Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 20 - 39)



  20. So we come back to the risk. You were in the dark about profitability, you were in the dark about the financial consequences of the deal. Why did you have so much faith in the Post Office itself to be able to deliver? Why did you give them such a free rein? Why were you not more involved as a Department? After all we are talking about approximately £290 million of taxpayers' money.
  (Sir Michael Scholar) We assured ourselves that the Post Office were being advised by competent, professional advisers. We ourselves took on a professional adviser. That adviser conducted discussions with the Post Office themselves and with the Post Office's advisers. We assessed the results of those discussions and we came to the conclusion, as the NAO report suggests, that this was a carefully considered commercial acquisition and, as in the words of the report, that the DTI covered the ground well.

  21. You feel you did have a close surveillance of what was going on.
  (Sir Michael Scholar) No, as the report says, we did not have a close surveillance and that was deliberate as a matter of policy.

  22. Are losses potentially possible?
  (Sir Michael Scholar) Of course. When any such acquisition takes place, losses are possible. In any kind of commercial activity losses are possible.

  23. Who will pick up the bill if there are any losses?
  (Sir Michael Scholar) The bill is picked up by other consumers and in the last resort by the taxpayer, because it is a public sector owned business.

  24. It has taken me four minutes to get to that response.
  (Sir Michael Scholar) It is a familiar point.

  25. What you are saying really is that the risk again is on the taxpayer at the end of the day.
  (Sir Michael Scholar) So is the upside.

  26. Are you talking about profits?
  (Sir Michael Scholar) Yes.

  27. We shall come onto that in a minute then. Are you now keeping a close eye on the situation? Are you monitoring what is happening?
  (Sir Michael Scholar) Yes, we have monitored it quite closely.

  28. At what stage would you have stepped in and stopped the deal?
  (Sir Michael Scholar) We could have stopped it at any stage.

  29. Hypothetically when would you have said "Hold on a minute".
  (Sir Michael Scholar) We could have decided that the acquisition was inconsistent with a strategy which Ministers thought they should—

  30. So on policy rather than financial consequences.
  (Sir Michael Scholar) No, we could have decided that the proposition was not commercially promising.

  31. I should like to come onto profits and page 38. Here I think I am on your side. Paragraph 2.44 talks about the competitors who were a little bit worried about the disadvantage or the unfair advantage they thought was happening in this purchase by the Post Office. Distribution of profits. Where did profits go pre-1997?
  (Sir Michael Scholar) The profits before 1997 were partly retained by the Post Office, but in very large measure taken into the Treasury.

  32. Now?
  (Sir Michael Scholar) Since the statement in 1998 to which I have referred, a much smaller proportion of the Post Office's profits have been taken into the Treasury as a matter of policy by Ministers.

  33. At the time of this acquisition were huge balances being built up by the Post Office?
  (Sir Michael Scholar) Yes, the Post Office has had a sizeable profitability. In the year in question the profit was much reduced by a large write-off for the Horizon project.

  34. If anything goes wrong it will have to be the taxpayer who subsidises them at the moment because the Post Office should in effect be able to subsidise the deal if anything goes wrong from its profits. Is that right?
  (Sir Michael Scholar) Yes, in a year in which the Post Office has profits it could use some of those profits to mop up any losses which might come from this particular transaction. Yes, that is true.

  35. Is that a major change in policy?
  (Sir Michael Scholar) No, it has always been the case that when the Post Office was profitable, there might be a particular kind of activity in which it was engaging, which was lossmaking and which was being financed from those profits.

  36. Do you think that as a nationalised industry you were able to benefit because of that in the acquisition process?
  (Sir Michael Scholar) Are you referring to the financing of it?

  37. Yes.
  (Sir Michael Scholar) Not in the event because the decision of Ministers was that the financing of this deal should reflect commercial borrowing rates. We have applied commercial borrowing rates to the borrowings that the Post Office needed to make in order to finance the acquisition.

  38. When I read the report I got the feeling that the deal was struck and the Post Office went into the deal, and you with knowledge of that, and you did not really know what the financial situation was at all. You did not know how much you were going to pay for German Parcel and indeed you did not know what the interest rates were going to be or what you were going to have to pay. That seems a very extraordinary way to go into a deal in purchasing another company. The private sector could not have done that, could they?
  (Sir Michael Scholar) I think the private sector would have done exactly that. We had a pretty good idea of what the price of this acquisition should be and together with the Treasury we set a limit for the negotiation. The Post Office carried out that negotiation and came in under that limit. As to the financing of it, the way in which we approached that was to carry out an analysis of the expected profits and the expected costs for the years ahead and we discounted those in the way in which this is normally done; we discounted it to take account of an estimate of the weighted cost of the Post Office's capital—between eight and nine per cent—and that produced a small positive net present value.

  39. Do you know the fact now?
  (Sir Michael Scholar) We knew those estimates then. We do not know the facts yet because the estimates span many years, many years ahead.

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