House of COMMONS









Wednesday 23 June 2004


Evidence heard in Public Questions 1 - 138





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Oral Evidence

Taken before the Education and Skills Committee

on Wednesday 23 June 2004

Members present

Mr Barry Sheerman, in the Chair

Valerie Davey

Mr Nick Gibb

Paul Holmes

Jonathan Shaw

Mr Andrew Turner


Memorandum submitted by the Higher Education Funding Council for England


Examination of Witnesses


Witnesses: Mr David Young, Chairman, and Sir Howard Newby, Chief Executive, Higher Education funding Council for England, examined.

Q1 Chairman: I would like to welcome David Young, Chairman of HEFCE, and Sir Howard Newby. David, I do not think you have been before our Committee before, so welcome; Howard is something of an old lag, in terms of his regular appearances here wearing different hats. It is nice to see you both. We have two serious items of discussion with you this morning. We will be asking you some questions to find out one or two things that are on our minds and we would like to start with this problem that seems to have arisen in terms of the e-University. David Young, would you like to make an opening statement on that?

Mr Young: Thank you very much indeed, Chairman. Thank you for your welcome this morning. I would first like to start by saying that the e-University was initiated in 2000. That of course was before both Howard and I came on to the HEFCE board, which was in the beginning of October 2001, but I can say that the board always accepted from the outset that the e-University would be a high risk venture, which meant that potentially the rewards were high but that there would be a correspondingly greater risk of failure. When the initiative was launched, as I say in 2000, the mood in government and elsewhere was quite clear that there was a much greater risk in failing to grasp the opportunity to make immediate progress on developing the UK as a major player in delivering e-learning to a global market. If you look at David Blunkett's Greenwich speech in February 2000, when he was Secretary of State for Education and Employment, you can see that that captures the mood of optimism at the time and also the imperative, as was seen then, to take decisive action. The project was launched as a public/private venture, with the intention in due course of floating off the company into the private sector. That private element was captured initially through the commercial expertise on the boards of the e-University holding and operating companies. It was an ambitious project and if you look in the business world you can find many examples of similar projects which failed to achieve success for a whole variety of reasons. Failure on high risk ventures is part of the entrepreneurial lifeblood for the private sector but it has been an almost unique and certainly an unsettling experience for HEFCE. But we did not go into the venture recklessly, nor did we take the more recent decisions to wind down the venture lightly. We believe that we gave it every possible chance to succeed, but we also believe that we did take decisive and defensible action when we came to the view that they were not going to realise their business objectives. We tried at every stage to manage the risk to public funds in a way proportionate to our commitment. We had to be careful not to direct the activities of the e-University operating company (Opco) and we managed our relationship through the holding company (Holdco) - seeing our role to monitor but not to manage the activities of the e-University. We are not set up in HEFCE to operate in an entrepreneurial environment and I think quite properly we stayed at arm's-length from the operating company. Indeed, if we had operated otherwise than that it could have impacted on the prospect of attracting private finance into the venture. In my experience in the private sector, the most difficult decision in an enterprise of this kind is that of timing, of knowing when to say, "Enough is enough. We have seen enough, not to wish to continue." You can see from our written submission that by the summer of 2003 our concerns were beginning to be coming up our agenda and from that point on I think I can say that we have acted decisively to protect the investment to safeguard public funds. Plainly there will be questions with 20:20 hindsight. Would we have set it up in this particular form. I can say on that immediately that HEFCE took a lot of advice, we got a lot of guidance from professionals in both the public and private, and, as we always do, we consulted widely, mainly within the HE sector, about the proposals. We live in a changeful world. The optimism of 2000 has long since evaporated. The circumstances have changed. Life has moved on. You cannot always predict outcomes. You are impacted by other people's actions, which cannot always be predicted, and the turn of global events. We did not have complete control and nor could we have had it. Throughout the development and operation of the e-University we had to be careful not to act as shadow directors and to maintain the integrity of this as a commercial venture and respect the roles of the holding and operating companies. It is very important to say, first of all, that this is one part of our total approach to e-learning and it is very important not to believe that e-learning is dead, even if this particular venture is close to dying. We do not think this is a story of total nugatory effort; there is residual value in the enterprise. We have already learned lessons and we will continue to do so. We believe the inquiry by your Committee, Chairman, is important as a critical component in helping us to do that and to establish the facts, and we are very happy now to answer your questions.

Q2 Chairman: Thank you very much for that introduction. I realise this must in some senses be embarrassing for you because you are the organisation that is normally looking higher educationists in the eye and saying, "Come on, you want this money for this, have you done a risk analysis? Have you done a thorough scoping job?" It is your business pack, in a sense, and here you are going to be looking at the same people you scrutinise in terms of their budgets and plans with a certain rueful feeling about this one, are you not? Following up my question, there is a very big difference between chance enterprise, entrepreneurship, when people are investing their private money, from the situation when it is taxpayers' money. This is mostly taxpayer's money we are talking about this morning. It is a lot: £63 million of taxpayers' money. It is not that private investors thought they were on to a good thing, they would make a lot of money if it turned out right. It is not quite the same, is it?

Mr Young: It is not quite the same, although fundamentally, I would argue, perhaps it is the same, in the sense that the public sector, just as the private sector, does have to take risk in order to gain reward. You cannot take more risk without also having a chance of failure. This is greater than, for instance, doing what perhaps we are more familiar with, finding capital money for buildings and so on. They are relatively secure enterprises. I think it would be a major tragedy, almost, if the lesson from this experience was: Do not take risks in the public sector. I think you have to take risk. That must mean that things fail. I think we did have risk registers and all the rest of it and it is certainly not the case that we are not being criticised by some people for acting too soon - I have got too many negatives in there, but, in other words, not everybody is saying that we let this go too long before saying, "Stop." Some are actually saying, "You could have let it go a bit longer." I think possibly the difference between public and private sector is you may be less willing to take risk as more facts become known to you and fundamentally that was a decision that we had. The assessment or risk had tilted. We are not saying, the consultants did not say, this is doomed to fail. But they did say, and we felt, that the chances of success had now become less, and we were not prepared - in a way that possibly in the private sector one might have been prepared - to go for another year, to put in more money, to take more risk.

Q3 Chairman: Looking at your evidence, looking at the stuff you have sent us, it is fascinating, because I got the feeling as I read that - and this is just my opinion, not the Committee's - that the initial "to go" was 2000 and you are not really going/moving until 2002. You have mentioned the then Secretary of State's speech and so on: those were the heady days of the dot.com boom. By 2002 a lot of people have lost their shirts in dot.com, and very naturally had either gone bust or scaled down their plans and done all sorts of things, but, with this venture, two years later, you are still ready and moving or confident. Is that not the case?

Mr Young: The first thing I would say is just because the dot.com boom had come to an end does not necessarily mean that all ventures that are based on the net are doomed to failure. I wear a quite different hat as director of a dot.com company, as it happens.

Q4 Chairman: But you would agree there was a very different environment in 2000.

Mr Young: I would agree with that, but there is a sort of dynamic. Already by 2002 money would have been committed to the project. There was no evidence that the basic business model was flawed at that point.

Q5 Chairman: We are going to pursue that. As I understand it, this original money for this project came out of the Restructuring and Collaboration Fund. Is that right?

Mr Young: No, I think we were given a specific grant from the department in 2001 of £62 million over three years, so it did not come from the SDF specifically. But the bigger point, of course, is that there is an opportunity cost. One assumes, if the money had not been spent on this, it would have been available. That may not be the case, of course, but it is a reasonable assumption.

Sir Howard Newby: If I may come in it was an earmarked sum of money in our letter of guidance, so that it was £62 million allocated for e-learning, of which £50 million was allocated specifically at the time for the e-University.

Q6 Chairman: What was this Restructuring and Collaboration Fund then?

Sir Howard Newby: The Restructuring and Collaboration Fund at the time was a fund that HEFCE had to assist universities in restructuring, either on their own or merging with other institutions, and collaboration speaks for itself: it was to fund collaborative activities between universities.

Q7 Chairman: What I am getting at is that here we are looking at this problem with e-University, are there any other projects of a similar kind that we do not know about or that perhaps we should know about? Is it something you do on a regular basis?

Mr Young: No.

Sir Howard Newby: No, this is unique.

Q8 Chairman: There is no other ----

Sir Howard Newby: There is no other activity of this kind.

Q9 Chairman: This is the only time you have done this sort of thing.

Sir Howard Newby: Indeed.

Q10 Chairman: I sound like a magistrate: "Will you be going straight from now on?" One of the fascinating things about the history - and I want you to take us through it, David or Sir Howard, whoever wants to do this, because, having read the evidence, it does seem the crucial thing - is you go to PricewaterhouseCoopers and you get a pretty thorough business plan, they give you some good advice, and all the evidence is that you did not stick to it; you went off and did something else. When I started reading this stuff, I was going to say, "Look, PwC have a real responsibility here." As I went through the stuff, it seemed to me that PwC did not have a case to answer - because you did not stick to what PwC suggested was a viable business. You allowed this business to go off and do something much more ambitious. Is that not the case?

Sir Howard Newby: That is not the case I recognise. Again, I think we may well struggle here because neither of us were around at that particular point in time, but certainly my understanding was that the PwC report advice was followed at the time. There was further advice gained on the market analysis from consultants as well. The issue, I think, was whether the business, as you put it, Opco, should be the kind of business which would cover everything from the technology platform right through to the selling of courses to students all over the world, or whether the business should depend upon a platform already in existence. The view was taken at the time that a new platform needed to be created, because of issues of scaleability (that is, the sheer volume of students who could use it), and to develop a degree of interactivity which students would be comfortable with. I mean, there are pedagogical issues here which it was felt none of the platforms at the time could service.

Q11 Chairman: Forgive me, but my read of this and some of the independent information that this Committee received suggests that the PwC report was quite a sensible and modest proposal, and what then took place was a much more ambitious programme that PwC never had in its document. Do you not recognise that at all?

Sir Howard Newby: I do not, I am afraid. No, I do not. I respect the fact that you have had advice from others but that is not what I recognise. The PwC report - and there was more than one report, of course, at the time ----

Q12 Chairman: But PwC was central, was it not?

Sir Howard Newby: It was indeed. Quentin Thompson was the consultant at the time. He is a very experienced individual.

Q13 Chairman: Are you thinking of trying to get your money back from PwC for bad advice?

Sir Howard Newby: No. I think we have to take the responsibility for what then happened. I do not think we can place that at the feet of PwC. My perception certainly is that the board at the time followed a good deal of the PwC advice. I do not think there was a fundamental difference between the business model proposed by PwC and that which was eventually adopted by my board. There were issues about how what was set up as a commercial venture could operate in an environment where quality was being assured - academic quality - and that led to the insertion, if you like, of what we now call Holdco (the holding company) between ourselves as funders and the operating company as a commercial venture. But the business model to which Opco (the operating company) was operating was fundamentally that which was proposed by PwC.

Q14 Chairman: Would you quickly, whichever of you is appropriate, take us through the history, what happened when. First decision to go, what date?

Sir Howard Newby: In February 2000 David Blunkett delivered his Greenwich speech. He said, in effect, that there was a global market developing in higher education and specifically in distance and e-learning, and he cited a number of examples of this, most of them American, and felt that it was in the national interest, given that we have a high quality higher education system in this country and that we have the great advantage of English being a global language -----

Q15 Chairman: You are not blaming David Blunkett for all this, are you?

Sir Howard Newby: No, but you asked me for the chronology, so I am taking you through it. He felt it was important that the UK should have a presence in this market and he asked the Funding Council essentially to set up a global e-learning venture. The Funding Council set up a steering committee chaired by Professor Ron Cooke, who was at the time vice-chancellor of the University of York. That was in February 2000, immediately following his speech. Then in May, PricewaterhouseCooper, to whom you have referred, were employed as consultants along with CHEMS. They delivered a report in October 2000, and in November we consulted on the model that they were proposing. This is all in 2000. In December 2000, an interim management team was appointed with an interim CEO and others drawn from the private sector, to establish the new company structure, and in the spring of 2001 we announced the conclusion of our consultation with the sector, which was that 74 per cent of those who responded agreed with the HEFCE board's decision to go ahead along the lines then discussed by them. It was proposed that there should be this structure of the holding company and the operating company, with the holding company overseeing the role of the operating company. Later in March David Blunkett announced the board members of Holdco and the members of the committee for academic quality, which was quality assuring the whole enterprise. During the spring of that year, 2001, all of the higher education institutions of the United Kingdom were invited to hold a share in the holding company. All but four of them did that. Then in October 2001, the strategic alliance with Sun Micro systems was agreed, so we then had a commercial partner. You may want to come back to the details on this, I realise. In November 2001 Antony Cleaver was appointed as chairman of the operating company and the board in turn appointed its own non-executive directors drawn from the private sector as well as from the higher education world. Then we come to 2002. In March the chief executive was appointed, John Beaumont, and other key staff were appointed. Really, this is quite important in some of the allegations that have been made about whether we were being too dilatory. It was in the spring of 2003 that the first pilot programmes were established. Between 2002 and 2003 there were two key issues which Opco were pursuing: one was the development of the platform with Sun Micro Systems and the other was attracting higher education partners to develop courses with them. Although there had been some slippage during that period, as you are well aware, on the technology platform it was not sufficient, we were informed, to delay the launch of the initial suite of courses in the autumn of 2003. They were duly launched in September 2003. The initial recruitment, as you know, was extremely disappointing when set against the business plan and at that point we did two things. We had already scheduled to have a review of the operation once the first round of recruitment had taken place, so that was going to happen anyway, but we strengthened the terms of that review - as you will know from the PA Consulting report - to ask some more fundamental questions about the business plan. That was in September 2003. By January 2004 the board received a recommendation that we should restructure the company, so we acted from start to finish in four months on that.

Q16 Chairman: Who did that come from?

Sir Howard Newby: That came from officers' advice, essentially myself advising the board at its February board meeting this year that in the light of the recruitment, the disappointing recruitment, and in the light of what was going on in the financial markets, the risk, as David has said, had tilted the other way. This was an unacceptable risk for us, and, given that the revised business plan which we had received from the operating company in the autumn of 2003 required an additional investment, on top of the £50 million already earmarked, of £17 million, our recommendation to the board was that the business plan was not sufficiently robust on which to base further investment. The board took the view to restructure the company in the light of that.

Q17 Chairman: So that is the complete history.

Sir Howard Newby: Well, summary, yes.

Q18 Chairman: More or less, yes. It is difficult for you because neither of you were there at the beginning. Did anyone, did your predecessor or predecessors, ever say to the Government look, "We are HEFCE, we do a certain job. This is our job. This is totally outside our remit, it is not our sort of thing"? Because it is not your sort of thing in a way, is it? You say there is nothing else in HEFCE's portfolio of activity like this. Did anyone say, "Secretary of State, it is a very unusual thing. We think it should be done in a different way."

Sir Howard Newby: No. I think at the time there was a good deal of enthusiasm in the higher education sector generally, and certainly within HEFCE, for a venture of this kind. I think there was also recognition that to be a major global player in a global market there had to be a substantial private sector involvement, because the necessary funding could not come realistically from the public sector alone. Government would not wish to earmark sufficient sums of money to be a heavy hitter in the global market without significant private sector involvement and certainly there were no spare funds in the Funding Council. You will recall, Chairman, this also coincided at the time with a big debate around top-up fees and how to attract more investment, if you wish, and more income into the sector from other than the taxpayer - and this was at the time of the origins, following the Dearing Report and so on, of the instruction of the flat fee for undergraduates into the sector. So there was always a recognition that for an e-learning venture of this kind to be successful in a global market, it had to attract substantial private-sector involvement.

Q19 Chairman: How much did it?

Sir Howard Newby: I need to be a little careful here, Chairman. The initial Sun Micro Systems investment was £5.5 million. However, I think it is fair to say that the amount, if you costed the Sun involvement over the period, is considerably more than that.

Q20 Chairman: I thought Pearsons were involved at one time. Did they bail out at some stage?

Sir Howard Newby: Pearsons were one of a number of private sector companies who in 2000 expressed interest in being private sector partners. In the end, at that time, they decided not to pursue that interest. I am afraid I do not know why exactly - you would have to ask them, obviously - but they decided not to pursue it. Instead I think they created FT Knowledge. Their involvement in higher education learning e-learning is now very minimal, although I think they still have a presence in e-learning in schools, which I understand has been quite successful.

Q21 Chairman: We were given a figure of £44,000 per course that this has cost. Is that an accurate figure?

Sir Howard Newby: I think the figure of £44,000 relates to Baroness Perry's question in the House of Lords about how much per student rather than per course.

Q22 Chairman: A mischievous e-mail to the Committee suggested that if you looked at it as a full-time equivalent, it was £1 million per course.

Sir Howard Newby: The situation, Chairman - and this is an estimate; I have to be careful here, I cannot pin it down to the exact amount - is that we expect, by the time we achieve the wind-down of the e-University, to have expended £30 million on the e-University: £30-£31 million. There are 16 higher education institutions which have developed courses as a result of this initiative. There were, as you know - it is in the public domain - 900 students who were registered for courses which were offered on the e-University platform. You do not need to be too much of a whizz at mathematics to work out that £30 million divided by 900 students is approximately £33,000 per student. It is of course the case in all conventional forms of learning that when any university offers a new course the initial costs will be very high. It costs a lot of money to put on a conventional course and you hope the numbers build up over time to make it worth everyone's while. If the numbers had built up, it would have been worth everyone's while, but the recruitment was extremely disappointing.

Mr Young: And it would only be a successful business if it operated at scale. That was always recognised. Indeed, that was very much in our minds when we looked at what they had achieved in the autumn of last year.

Chairman: Val, you wanted to come in just now.

Q23 Valerie Davey: Yes, I wondered very specifically about the change, as I understood it now, from the PwC report to the later delivery. The one aspect in which I am interested is the fact, as you rightly say in the information you have given us subsequently, of some very good work on e-learning going on, which you were supporting, at different universities. Indeed, there was a British market for it, and, as I understood it, the PwC report was building on a British market, whereas the business plan as it emerged was purely for a global market and did not seem to have that natural progression. Am I right, or is that a misunderstanding?

Sir Howard Newby: I think there was a shift in emphasis, yes. I do not think it was one or the other but once the e-University Opco board had been set up, they certainly felt that there was a major opportunity here, if you like, for UK export earnings. A great deal of emphasis was placed on international recruitment but not at the expense of students and home courseware. Even those UK universities which were developing courseware saw an international market for what they were producing in addition to the home market, but I think it is fair to say that the Opco board took the view that the major growth market was overseas, especially in Asia.

Q24 Valerie Davey: But HEFCE, with its educational background, perhaps ought to have been more alert to the fact that you develop these things from known good practice, and we had known good practice, and in the account you have just given, the historic outline, as it were, the universities do not seem to have been brought in with their expertise until March 2001, which is some way down the line of developing the business plan. My underlying concern, looking in - and I am not an entrepreneur - is that you have a process of delivery before you have the product.

Sir Howard Newby: First let me be clear, the university sector was brought in right from the very beginning. There was extensive consultation over the structure of the e-University as it went forward, and, as I said earlier, only four institutions decided not to take up the offer to become shareholders in Holdco.

Q25 Chairman: What did it cost them?

Sir Howard Newby: £1 - because Holdco is a company limited by guarantee. What I was referring to specifically was working with those universities - some of which, you are quite right, had already developed in embryonic form and some of which had developed quite extensively, certain amounts of courseware which could be improved and marketed through the e-University. Some universities were approached by the board to develop courseware from scratch. That is where a lot of investment went, because the e-University believed it had spotted a market in which it was looking for a UK institution or institutions to help them develop. So the sector was brought in right from the beginning. If I may say so, we are approaching one area, which I hope we will come on to, which I personally did find extremely difficult, and that is where my responsibilities as an accounting officer end and those as a shadow director begin. This is what was unique about this venture. To go back to your earlier comment, Chairman, if I may, when we deal with a conventional university, my role is very clear: I am the accounting officer for the sector, the vice-chancellor or principal is the accounting officer for the institution. That whole relationship is set out in a financial memorandum between ourselves and the governing body of the institution, and my rights and responsibilities are very clear. In this case, because it was set up as a commercial venture, company law comes into play, where I have to be very, very careful - and I was always cognisant of this - of not acting or being seen to act as a shadow director, and yet I had accounting officer responsibilities which might, if it had been a more conventional institution, have led me to act in a way which might have been judged as acting as a shadow director.

Q26 Chairman: Going back to my earlier question, Sir Howard, that was my very point: Why you? It does not fit really, does it?

Sir Howard Newby: It did not fit in that respect, no, but, as I said earlier, there was a recognition by everyone concerned, including myself when I took over in this post, that the e-University would not be a success without substantial private sector involvement. It was not something we could do ourselves.

Q27 Chairman: Sir Howard, you keep saying that, and we all agree with that, but why in this form? Why did you not spin it off to the Open University or a cluster of universities and give them the money to do it, so you had that traditional relationship?

Sir Howard Newby: Both of those options were very seriously considered and the answer to the question why we did not do a deal with either the Open University or with a cluster of universities was there was such enthusiasm from the sector as a whole for this, to be involved in this, that the sector did not take kindly to the idea that one institution or a group of institutions should in some way be privileged in running this venture.

Mr Young: My understanding is certainly that the structure, the Holdco/Opco structure, was specifically recommended in the Pricewaterhouse report which was published for consultation in October. It was not that HEFCE overturned - because you made that point earlier. We will go back and look at it, and if I am wrong we will put a note in, but that is certainly my understanding.

Q28 Chairman: If the Secretary of State said tomorrow, "We have this idea that you run this arm's length venture" on a similar method for some other purpose, what would you say?

Sir Howard Newby: I think I would want to establish very clearly, as I said earlier, how we get around this problem of shadow directorships conflicting with my accounting officer role. That is a very serious lesson to learn from that.

Chairman: Thank you for that introduction.

Q29 Mr Gibb: You have both been very assiduous in disassociating yourself from this operation by highlighting when you were appointed. David Young, you were appointed in June 2001; Sir Howard, you were appointed in October 2001. But some key decisions were taken after that. The impression we have as a Committee so far, I think it is fair to say, is that the failure here was not in the plan; the failure was in the implementation of the plan which falls squarely within the periods that you were in office. For example, Sir Anthony Cleaver was appointed in December 2001 and John Beaumont was appointed in March 2002. Could one of you tell me what commercial experience John Beaumont has had?

Sir Howard Newby: John Beaumont was recruited from Energis, where he had been responsible for their IT operations. Before that, from memory, he had been in the academic sector as head of the University of Bath Business School. We can send you a note on that.

Q30 Mr Gibb: For how long was he at Energis?

Sir Howard Newby: I cannot put an exact figure on it, but my memory would be something in the order of four to five years. But, again, his appointment was not made by us but by the board. I can send you that information, certainly. I am sorry, I just do not have that information at hand.

Q31 Mr Gibb: I know you are trying to avoid some company law problems with being a shadow director, but your recollection of events seems very vague and you seem always to disassociate yourself from any of these key decisions. I would have thought as the accounting officer you would have been far more involved in deciding who was to be the chief executive of this very large commercial venture.

Sir Howard Newby: No, I was not involved in deciding. I was certainly consulted at the time by the chairman Sir Anthony Cleaver - just as I was consulted at the time about the appointment of Sir Anthony himself, which again was a matter for the then interim board.

Q32 Mr Gibb: Should we have some other people before us, then, instead of you two? Should we have Sir Anthony Cleaver and John Beaumont before us? Is that what we should do next?

Sir Howard Newby: I think that is a matter for you. If you want to investigate in some detail, which you may wish to do, the detailed operational management of UK e-University, that really was a matter for the board and its senior management. I understand what you are saying about sounding vague and disassociating myself, and I am certainly not disassociating myself with oversight responsibility of what happened - absolutely not - but when it comes to the day to day business decisions that were taken, they were taken by the board and its senior management and not by HEFCE.

Q33 Mr Gibb: I was just trying to wonder who was responsible for the senior management.

Sir Howard Newby: The senior management of Opco was the responsibility of the Opco board and it non-executive directors.

Q34 Mr Gibb: Who appointed the Opco board?

Sir Howard Newby: Formerly the Opco board was appointed by the holding company, through whom we channelled the funding.

Q35 Mr Gibb: So you had no responsibility for that either, then.

Sir Howard Newby: No, I have absolute responsibility as accounting officer for ensuring that the money that we forwarded to the operating company via the holding company was properly spent.

Q36 Mr Gibb: And you did not have any say in who was appointed to the operating company board.

Sir Howard Newby: Absolutely not.

Q37 Mr Gibb: Or the holding company board.

Sir Howard Newby: The holding company board, yes, because that was a matter on which the Funding Councils, all of us, and the standing committee of principals were involved.

Q38 Mr Gibb: So you are responsible but you are just trying to disassociate yourself by saying that indirectly these different people had a decision. There seems to be nobody who is to blame for this.

Sir Howard Newby: I am responsible for the funding of the operation.

Q39 Mr Gibb: Right.

Sir Howard Newby: And for ensuring that public money was properly accounted for and properly spent.

Q40 Mr Gibb: Which it was not.

Sir Howard Newby: I am not responsible for the management of the company.

Q41 Mr Gibb: Yes, but who was responsible for the management of the company?

Sir Howard Newby: The board.

Q42 Mr Gibb: Who was responsible for that board?

Sir Howard Newby: The holding company board.

Q43 Mr Gibb: And who was responsible for appointing the holding company board.

Sir Howard Newby: We were.

Q44 Mr Gibb: Ah!

Sir Howard Newby: Together with the other Funding Councils and the standing ----

Q45 Mr Gibb: At last!

Sir Howard Newby: Well, I have already said that once, Chairman, together with the other Funding Councils -----

Chairman: You do not have to be so theatrical, Nick.

Mr Gibb: I just find that whenever the state sector engages in these high risk ventures there is a rapid rush to the door to disassociate everybody from it and we can never find who is the key man or woman responsible for this loss of taxpayers' money. Let me just ask you this question ------

Chairman: Hang on, Nick, this is our job. This is the first time of being here on this and we are asking questions. If they were not giving us information, I, as Chairman, would immediately point that out, but, as I understand it, Sir Howard and David Young are giving you full answers to questions.

Mr Gibb: Which they are doing now. They have said they were responsible for appointing the board which appointed the other board to the management decisions that have led to this course -----

Chairman: Carry on. I do not want to cramp your style, but I just want to ensure -----

Q46 Mr Gibb: Sure. My next question really is: Was this new web-based learning platform - and this may be something you cannot answer because these different indirectly appointed people were responsible for it - which £20 million was spent on creating - and, as you said earlier, was a much more ambitious IT system, because you felt that was what was necessary - in the PricewaterhouseCooper plan?

Sir Howard Newby: Yes, it was. I referred earlier to this issue of scaleability. The existing commercial-based products, it was believed - and I think rightly at the time - could not actually operate on the scale that was going to be demanded of the e-University business plan.

Q47 Mr Gibb: I am sorry, I do not follow.

Sir Howard Newby: The volumes that were needed. The business plan had to build up to considerable numbers of thousands of students using the e-University platform and at the time none of the existing commercial products could handle that volume of student traffic.

Q48 Mr Gibb: What did Pricewaterhouse recommend in their report?

Sir Howard Newby: On this particular issue?

Q49 Mr Gibb: Yes.

Sir Howard Newby: They recommended, as I recall, that the venture would need to handle both the technology platform right through to marketing and sales, as I mentioned earlier. The key, if you like, business decision or structural decision made at that point was that the e-University would handle all aspects of e-learning on behalf of the UK e-sector, from the technology side right through to the sales and marketing and student support.

Q50 Mr Gibb: What costs were included for this platform in the PricewaterhouseCooper plan?

Sir Howard Newby: At the time, the business plan that we funded into suggested an upper limit of £50-£52 million.

Q51 Mr Gibb: For creating the platform?

Sir Howard Newby: No, for creating the platform and all the other associated services.

Q52 Mr Gibb: I just want to know for creating the platform.

Sir Howard Newby: Sun Micro System involved in that was costed at £5.5 million.

Q53 Mr Gibb: What did the Pricewaterhouse plan say was the cost of creating the IT platform in their business plan? Or did they not have a cost in their business plan?

Sir Howard Newby: I think my recollection was £15-£20 million. I am advised that the original Pricewaterhouse plan did not cost it at that level of detail.

Q54 Mr Gibb: So you went ahead with a plan that had really no detail in it at all about the major fixed asset.

Sir Howard Newby: No, because that was the first Pricewaterhouse report we received. There were further reports that we commissioned at the time, both subsequent reports from Pricewaterhouse Cooper itself and from other consultants, which we used to assess the scale of investment required to launch UK e-University in 2002 as it was originally proposed. At the time we felt that the total cost of all the e-learning activity in which we would wish to invest was around £50-£52 million, of which, from memory, around £37-£40 million would be invested in the e-University.

Q55 Mr Gibb: Do you think the state should be involved in high risk ventures? I understand your point that in the state sector sometimes there is a tendency to be risk averse and therefore uninnovative in the way the state sector delivers public services, but do you think there is a role for the state to be involved in high risk ventures, that are engaged in to create a profit, which I think was planned, of £110 million by year 2010. Do you think that is the role of the state sector? Do you think that is what taxpayers of my constituency are wanting to put their own money into, to engage in these kinds of high risk ventures? Or do you think that is something that really should be left to the stock exchange?

Mr Young: It seems to me that is very much a political call. I would go right back and say that the decision to create this venture was fundamentally a perfectly reasonable political decision and there is no reason at all why the public sector cannot engage in a reasonable share of risk in return for a share of the rewards.

Q56 Chairman: Do you not spend a lot of time giving money to universities which do just that?

Mr Young: We certainly will continue to encourage universities, higher education institutions, to take appropriate levels of risk. I am quite unashamed about that. I think you cannot possibly have a system that is efficient and effective which is without risk, and that must mean that occasionally things will go wrong. What you then have to ask is: Why did it go wrong? Was it a reasonable decision at the time on the basis of the knowledge that you had at the time? How did you deal with it when it started to go wrong? They are common questions in the public and the private sector. For me, I would never say to the Secretary of State that the lesson from this is that we do not take risk. I have always said to ministers that you have to understand that risk needs to be controlled, it needs to be managed, and it must mean that occasionally things will fail. I have certainly said to ministers at an early stage in this project, "Look, this is a high risk venture," and that is precisely what it means, but that is not a reason for not doing it. It is a political judgment, if I may say so.

Q57 Mr Gibb: I thought the political judgment was to create an e-learning platform, not to create a world-hitter in the international markets with a view to creating £100 million a year profit. Could I just ask a final question, but you can come on to answer that point in relation to this final question: Have you referred this whole exercise to the Public Accounts Committee to investigate?

Mr Young: It is not a matter for us to refer it to the Public Accounts Committee.

Q58 Mr Gibb: If not, would you suggest that a member of this Committee perhaps refers it to the Public Accounts Committee?

Mr Young: I actually think that the National Audit Office are perfectly capable of coming to their own judgments on a matter of that kind. If they do decide to investigate, we will cooperate fully in the usual way, and Sir Howard will, if it comes to that, appear in front of the Public Accounts Committee - no question about that and no problem with it either.

Chairman: I want to put it on record that the Committee, when we investigate the individual learning accounts, did put on record that we did not want to inhibit innovation and enterprising ventures, but we just needed to learn the lessons when these things went wrong.

Q59 Paul Holmes: David Young, in your opening comments you quite rightly warned that it is all very well with 20:20 hindsight to take judgments but you have to look at it from the start point. But you also said, and you repeatedly said, that it was a high risk venture from the start, and you were very conscious of this and you were very conscious of the need to be at arm's length so that you could draw in private expertise and private money. Without 20:20 hindsight, you were saying from day one, "We have to be very careful here because this is high risk." Were there not a number of early warning signs that all was not going to go well with this? For example, the consultancy report you had done in December 2003 said that right from the start there was never from the e-University a clear statement of what their business objectives and strategy were. If there is no clear statement right at the beginning and HEFCE never asked for such a statement, how can you be measuring what they are doing and how realistic it is?

Mr Young: It was a very fast-moving position. It is true to say that we were a bit surprised that there was not a formal business plan, as I would have understood it, in the autumn of 2003. We certainly had had, however, oral briefings from the Chairman of Opco and the direction in which they were taking the business was known to us. If I go back to why is it high risk, it is because of trying to do a lot in this venture - I mean, to get the technology right. We all know that there is a risk that it costs more/takes longer when it is a cutting edge project. There is the market risk, which you cannot really establish until you are in the market; there is getting the course material, which is perhaps lower risk; and finally, and crucially, there is the question of getting private capital into the venture. Plainly, we certainly looked all the time at the prospects there, and we got advice from the Opco board, which did contain people with relevant business backgrounds and they also took advice, and we were advised that it would remain possible to bring in that money. But when, finally, you have problems with the platform, problems with the number of students and no obvious prospect of private money in the short to medium term, that was the point when we felt, "Enough is enough. The risks are now too high. We need to restructure."

Q60 Paul Holmes: There are two things there from what you have just said and the first one is back to my original question. You are saying that you were surprised that by 2003 there was no clear business plan and statement of objectives, but surely you had already by that time handed over £40/£50/£60 million of taxpayers' money to a company which you were then surprised two and a half years later had no clear business plan. Surely you should have wanted a clear business plan before you handed the money over.

Sir Howard Newby: First of all, there was a business plan originally, but time had moved on and we asked for a revised business plan from the company in the summer of 2003, which they eventually brought to us in the autumn. Sir Anthony Cleaver and Professor Beaumont had made a presentation to the HEFCE board in February 2003, so we certainly knew what was in their minds, going forward. But could I come back and say it was not £40/£50/£60 million that was expended at that time or even now on this. I gave you the figures earlier - just for record. The issue on attracting private sector finance was crucial and we were advised by the Opco board that this money would be attracted from the private sector once we had established the e-University as a going concern, as a business. It had attracted the number of students that were laid out in the business plan, then we were advised that the private sector would come in to back it. It was when we saw that the numbers were nowhere near those that were planned, that we felt that any realistic prospect of attracting private sector into the venture was nil.

Q61 Paul Holmes: Was it as late as December 2003 in the PA Consulting report that you realised that the ambition of the e-University was great, because they were looking not to do part of the job or part of the market but to take on the entire process: everything from finding the market to writing the learning platform to marketing itself to collecting the money. They were going to do absolutely every part of the chain which normally any company involved in this area would not do; they would deliver part of the chain.

Sir Howard Newby: We were being advised throughout 2002 and 2003, as developments went on, that there was a big market out there, that Opco was actively pursuing it, that there were lots of irons in the fire and they were confident of attracting the kind of student numbers that were in the plan. It was actually in September 2003, when we had the first results of the first round of recruitment on to those first courses that were launched that we realised the numbers were so disappointing. At that point, as I said earlier, we changed the terms of reference of the already planned PA Consulting evaluation for us into something much more wide-ranging.

Q62 Paul Holmes: Again, both of you have emphasised a number of times that right from the start it had to be entrepreneurial, it had to get private sector involvement and capital, but there was virtually no private sector capital and even the most optimistic report was saying, "Well, by 2006 we might start to get significant money from the private sector." If from day one, back in 2000/2001, when it was being thought up and set up, you were all saying that it must have 50:50 public sector and private sector, but the private sector money just was not there.

Sir Howard Newby: Again, I think we are talking about the balance of risks here. We were still confident and the Opco board was still confident early in 2003 that private sector funding would be attracted to the venture, that it would take a little longer but it was still within the envelope that we had allocated, and that once the venture was up and running and had attracted a substantial number of students who were seen to be successful then there was every prospect of the original business case being upheld. It was when, as I say, in September, we saw the results of the first round of recruitment for the first suite of courses that we felt that was not a viable proposition, and also the revised business plan which the Opco board submitted to the HEFCE board in the autumn of that year itself suggested they needed more time for that to happen, and that was the basis of their request for an additional 17 million on top of the money already allocated. At that point, my board quite rightly took the view that was too big a risk to carry.

Mr Young: Could I just add that my own recollection is that in 2001 we were advised that there was a good possibility of private money coming in as early as 2003, and that at that time (in 2001) despite what was going on in the financial markets, that did not seem an unreasonable judgment, if there had been by 2003 a business that was plainly working. As I said earlier, I wear a hat with a different company where precisely that has happened, where despite the dotcom collapse, nonetheless, it has been possible to raise private equity provided you have got a business that is meeting its targets.

Q63 Paul Holmes: This is the final question from me: is it not provided you have got a business that is meeting its targets and has a realistic plan? Although you started off by emphasising "We knew this was high risk and we had to be very careful", as late as December 2003 the PA consultant report said "UKeU has yet to demonstrate that there is a substantial and accessible global market, it has yet to demonstrate that it has a well-founded product and it has yet to demonstrate that it has a market strategy for earning profits." So on every count it was hopelessly failing to demonstrate that anything was viable, two-and-a-half years after the whole thing ----

Mr Young: I think the crucial point here is that in terms of marketing - what is happening in the marketplace - it was not until the student numbers for the launch in September 2003 were available that you could say without debate "These are the facts; we know now what the numbers are." Again, one of the things we will continue to chew over is the arms' length relationship; how much was it reasonable for us to get involved in the detail of "How many students have we got on this course, from that university, in that country?" It was entirely reasonable to say, "The autumn of 2003 is a major milestone and checkpoint when there will be hard figures available, and we will move on from there".

Q64 Valerie Davey: Just on one detail in that scenario: every educationist knows there is no school without pupils; there is no university without students. The fact that the platform was set up with the very remit to do the marketing and to be the support mechanism for students - did anyone show you the basic work which they had done to assess that there was a "big market" out there?

Sir Howard Newby: If I may answer this one, Chairman, at the original planning stage a marketing analysis was undertaken by CHEMS to establish the extent of the market worldwide and the areas, both geographical and academic ----

Q65 Chairman: Who did that?

Sir Howard Newby: CHEMS, the Centre for Higher Education Management Studies. They did an initial market analysis - this would be, from memory, back in 2000 - to establish the extent of the global market for online learning, and the areas in which there was a real market opportunity, both geographically and in terms of academic areas. So there was that initial market analysis done. Again, I think in retrospect, knowing what we know now, and the PA report is quite clear on this, the Opco took a decision not to have a marketing and sales director at board level. Certainly the PA report suggests that it was not sufficiently focused on key markets, as a result, in terms of identifying key markets and therefore developing courseware appropriate to those key markets early enough to attract the kind of volumes that their business plan demanded.

Q66 Valerie Davey: Are you saying that that initial research was wrong or that it was not asking the right questions?

Sir Howard Newby: I think the initial research established at a general level that there was a market out there and it helped to pinpoint some parts of the world where this market was likely to be particularly buoyant - in Asia and South America, for example. However, between then, 2000, and 2003 not only had we talked a lot about the dotcom boom but the education world had moved on as well. A lot more is understood now - and this is one of the lessons we have learned - than was understood in 2003 about the uses to which e-learning can be put in a higher education environment, and that the market we can now see for what one might call pure e-learning, that is e-learning unsupported by any form of conventional learning, is much smaller than that analysis suggested at the beginning, or that indeed was generally believed at the time by other countries, most notably the United States. What we now know is that the market for e-learning is a large one but it is e-learning blended with more conventional forms of learning; in other words, it is e-learning supporting more conventional styles of pedagogy, and that is where we see the way forward.

Q67 Valerie Davey: That is the very lesson, surely, that our universities, specifically Open University, could have told you, and the PWC report, as I understand it, was suggesting should be built on, and that understanding was available to you, or to the people setting this up.

Sir Howard Newby: I am not sure that that understanding was available at that time. I think the notion of blended learning and managed learning environments was certainly in its infancy then. The Open University, after all, has been around a very long time and, as we all know, is a very, very successful distance-learning organisation, but had not ----

Q68 Valerie Davey: Blended.

Sir Howard Newby: ---- at the time shown a huge amount of interest in developing an e-learning platform. Indeed, it still does not have one to this day.

Q69 Chairman: Who is in charge of marketing then?

Sir Howard Newby: There were two directors of sales and marketing: one based in this country and one based in Singapore, reporting to the chief executive.

Q70 Chairman: In terms of the structure of the company, I thought you said earlier that Sun Microsystems was in charge of marketing as well as other aspects of the platform.

Sir Howard Newby: No. Sun Microsystems were essentially involved in the development of the technology platform. Obviously it is a question for them, but I have no doubt that in terms of their commercial interest they saw further marketing opportunities stemming from their involvement in this venture, but as far as Opco is concerned marketing and sales were in the hands of two directors, but they were not board members.

Q71 Chairman: The astonishing thing about all this as it unfolds is not, actually, that you did not have talent there but you had the crème de la crème; the people who had been involved in this are significant players in the private and public sector, are they not? If you look at the board - Sir Anthony Cleaver, and so on - you had some big hitters involved in this.

Sir Howard Newby: Yes. Therefore we had confidence in their judgment.

Q72 Chairman: Yes. Later we are going to talk about the British Council and we are going to talk about the great success of higher education in attracting students in, but, as Val Davey has said, there was a lot of expertise out there that could have informed you of the real market earlier on. This is all pretty recent stuff.

Sir Howard Newby: I think it is fair to say, Chairman, that as events unfolded in 2002/03 there were those in the sector who were questioning whether the rather - if I can put it this way - technology-led approach, which the Opco board had adopted, was the appropriate approach. But I have to emphasise, at the time, that was an opinion and, as my Chairman said, we were waiting to get some hard facts before we could authoritatively intervene, rather than trade opinions with those, as you rightly say, who were heavy hitters, who had experience in the IT world, and who had the commercial background as well. Who were we to question their opinion on this matter?

Q73 Jonathan Shaw: John Beaumont received a performance related bonus of £44,914. Were you aware of that?

Mr Young: Yes, we were aware of it.

Q74 Jonathan Shaw: When were you aware of that?

Mr Young: After February 2004. When we communicated the HEFCE board decision and the Opco board, at that point, resigned and we put in the Robson Rhodes Consultant, in effect, as a company doctor (he became executive deputy chairman of the Opco board), we were aware of some of the details of the bonus scheme for the first time, and of legal advice to the reconstituted Opco board that those bonuses had to be paid as a matter of law. There have been quite a few surprises along the way; certainly surprises on the marketing side, for instance. Now to discover from the PA report about mis-pricing in China and India - it looks rather basic to me that the market research might have turned that up earlier. I also have to say, on the bonus scheme, that I am not personally very happy with what I know of the bonus scheme that was in Opco, but it was not something that required or had our approval before it was put in place, and all we could see was that they had a governance structure which looked perfectly straightforward and proper.

Q75 Jonathan Shaw: Sir Howard, you said you had confidence in people's judgment; we had the crème-de-la-crème here. What was the basis of the bonus scheme? You said that there was nothing you could do about it; it was legally binding. Presumably it was attached to performance.

Mr Young: I still do not have the full details of it, but my understanding of it is that the performance targets were - I would describe them - rather loose.

Q76 Jonathan Shaw: How have you made that judgement that they are rather loose? Can you, perhaps, assist the Committee to help us also reach that judgment?

Mr Young: I base that on what Bob Stubbs, who is the executive deputy chairman of the Opco board now, has said at meetings. HEFCE set up at the outset a sub-group of the board, which I chair, recognising this was a very unusual situation, and we have had almost fortnightly meetings in recent months. So I am basing what I have just said on oral advice that has been given to us.

Q77 Jonathan Shaw: What has Bob Stubbs said?

Mr Young: What I have said to you: that (a) the bonuses on legal advice would have to be paid and (b) that it looked to be a somewhat unusual structure.

Q78 Jonathan Shaw: How is it unusual? How did they get that bonus?

Mr Young: I can, really, only repeat what I have just said, that the linking of bonus to performance would seem to be relatively loose, and maybe not with the targets that I, if I personally had been doing it, would have chosen to put in place.

Q79 Jonathan Shaw: I have details of Mr Beaumont's performance related bonus. You said there were other bonuses. Did other directors of the company receive bonuses as well?

Mr Young: They did, including the chairman of the operating company.

Q80 Jonathan Shaw: Including the chairman. What do those bonuses total?

Mr Young: I would have to put a note on the total. They varied in terms of percentage of salary, I think, between relatively low amounts, like 3 per cent, up to 100 per cent.

Q81 Jonathan Shaw: One hundred per cent?

Mr Young: Yes. Throughout the company, as a whole, I think of the order of 70 staff were within a bonus scheme of one kind or another, which will include the executive directors and senior staff.

Q82 Jonathan Shaw: This is not very good, is it?

Mr Young: I have gone as far as I feel able to go in making plain that I have some personal unhappiness about what I now believe to have been the case.

Q83 Jonathan Shaw: So 70 people in this company that really was not performing, to say the least, were all receiving up to 100 per cent performance related bonuses. That is what we have here. I do not know if Sir Howard has a comment.

Sir Howard Newby: As I said, first of all our concern was with the governance of the Opco board. There was a properly constituted remuneration committee which determined the contracts and bonuses payable to the directors and other employees of the company. We had, through Holt Co, insisted, as a condition of grant, that the operating company abide by best practice with regard to the governance of a commercial company, and we are satisfied from the structures they set up that that was indeed the case. I have to say to you I was unaware of the nature of the bonus scheme that the remuneration committee and the board had endorsed, and I share my chairman's view that the outcomes are not ones we feel very comfortable with.

Mr Young: Can I just make a correction? I have looked at the note I have here. Of 75 employees, 31 were eligible for bonuses, and the actual ones paid ranged from 10-50 per cent but the possibility of it going as far as 100 per cent would seem to have been there in some cases.

Q84 Jonathan Shaw: Did you have a conversation with the chairman and chief executive about this?

Mr Young: I have had no such a conversation.

Q85 Jonathan Shaw: Sir Howard?

Sir Howard Newby: No.

Mr Young: Bear in mind that the chairman of the operating company stood down when we communicated the decision of the HEFCE board to him.

Sir Howard Newby: We certainly had conversations with our legal advisers about these payments.

Q86 Jonathan Shaw: Did you have a conversation with the Secretary of State?

Sir Howard Newby: I have not, no.

Mr Young: No.

Q87 Jonathan Shaw: Do you think you should have done?

Sir Howard Newby: Our legal advice, to repeat, was that these were, as a matter of law, payable. We had no real choice in the matter. In that respect I am not quite sure what form the conversation with the Secretary of State would have taken. This was a legal obligation, the company had to abide by the law. I repeat, I think both my chairman and myself find the outcomes uncomfortable.

Q88 Jonathan Shaw: Mr Young, in your opening statement you said that this was an ambitious project and that there were many similar projects that had failed for a whole host of reasons. Can you tell us what similar projects there are and for what reasons they had failed? What did you mean by that?

Mr Young: My recollection is I did not use the word "similar"; if I did I certainly did not intend it to mean other e-learning projects of a similar kind. What I certainly had in mind was in the private sector, in particular, taking on a venture of this kind, which you could see to be high risk for a number of factors. Mr Holmes, quite correctly, drew attention to one of those factors, which was seeking to do everything within the company itself, which in itself imports risk. You can look around, as it were, the landscape of companies that got it wrong, for whatever reason, and sometimes things happen. You do not expect that the competition will react if it reacts in a way that was not predicted, and if people do not buy what is put on offer when it is put on offer, it is very difficult to know in advance. That is all I had in mind.

Q89 Jonathan Shaw: I understand. Sir Howard, when the Chairman suggested to you "Why was this not given to a collaboration of universities or the Open Universities" your response was that you had thought through all this and you did not want any one particular institution or group of institutions to be in a privileged situation. Some are in more privileged positions than others, anyway - research funding, for example - so it is hardly new, is it? That is a bit thin, is it not, really?

Sir Howard Newby: I repeat, we had a lot of enthusiasm from the sector to be involved in this.

Q90 Jonathan Shaw: You always have enthusiasm from this sector if there is opportunity to develop cutting edge research.

Sir Howard Newby: Yes, but the difference is we have performance in research on which to base our funding; we did not at the time, and do not now, have any performance on which to base our funding of this. One of the issues we were faced with at the time was that those institutions which had taken the greatest interest in e-learning already, before the e-university came along, were not necessarily those with the strongest international brands, and those which had the strongest international brands were not necessarily those which had developed an interest in e-learning, although many of them expressed a desire to get into e-learning. The Open University, as I described earlier, is in a rather different category because it certainly has a brand, it has an international brand, but it had not actually developed its distance learning into e-learning. Certainly, whilst the Open University was invited all the time to be a partner in this we did not feel we could hand the whole venture over to the Open University, although that, I repeat, was considered as an option.

Q91 Jonathan Shaw: Why is that though? Why, if we have an institution like the Open University which has a proven track record of success, do we feel we have to go and invent this funny old hybrid in a risky situation?

Sir Howard Newby: If we look at the institutions worldwide, that were referred to in David Blunkett's speech at Greenwich, that were already operating in an e-learning environment, they include universities like the University of Chicago, the consortium of Western United States state universities - public universities in the United States - and there was a lot of discussion at the time about MIT, Princeton and Yale becoming involved in worldwide ventures with Chicago and with the London School of Economics. These are major worldwide brands and, in talking about the commercial market, brand is important in this field, like any other.

Q92 Chairman: There are rather lesser known brands that have made a success of e-learning, have they not?

Sir Howard Newby: Not really, Chairman.

Q93 Chairman: No? People talk about the University of Phoenix, for example.

Sir Howard Newby: I will come back to that. Of the seven institutions referred to in the then Secretary of State, David Blunkett's, speech as being involved in this area only two remain today, and one of those is indeed the University of Phoenix. Of course, what is interesting about the University of Phoenix is it is not a pure e-learning organisation; it is actually a very interesting model of a university which predominantly focuses on adult learning and which blends conventional forms of learning - there are bricks and mortar buildings of the University of Phoenix dotted all around the United States and elsewhere - supported by e-learning courseware.

Q94 Chairman: It is our job to hold you to account. That is what this Parliamentary Committee is about. We have good relations with HEFCE and we call you to account and we have a familiar pattern of exchange. In this one, the Committee, listening to what you have said this morning, would absolutely understand that these things are high-risk and can go wrong, and it is our job to unravel that. Where it becomes scandalous - and we are representatives of the taxpayer - is on this bonus thing. People in Huddersfield, my constituency, are very likely to say to me: "Come on. We can understand that one of these things went wrong, but for bonuses of 50 per cent and nearly £50,000?" Bonuses, as most people out there believe, are linked to some kind of success. Where this becomes scandalous, in a sense, is the bonus . What on earth was going on? Was not someone in the system - you can say it was arms' length and all that - whistle-blowing and saying "Come on"? Was there not anyone saying "Something is going on, paying bonuses when this thing has not earned one penny piece"?

Sir Howard Newby: I have some sympathy with the view that - and I can certainly say this about my contract, Chairman - bonuses should not be paid out when there is clear evidence of failure to meet the performance that was expected. My understanding is that the Opco board felt it was necessary to construct the kind of bonus scheme it did in order to attract and retain the kind of talent it required from the private sector against a public sector salary environment where, as you know, vice-chancellors are paid below the level that a chief executive would be paid in an equivalent size company in the private sector.

Q95 Chairman: How much was the chief executive paid? What was his salary?

Sir Howard Newby: His salary, from memory, Chairman - and we can send you a note on this - was £186,000.

Q96 Chairman: £186,000. That is a lot more than most vice-chancellors earn, is it not?

Sir Howard Newby: There are a few vice-chancellors who are paid more than that, but it is at the upper end of the scale.

Q97 Chairman: At the upper end of the scale, and a bonus.

Sir Howard Newby: And a bonus, indeed.

Q98 Mr Turner: There seems to be some sort of confusion about the Pricewaterhouse report - more than one report - and a disagreement about what they said in terms of their advice on who should be the target market. Can you make those reports available to the Committee?

Sir Howard Newby: I think you have the powers to ask for them. I do not see why we should not make them available to you. We will send them to you, Chairman. Let me say, there is more than one report - you are aware of that? There was an original PricewaterhouseCoopers' report which advised on, if you like, the fundamental business model that was to be adopted. That was then later followed, in 2001, after the interim management team had been appointed, by a further PwC report. Indeed, the interim management team was supported by PwC and that created a further plan which took matters forward. So there is more than one report, but we will ensure they are sent to the Committee.

Q99 Mr Turner: Thank you very much. Mr Young, you said that it was always accepted that this was a high-risk venture, and later on you said that you made it clear to the Minister - I think you said "at an early stage" - that it was a high-risk venture.

Mr Young: I can certainly recall a conversation with Margaret Hodge, although it was some little while ago.

Q100 Mr Turner: Clearly, that was subsequent to your appointment in March 2001.

Mr Young: I was appointed to the HEFCE board in June 2001 and took over from Michael Jeppard (?) as chairman on 1 October.

Q101 Mr Turner: So that was subsequent to that. What advice did ministers have about the level of risk, as far as you knew, before that conversation took place?

Mr Young: My understanding would certainly be that from the outset it was always made plain that this had more risk than most of the things - almost all of the things - with which the funding council involves itself.

Q102 Mr Turner: I think most of us find it quite difficult to envisage risk. We know that with Russian Roulette there is a one-in-six chance of being dead. Can you give me some sort of measure of the risk which (a) you represented to Mrs Hodge and (b) was represented at the beginning to ministers during the year 2000?

Sir Howard Newby: Perhaps I could take this because, in practice, Chairman, it was I who reported to Mrs Hodge at the time, and subsequently to Mr Johnson on a regular basis, about the e-university in our regular meetings. The nature of the measurement of the risk was in what we might call a fairly conventional form - low, medium and high risk were identified. We set up a risk register, that risk register was agreed by DfES in 2001 and it was updated subsequently - but without, I have to say, fundamental changes thereafter. I think the risks which have come to fruition, if I can put it that way, were risks that were identified in the original register.

Q103 Mr Turner: Right. So the DfES accepted those risks in 2001?

Sir Howard Newby: Indeed they did.

Q104 Mr Turner: Did they, in your view, understand those risks? Who set the ball rolling? We know that David Blunkett made a speech, we know he asked you to do things, and we know that in February 2000 a steering group was set up and PwC was employed. Was HEFCE asked to give him any advice before he asked you to set up a global e-learning enterprise?

Sir Howard Newby: Well, obviously, I was not around at the time but my understanding is yes, HEFCE was involved at that stage. My predecessor, Sir Brian Fender, was quite heavily involved in discussions with ministers at the time about the form in which the e-university might take. One of HEFCE's obligations is to advice ministers on the needs of the sector, and I have little doubt that some of HEFCE's thoughts at the time were, indeed, incorporated into David Blunkett's speech.

Q105 Mr Turner: So he had their advice before he made the speech and before he asked you to set the ball rolling?

Q106 Sir Howard Newby: Yes. I was President of Universities UK at the time of that speech, so I also know that some of the advice that was fed into the department and to ministers at that time consisted of reports, one of which, at least, had been commissioned by Universities UK itself. That was the boardless (?) education report commissioned by Professor Robin Middleton at the University of Surrey, which had also surveyed the global scene and tried to assess the potentiality for e-learning in a UK context. That was also fed in at the time.

Q107 Mr Turner: Would you like to quantify the risk which ministers were advised on at that stage, or were they not advised on any risk at that stage?

Sir Howard Newby: I think, Chairman, I see no reason constitutionally why we cannot send you a copy of that risk register. We are not trying to hide anything here. I do not think it is covered by the confidentiality of advice to ministers - we can check on that - but I certainly have no objection to sending the Committee a copy of that so you can see for yourselves both the risks that were identified and how they were categorised in terms of high, medium and low.

Q108 Chairman: That would be most useful, as would your suggestion - going right through to Brian Fender, significantly, PwC, Sun Microsystems, PA and the other two boards - as to who you think are the crucial people that this Committee should interview to continue our forensic investigation into what happened. We will not take them all but we would be grateful to know who you thought were the key players as well. Could you give us that information?

Sir Howard Newby: Personally, given the structure that was established, I would have thought the Committee might like to consider inviting someone from the Holdco board, which would probably be Sir Brian, who chaired Holdco, and no doubt someone from the operating company; either Sir Anthony or Professor Beaumont, or both.

Q109 Chairman: When you talk about PwC, as a company, we all know there will have been a key person in PwC.

Sir Howard Newby: That was Quentin Thompson.

Chairman: That is the sort of information we want.

Q110 Mr Turner: The next stage was that 74 per cent of the respondents among the higher education institutions leapt on board. Presumably this was on the basis it was not costing them anything.

Sir Howard Newby: It was on the basis of them agreeing that there was a real opportunity here that the UK should grasp, and a broad consensus that it should be something that should, as far as possible, involve the whole sector, not just one or two institutions in it.

Q111 Mr Turner: So it was 74 per cent. A pretty large number of the institutions.

Sir Howard Newby: Yes.

Q112 Mr Turner: How many respondents were there, after all?

Sir Howard Newby: Again, we can send the precise information but, since at the time this was looked at as a UK venture, there would have been, I guess, probably 104 universities and, possibly, about another 30 or 40 colleges. As a round figure we are saying there was about 150, I would guess.

Q113 Mr Turner: At what level in an institution would such a decision classically be taken?

Sir Howard Newby: In this case it would be taken by the senior management of those institutions - at chancellor and, indeed, vice-chancellor level - advised, no doubt, in many cases by the heads of their education technology units. That was certainly the case in my institution at the time.

Q114 Mr Turner: Earlier on, Paul Holmes referred to the lack of private sector capital, and you have used the word "partner". Judging by the amount of information that has been withheld by Sun Microsystems, what risk were they taking as your "partner"?

Sir Howard Newby: Chairman, that is a question you will have to ask Sun Microsystems. They were making a considerable investment, in their terms. There was a financial risk (and, I repeat, I think the amount of money they put into the venture - they would probably claim they spent far more than that, as things have turned out), and there was obviously a reputational risk to them if the venture was not successful. I would imagine those were the two key reasons they would have identified.

Q115 Mr Turner: But there was no private sector capital invested in the scheme?

Sir Howard Newby: If you mean by that did the operating company have a significant private capital investment, the answer is no. Sun were a partner in developing the platform but they were not an investor in the operating company.

Q116 Mr Turner: Could you tell us how big were the holding company board and the Opco board?

Sir Howard Newby: Yes, the operating company board had approximately ten members and the holding company ten or 12. We can supply you with that information.

Q117 Chairman: Can you tell us if at any time people left and when they left?

Sir Howard Newby: On the operating company, Sir Alan Wilson, who was a founder member of the operating company board (he was then vice-chancellor of the University of Leeds) left the company on his appointment as director general for higher education in the DfES. That would be, from memory, in August 2003.

Q118 Mr Turner: You told my colleague that the holding company board was appointed by you and institutions. Exactly what was the process by which members of the holding company board were appointed?

Sir Howard Newby: For the holding company board we, essentially, put out an advertisement for people to apply to put themselves forward as members of that board.

Q119 Mr Turner: "We" being HEFCE?

Sir Howard Newby: Yes, on behalf of the funding councils and SCOP. We had a very large number of applications from whom the eventual board names were selected by a small working group.

Q120 Mr Turner: Of the HEFCE board?

Sir Howard Newby: Of HEFCE with our other partners at the time, by which I mean the other funding councils and the Standing Committee of Principals. We also consulted Universities UK on that.

Q121 Mr Turner: There was a shadow board in December 2000 and the holding company was set up subsequently. Who appointed the shadow board?

Sir Howard Newby: There was a series of interim arrangements put in place to get the whole thing moving and, essentially, we (HEFCE) appointed the interim management committee, but none of those who were in that group, from memory, subsequently became members of either board. Chairman, if I may, I now have the list in front of me. If you would like me to see whether my estimates of the size of these two boards was correct or not? On the holding company there were 12 members of the board, so my initial estimate was reasonably correct, and on the Opco board there were ten members.

Q122 Mr Turner: How often did you review the operation of the holding company board?

Sir Howard Newby: The holding company board, as a condition of grant, was obliged to report to the HEFCE board annually, but we received reports from the holding company more frequently than that - on average they were every six months.

Q123 Chairman: But that never included the bonus system?

Sir Howard Newby: No. I have to say, the first I was aware of the existence of that system was when the Opco board resigned following my board's decision.

Q124 Mr Turner: You insisted, you said, as a condition of grant (presumably, through the holding company board), that best practice be complied with.

Sir Howard Newby: In terms of company governance, yes.

Q125 Mr Turner: Do you think it was complied with?

Sir Howard Newby: The governance structure I would defend. I think it was best practice, because what we are talking about is the difference between the structure and the substance of decisions that were made.

Q126 Mr Turner: Who was responsible for the remuneration of the chairman of Opco?

Sir Howard Newby: That was the responsibility of the remuneration committee of Opco.

Q127 Mr Turner: Who was on the remuneration committee of Opco?

Sir Howard Newby: I think, Chairman, we would have to send you a note on that. They were, essentially, the non-executive directors, as I understand it. We can give you the information, rather than speculate.

Q128 Mr Turner: Would you have expected that the Secretary of State, on hearing the advice that you gave him in the spring of 2000, in particular, would have sought other advice from officials?

Sir Howard Newby: I would have expected that, yes, and I am pretty sure he must have done.

Mr Turner: You, Chairman, described the bonuses as a major scandal.

Chairman: I said "scandalous".

Q129 Mr Turner: Scandalous. Where do you think, Sir Howard or Mr Young, the biggest failure lies in this, either the process or the decision making associated with it?

Sir Howard Newby: With the company or with the bonus scheme?

Q130 Mr Turner: With the whole story, ending up with today.

Sir Howard Newby: My personal view is that it is really a marketing failure, and that the markets were not identified and focused upon with sufficient clarity. I think, while the technology platform slipped in terms of the timetable the slippage was not sufficient to threaten the integrity of the company. We were advised, and we are advised now, that the technology platform is an advance on previous platforms but, as we know, in the end, only 900 rather than 5,000-6,000 students registered to use it, and I would say that this is a failure of marketing and selling.

Q131 Mr Turner: Mr Young is nodding.

Mr Young: I would have started in exactly the same way and would say, finally, that the other piece of the jigsaw, which is in the event the non-availability of private sector finance, is more of what I believe is called an exogenous factor, perhaps.

Chairman: We do have one more topic to cover, so if you could have a last bite.

Q132 Mr Turner: My last question is do you know of any other e-learning projects - of those that were mentioned in the Greenwich speech or others that may have happened elsewhere - that have failed because of a lack of customers?

Sir Howard Newby: Yes, a number of them.

Q133 Mr Turner: Those are?

Sir Howard Newby: The one that, I think, has probably the highest profile would be Fathom, which was the venture set up by the University of Chicago and a number of American universities with the London School of Economics. That closed down, again, because of a lack of student numbers. The Western Governors' University, as it was called, in the United States, which is the consortium of public universities in the Western United States, is also no longer operating for somewhat similar reasons. And there are others. Of those that were mentioned in the Greenwich speech those two certainly have struggled because of a lack of student demand, in the end.

Q134 Chairman: As you have put your finger on the failure to market the product or to know about the market as being central, it is quite interesting to see that Nigel Bannister was director of marketing. Did he get a bonus?

Sir Howard Newby: I do not know. We can, again, let you have that information.

Q135 Chairman: Could you find out?

Sir Howard Newby: I am advised, Chairman, that he did and it was 3 per cent only.

Chairman: I now want to switch, very briefly, to the future of e-learning because this Committee is minded to look at e-learning. As I said earlier, we would not want this experience to cast a shadow over a very important area of development in education generally.

Q136 Jonathan Shaw: Whatever, I think, the lessons drawn from the main topic today, as the Chairman said, we want to see e-learning continue in this country. What lessons have been learned? Tell us about the future, Sir Howard.

Sir Howard Newby: The first lesson I would learn is that the development of e-learning needs to be learner-centred rather than technology driven. We need to know a lot more about the needs of learners and, if I may get a little bit technical here, the form of pedagogy that e-learning involves, which, as we can now begin to see, is quite different to that of more conventional "chalk-and-talk". I have to say, one of the elements of value we have extracted from this unfortunate affair is the research component, which of course still survives, where we now know a lot more as a result of the investment we put in about, if you like, what students are looking for and the kind of form of teaching and learning which we need to present to them through this technology. I say that rather than starting off, if you like, with a technology driven solution, where you start off with a piece of technology and then, based on the view that we know what the student ought to want and if the student does not want it in that form that is the student's problem and not ours - I do not think we could possibly go down that route again. Secondly, I think it really follows on from that that, as I said earlier, we now know - perhaps more than anybody did at the time, in fairness - that the future of e-learning lies in what is called "blended" learning; of allying e-learning materials (courseware, in the jargon) to more conventional forms of learning. As I said before, and I think I said, Chairman, to this Committee before, there is more to being a student than sitting in front of a computer screen. I think that is another important lesson. So the way forward would be to encourage, facilitate and invest in universities which are developing this blend of courseware allied to their existing materials. That, therefore, puts individual universities or, if you wish, small groups of universities at the forefront of this, rather than having a single e-university attempting to develop, market and sell on behalf of all of the sector. I think that is the third lesson we would learn.

Q137 Jonathan Shaw: A privileged view?

Sir Howard Newby: We still would wish to see e-learning, in the form I have described it, as being part of the walk and weft of the entire university sector. In other words, we would wish to see all higher education institutions pushing forward high quality, blended forms of learning, making use of the new technology but not being dominated by the new technology.

Q138 Jonathan Shaw: What is going to happen to the existing 900 students?

Sir Howard Newby: Of the 900 students that were present using the platform in September, there are now, on the latest estimate we have, 145 still registered on courses which have not yet concluded. We hope that virtually all of them will have completed their courses or their courseware will be reversioned to another platform to make sure that their interests are catered for before the final wind-down of the e-university which we would anticipate being at the end of July. There may be a very small number - and I am talking of tens, no more than that - of clusters of students on particular courses at particular universities which are totally dependent on the e-university platform. Between now and then, we - and I have to pay tribute to the remaining staff at the university - are working very, very hard indeed to ensure that their interests are properly protected. However, in the end, I would anticipate the number of students who are most at risk is probably no more than 20 or 30.

Chairman: That moves us seamlessly on to the last thing we want to talk about, which is rather different, but how that links to international student demand.