Examination of Witnesses (Questions 1
- 19)
MONDAY 12 FEBRUARY 2001
SIR MICHAEL
SCHOLAR, KCB AND
MR JOHN
ROBERTS, CBE
Chairman
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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