Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 60 - 79)



  60. I am always aware that when deals of this nature come up the one partner who is in a hurry always gives lots of good reasons why things need to be done yesterday and most of them do not turn out to be very accurate. What really concerned me about this was that you did not appear—and I am not one of those who would criticise the DTI for lack of commercial savvy, because I do think you operate regularly—to think that having advisers, especially with all of the ambiguities I have mentioned, working for you earlier would have been appropriate in these circumstances?
  (Sir Michael Scholar) Yes, I am bound to say that I should have preferred to have had the kind of advisers then that we have now. In an ideal world we would have had the set of advisers we now have in place and we would have had longer to appraise the deal. I am not sure if we had had longer that we should actually have been able to do much to reduce the degree of risk to which we were exposed.

  61. Would you accept the criticism that the fact that you did not have advisers reflects perhaps too cosy a relationship between your Department and the Post Office? Are you too close? Did you accept what the Post Office was doing when perhaps you should have had a more critical attitude in general?
  (Sir Michael Scholar) I do not think that is fair. We did take on an adviser. We took on an adviser quickly. The adviser asked a series of probing questions. He caused the Post Office to make some changes to the case they had put forward. We ourselves appraised that advice from our adviser and our own team, although it lacked corporate finance experience, had a good deal of commercial experience, a good deal of experience of dealing with big project finance; they were not babes in the wood.

  62. Can you tell me any circumstances in which you would have vetoed this deal?
  (Sir Michael Scholar) Yes.

  63. Clearly the Post Office might not have wished to go ahead with it, if they had not thought the terms were advantageous but are there any circumstances where they came forward with what they considered to be advantageous terms where you would have said no?
  (Sir Michael Scholar) Yes, I think so. We envisaged a price envelope which we derived from our understanding of the likely stream of revenues and costs ahead, discounted by quite a tough discount rate—eight to nine per cent discount rate. If the deal had gone above that, we would have thought very hard about whether it should go ahead. If our investigation of some of these risks had come to a different conclusion and if the remedies which were discovered and applied in the shape of warranties, deferred payments, guarantees and so on, we might have thought again about the deal.

  64. In terms of disclosure do you accept that taxpayers deserve the same level of disclosure, reassurance, assurance, whatever you want to call it, as City investors? Effectively what happened in this deal was that the taxpayer was not given what would be considered to be absolutely essential for any investor.
  (Sir Michael Scholar) The shareholder was given the information, the shareholder being the DTI. There was no problem about disclosure to the shareholder. The Post Office held nothing back from us. We were able to find out anything we wanted to. We, as the representative of the taxpayer, as the shareholder, had the information. I take your point that the market and Parliament did not have the information and I entirely accept the view that you should have it.

  65. That is effectively our role on behalf of Parliament, to scrutinise this.
  (Sir Michael Scholar) Yes, and I accept that.

  66. You would expect us to take a close interest in that particular aspect of the issue.
  (Sir Michael Scholar) Yes.

  67. You were asked earlier about continued monitoring of this situation. I am intrigued by the fact that there are 24 franchisees, but I suspect that could be a difficult and delicate relationship as they are in Germany and presumably the commercial culture is slightly different. Were there any ongoing difficulties which may have arisen with such a multiplicity of franchisees or was the relationship a smooth one?
  (Mr Roberts) The use of franchisees in the private sector parcels industry is actually very common, both in the UK and in Germany. To answer your specific question, no, we have not had any difficulties. The reason we have not is that it was a very important part of the deal that we took on and retained the senior management of German Parcel. We have done that, in particular the Managing Director and his top team, with one exception over the two years, are still with us and will remain so under contract. That has meant we have been able to run with a joint board, a board which I chair with some representatives from the UK, with the senior management in Germany. We did not want to export the Post Office to Germany, we actually wanted to import the expertise of this company to the Post Office. We have put in the normal controls, but we have left them to continue to run it under our control. It is that which has meant we have not had problems with franchisees, because those franchisees have been working with the group for a long time. The second thing is that a lot of the work over the last two years has been to restructure the company into one company. While we still have 24 franchisees, there is a lot more central control over the whole of the organisation than there was before, leaving the franchisees to do the last bit of the route.

  68. I was intrigued by something you said. I was interested that in the report they talk about a very innovative computer programme which allows you to track parcels and that a Europeanwide system has been set up for parcels along similar lines. Have you made use of that in the United Kingdom and could you quantify for us some of the benefits that you perceive the German Parcel operation may be able to deliver to what everyone accepts is a difficult operation here in the UK under Parcelforce.
  (Mr Roberts) We were in the process of trying to introduce exactly the same kind of technology and the same operational setup as the Germans already had. In the parcels industry it is now the accepted norm that the best way to run it is to have one central big sorting centre and then spokes coming out of it. For many years in this country we have not had that. We were able to complete the building of one in the middle of last year and we are now introducing track-and-trace technology; in fact we are about half way through that. The fact that when we took over German Parcel in 1999 they already had that experience meant we were able to bring some of their expertise in already running a modern hub and running the technology back across to our people at the stage we were building our own hub and developing our own technology. It was also very important because we changed positions with a British company called United Carriers in May of last year. They had originally been the British end of this wider network called General Parcel. When we bought German Parcel, after a period of time, after negotiation, we exchanged Parcelforce for that. General Parcel has a set of rules, as you can imagine, particularly based on common technology and it meant that our technology then had to link in with this wider European network. We have had quite considerable advantages in terms of learning from the experience that German Parcel already had.

  69. How central was that to your original decision?
  (Mr Roberts) It was absolutely key. We had seen synergies with Parcelforce. We had looked at two cases, one stand alone and one whether we could get synergies out of our own business. We were particularly concerned about the market pressures over here in the way Sir Michael has already described. The ability to bring both Parcelforce here and the Germans into a linkage was absolutely central and that was part of the strategy we discussed with Ministers and officials.

  70. Sir Michael, you read out earlier a quote from the guidance given by Government suggesting that borrowing must be commercially robust. The Chairman pointed out the comment on page 25 about the deal being financially neutral. I want to press you on this. Are you still in a position to view this as a commercially robust deal?
  (Sir Michael Scholar) Yes, I am. By commercially robust, we meant that it should be consistent with a strategy which Ministers had agreed for the Post Office, that it should be based on reasonable assumptions about the revenues it might generate and the costs which it might encounter and that it should have a proper appraisal of the risks, legal, regulatory and so on, which it might face and that those risks should have been dealt with. I believe that on all those counts it scored well and that as we look at it since the acquisition, it has continued to score well.

  71. You are reassured on all the points you have just mentioned.
  (Sir Michael Scholar) Yes, I am.

Mr Rendel

  72. One or two things have come up from today's meeting which I should just like to follow up on. Firstly, the impression I got from reading the report, was that this whole business was something of a rushed job. The Department were not really ready to monitor them in the way expected and from the PO's point of view they really did not have the time to look at the thing in the detail they would have liked, in particular perhaps looking at the individual franchisees and so on. Do you accept that it was a rush job?
  (Sir Michael Scholar) I would not say it was a rushed job. The Post Office had been considering this acquisition for some time before they came to the Department in the early autumn of 1998. At that time they expected that the acquisition would fall comfortably within the £75 million threshold at which the Department would begin to scrutinise. The new policy which the Department was following was that for the smaller acquisitions the Department would not be concerned at all. It would leave the Post Office with its commercial management, with its strong business non-executive directorship to get on with it. The Department would not try to second guess it. As the Post Office investigated this partnership, this acquisition, they realised that the value was not so much in the hub, which they thought might be a £20 million deal, but in all these 24 franchisees and in the rest of the system. That began to take the value of the transaction up well above the £75 million threshold. It was several months into the autumn before that became clear to the Post Office. As soon as it became clear to the Post Office they told us and then we got into the business of getting ourselves a professional adviser from outside. From then onwards the thing did pick up speed, but I would not say it was a rushed job.
  (Mr Roberts) The one thing which changed as we were going through this was that we suddenly became aware through the vendors that there was about to be a change in German tax law which was due to come in on 1 January 1999. This was something which did happen during that period. As a result of that, if the deal had not been signed before 1 January the vendors were not going to sell because they would have lost money because of the tax change. Therefore just towards the end—not during the process when we were developing this and having discussions with the Department—we did have to rush a bit at that stage. We were very satisfied—in fact we tried extremely hard given that this was the first big acquisition we had made, to do all the necessary work and if we had not been satisfied at the end that we could convince the Department that it was a sensible acquisition or, in my case, convince the Board, then we would not have gone forward with it.

  73. We are told in paragraph 2.3 that you first approach German Parcel in early 1998. What month was that?
  (Mr Roberts) I cannot remember precisely. It would have been in the first quarter of 1998. At that stage we were looking at them as a possible contract partner. We did not realise at that stage, even though we were looking at the German market, that they might be for sale. We were looking for somebody who would take our business at the other end. As we got into discussions with them, which would probably have taken us towards the middle of that year, it then became clear that they were prepared to contemplate sale. As the fourth largest parcel carrier in Germany, which is the biggest market in Europe, and two of the other three were not for sale and the other one was going to be too expensive, that was the point at which we really got into the process of looking at the evaluation of whether it would be worth buying this company.

  74. When did you get to know that it was going to cost you more than £75 million?
  (Mr Roberts) We would have got to know that fairly soon after we began talking seriously. That would have been about the summer of that year. I remember going to Ministers in the early autumn talking about the strategy and that this was a potential acquisition, probably in parallel with talking with officials. It would have been round about the summer of that year. Once we started talking and we understood what their turnover was, that would have given us the indication that it was going to be outside the £75 million.

  75. When you started talking to Ministers when did you expect the acquisition date to be?
  (Mr Roberts) We would probably still have expected at that stage the acquisition to be the first quarter of 1999, about two or three months later than we eventually did it. That was where there was the compression just at the end. We finally completed the deal on 7 January 1999 and I guess if we had been left to our own devices without the issue in Germany, it might have taken another month or six weeks.

  76. Paragraph 2.3 tells us that you were warned in August 1998 that the acquisition might be going to go ahead. The target of that acquisition was apparently only named to you in October 1998; for some reason two months to tell you who the target was. Is that correct? Did you take two months, Mr Roberts, to tell them what the target was? It appears to be what it says in paragraph 2.3, if I have got it right.
  (Sir Michael Scholar) There was a period during which we knew they were planning on acquisition. There was a code name for the acquisition and it took some time before they told us the identity of the company.

  77. Was there any particular reason why you were secretive about the name of the potential acquisition at that point? Two months to tell the Department.
  (Mr Roberts) No, I do not recollect.

  78. It is what it appears to say. In paragraph 2.3 it says "In August 1998 the Post Office informed the Department that it wished to proceed with a major acquisition and, in early October 1998, named the target company formally". It seems rather an odd thing to have kept secret from the Department, that is all.
  (Mr Roberts) I cannot answer that from memory I am afraid. I can find out. I cannot think of any particular reason unless it was that we were talking about an acquisition in the German market as opposed to a particular company. That is the only thing I can think of.
  (Sir Michael Scholar) Normally one starts with a code name for reasons of commercial confidentiality and security.

  79. Between the Post Office and the Department? I do not see any reason for confidentiality between the Post Office and the Department.
  (Mr Roberts) I have just read the sentence, I am sorry. I think there are two things. The first thing is about the strategy. We would have been talking to the Department at that stage, in the way Sir Michael described earlier, about our approach to Europe. We would have been saying to them that where we wanted to start was in the German market. What I would guess—and I am guessing, I apologise—is that it would then have been October before we were clear that there was the likelihood of a deal with this particular company, German Parcel. We may have been talking to them at the time. We were certainly talking to one other company at the time, which was also operating in Germany. That is the only thing I can think of. There is normally no reason at all why we would have spent two months, if I may put it this way, concealing from the Department what the target was. We have not done that on any of the acquisitions. Sir Michael is looking at Figure 10.
  (Sir Michael Scholar) This sets out all the dates.
  (Mr Roberts) We would have been talking about the strategy at that stage and certainly talking about the German parcels market, but I would guess it would not have been until the later date that we knew for certain that we were then not going to have a contract with German Parcel but that we were actually into something which looked like an acquisition. I think both of us would say that in relations between us and the Department we normally try to get to the Department as soon as we can the target name of a company we are going for. There is no point us trying to conceal it at all.

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