same time as taking on management of an overseas business?
  (Sir Michael Scholar) The Department addressed these questions of Parcelforce's losses and had addressed them in the period up to and before the autumn of 1998. It was aware of the situation in which Parcelforce was experiencing very strong competition in the UK market, much stronger than it had before. The liberalisation of the market had meant that various private sector players who were not obliged to take every kind of parcel which was offered to them, who did not in short have the public service obligations of Parcelforce, were operating in a selective way and putting pressure on margins, on price and on service. This was something Parcelforce was facing in the UK and I believe it is something which Deutsche Post were facing in Germany and La Poste were facing in France. It was not altogether unexpected that Parcelforce would be in a challenging market situation. We were also aware that the business which the Post Office sought to acquire, German Parcel, was not strictly on all fours with the business of Parcelforce. It tended to be a business to business set of transactions, city to city transactions, it had a very high reputation in the marketplace and very strong local management. Those were the kinds of considerations that we had in mind as we addressed the issue you put to me.

  11. Paragraph 2.6 sets out as one requirement for approval of this investment of nearly £290 million of taxpayers' money that the proposed acquisition should not lose money. Why did you not place more emphasis on financial targets for the combined business as a whole, as the C&AG's report recommends?
  (Sir Michael Scholar) We thought that it was wiser to address a financial target for the business on a stand-alone basis, which is what we did, rather than make the case for the acquisition on the wider grounds of the synergy with the rest of the Post Office's business.

  12. The point is not that it should not have financial targets, it is just that a £290 million investment for which the target is "Don't lose money", is pretty slack, is it not?
  (Sir Michael Scholar) The acquisition was made in the context of a general broad strategy which had been approved by Ministers. The view we took was that we could put together a more rigorous appraisal if that appraisal were confined to the financial position of the business itself which was being acquired. We believed that the effect on the Post Office's business as a whole would be benign, would be helpful. We have never had any reason to suppose otherwise. Just how helpful it would be was rather more speculative. We felt that the most rigorous way of doing this was to look at the business on a stand-alone basis in the belief that the result would in the end be better than that for the Post Office as a whole. When we moved after the acquisition of the business to setting targets for the year ahead, we did precisely what you have suggested that is we set a target for the Post Office's business as a whole, taking account of the impact of German Parcel on that.

  13. Once you have acquired a business there is a limit to what you can do, as it were, to reverse out of it. My last question for the moment is on paragraph 2.37 which tells us a key aspect of the deal was that the acquisition should be funded at commercial rates of interest. Have you set a rate yet and imposed the charges retrospectively and in full?
  (Sir Michael Scholar) Yes, we have done that.

  14. I have to say the general thread which is striking me on reading this report is that here we have quite a large chunk of taxpayers' money and the overall feeling I have is that it has been treated with rather less close scrutiny or rather less close control than would have been the case had it been private sector money. I shall come back to that at the end of this exercise.
  (Sir Michael Scholar) May I make one observation in answer to that point. At the time this acquisition was made the Government's approach to the Post Office was changing. You will recall that in the Secretary of State's statement to the House in December 1998, he explained that the key features of the Government's new policy towards the Post Office, which has subsequently been enshrined in an Act of Parliament, were that it should have greater commercial freedom and ability to manage its business itself. If I could just quote one sentence from the Secretary of State's statement to Parliament, he said, "The Government will approve normal Post Office requests for borrowing for investment cases which are commercially robust". There was a strong desire by the Government at the time not to second-guess Post Office's management, not to crawl over every detail of a commercial proposition which it put to the Department and that of course was an approach which was shared by the Treasury. It was not simply the DTI, it was the Treasury and the DTI who together appraised this proposal in the first place.

  Chairman: I quite understand that but the determination of commercial freedom does not release you from Accounting Officer requirements. You talk about robust requirements, but the last bullet point on page 25 demonstrates my point clearly, "demonstrated at least a financially neutral impact on the Post Office's projected finances on a stand-alone basis (that is without taking into account any possible synergies". For £289 million that is not in my view particularly robust. However, I suspect we shall come back to this at the end.

Mr Steinberg

  15. Why did the Post Office refuse to give evidence directly to the National Audit Office?
  (Mr Roberts) Since 1969 the National Audit Office has not had direct dealing with the Post Office. What we did was to feed comments in on the draft report and on other questions via the DTI as our sponsoring Department.

  16. I am well aware of the Act. The fact is that it seems a bit strange to me that they may not have the right to come in and ask for evidence, but I would have thought that you would have obliged them. They were doing a report on behalf of the House of Commons, on behalf of the taxpayer and it seems, to say the least, a little bit strange that you would refuse them access. What do you have to hide?
  (Mr Roberts) Nothing at all. It is not as though this was something which was unusual: this is the way we have done business for the last 30 years, ever since the NAO ceased to be responsible for auditing the Post Office. We now have and have had since 1969, independent commercial auditors who are appointed by the Department of Trade and Industry and we felt that the best way to deal with issues was via the Department.

  17. Through a third party.
  (Mr Roberts) Yes, through a third party, but the role of the Department, certainly at that time and now, as amended by the Act, is to act as our sponsoring Department and therefore deal with all issues within government.

  18. When I read the report it appeared to me that the Department were taking a huge risk in this deal. When I read the report as a bit of a layman, I could not actually see why the risk was basically needed to be taken. How does owning a German parcel company help the national delivery of post?
  (Sir Michael Scholar) If the UK obligations, the public service obligations of the Post Office, are to be carried out efficiently and effectively and economically, it has to be a strong organisation commercially. The view that DTI Ministers took was that if it was to be strong it had to take up a strategy of acquisition, of international expansion and it should seek to acquire businesses in Europe. That was the strategy, that is the strategy and it was in accordance with that strategy that this acquisition was made.

  19. How does that help the UK postal service? Are you saying, for example, that it makes the Post Office stronger, economically and financially because it has more irons in the fire?
  (Sir Michael Scholar) Let me give you a specific example of the kind of thing I meant. With the parcels business, the Post Office were beginning to find that parcels coming from Germany or through Germany, instead of being passed over to them to deliver in the United Kingdom were being passed over to Deutsche Post's subsidiary, Securicor, thereby removing a considerable chunk of revenue from the British Post Office. They felt that to plug that gap and to give themselves the kind of strength that their competitors, in this case, Deutsche Post, had, they needed to take on a German parcel business and work in conjunction with that business.

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