House of Commons - Education and Skills

Select Committee on Education and Skills Third Report

2 Background to the UKeU

6. The original idea for the e-University project was being discussed in 1999 at the height of the dotcom era. The context in which the idea was developed goes some way to explaining the highly ambitious nature of the project. It was a time when there were thought to be no limits to the potential of the internet. The Minister said to us:

'I think we certainly have to go back to that period when it looked as if it would be possible to deliver all kinds of education on line.'[1]

7. At the height of the dotcom era there was also a sense of urgency that if you didn't strive to take your share in this global market straight away, you would lose out. David Young, Chairman of HEFCE, said:

'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.'[2]

8. By 2000, a number of on-line learning ventures had been launched in the US: the Western Governors' University, Pheonix University, e-College and many others. The experience of what was happening in the US at this time certainly contributed to the feeling of pressure for the UK to establish its share of the global e-learning market. In a speech that announced the e-University project, the then Secretary of State for Education, David Blunkett, said that the role of the e-University project was to 'concentrate resources from a number of partners on a scale which can compete with leading US providers.'[3] As the current Minister for HE, Dr Kim Howells, explained in his evidence to the Committee:

'It was also informed by a kind of fear that the Americans were going to capture students and that they were actually going to capture students in this country.'[4]

9. The context in which the idea of the e-University was formed led to it becoming a highly ambitious global project. It was intended to be the 'flagship provision of UK higher education excellence,'[5] that would establish the UK as a leading player in the market for online learning. The extent to which the highly ambitious nature of the venture contributed to the failure of UK e-Universities Worldwide (UKeU) will be considered further in this report.

Setting up UKeU

The Government's proposals:

10. In February 2000, the then Secretary of State, David Blunkett, announced the project to establish the e-University as a vehicle for the delivery of UK universities' HE programmes over the internet.[6] The ambitious nature of the Government's proposals were clear from the Secretary of State's speech. He said that 'e-learning has become a big business' and, as a result, 'a new national initiative is needed to maximise Britain's chances of success in this global environment.' He announced that it would be the HEFCE that would 'bring forward proposals for a new collaborative virtual venture—a consortium of 'e-universities…to create a new partnership between universities and the private sector.'

11. The Government allocated £62 million to the HEFCE for the project over the period 2001-2004. The guidance that was given to HEFCE in the Secretary of State's Grant Letters in 2000, 2001, and 2003 regarding the UKeU is included in Annex 1.

The HEFCE's role in setting up UKeU

12. Following the Government's announcement of the e-University project, the HEFCE set up a steering committee in February 2000 chaired by Professor Ron Cooke, the then Vice Chancellor of the University of York. In May 2000, PricewaterhouseCoopers (PwC) was employed to develop a business model. CHEMS[7] were asked to undertake some initial market research. PwC reported in October 2000 and, in November 2000, HEFCE consulted the sector on the model that PwC had proposed.

13. In December 2000, an interim management team was appointed with an interim CEO, Nick Winton, and others drawn from the private sector, to establish the new company structure. In spring of 2001 the HEFCE announced the conclusions of their consultation with the sector.[8] 74% of those who responded agreed with the HEFCE board's decision to go ahead along the lines proposed: an operating company and a holding company to oversee the role of the operating company.

14. In its memorandum to us the HEFCE stated:

'Our original model was for a joint venture between a consortium of HEIs (supplying the learning programmes) and private sector partners (putting in the technology, marketing and business drive). However, PwC took the view that many HEIs would be involved in e-learning globally, and so it would be cost-effective to have a central vehicle accessibly by all HEIs.'[9]

The operational structure of HoldCo and UKeU

16. The holding company, e-Learning Holding Company Ltd (HoldCo), was a private company limited by guarantee. The members, whose role it was to appoint the Board of the company and hold it to account, were the HEIs themselves. All but four of the UK HEIs became members. The universities and colleges jointly owned the holding company, through which they licensed the operating company to deliver their courses.

17. The e-Learning Holding Company Ltd (HoldCo) was established in March 2001, with Sir Brian Fender, Chief Executive of HEFCE at the time of his appointment, as Chairman. The holding company was the vehicle through which HEFCE was able to invest public money in the e-University venture without having any direct relationship with the operating company, granting HoldCo funds to invest in the operating company.

18. In October 2001, the operating company was established (UKeU). It was a private company, limited by shareholders. The shareholders for UKeU were the Holding Company, Guillemont Trust (a charity that Sun Microsystems UK vested its UKeU shares in because it chose not to hold shares in UKeU), and Croft Nominees (a company vehicle to hold the contributions from Sun Microsystems UK that were put into escrow). Equal shares were given to the public sector shareholders (HoldCo) and the private sector shareholders (Guillemont and Croft Nominees). Over time, however, as HoldCo needed to invest more public funds into UKeU, HoldCo became the dominant shareholder by a significant margin and this affected the relationship between the holding company and the operating company.

19. In October 2001, the strategic alliance with Sun Microsystems Limited was agreed. It was after this had been agreed that the Chairman of UKeU, Sir Anthony Cleaver, was appointed in November 2001. The board then appointed its own non-executive directors drawn from the private sector as well as the HE sector. The Chief Executive of UKeU (John Beaumont) was appointed in March 2002, along with other key staff.

20. The senior management of UKeU were responsible to the UKeU Board of Directors—appointed by the Holding Company. The Holding Company Board were appointed by HEFCE. The Chief Executive of the HEFCE was the accounting officer responsible for the public expenditure, but not the operating decisions, of UKeU (although through the Holding Company HEFCE had insisted as a condition of grant that UKeU were consistent with best practice in the commercial sector).

21. Once UKeU was operational, it was given a considerable amount of freedom. The original PwC business model formed the blueprint for UKeU, but after it was operational the decisions were those of UKeU. As Dr Howells said in evidence:

'PwC had produced…a business plan; it had attracted two very distinguished businessmen to run it and the board …of the holding company contained numbers of distinguished business people and of course academics who had a very real interest in this. So, theoretically at least, there ought to have been enough expertise there.' [10]

22. The accounting officer was the Chief Executive of the HEFCE, Sir Howard Newby, but he made the point that, as the accounting officer, he could not make any operational decisions. He was there to monitor, not manage the UKeU. Dr Howells, told us:

'The company that was created, however, was a company which had to operate as any other commercial entity. That meant that individuals from HEFCE had to be very, very careful that they were not seen to be acting as shadow directors.'[11]

Outcomes and expenditure

23. The UKeU failed to meet its targets, aims, and objectives. The launch of the first UKeU courses was delayed until September 2003. When launched, they attracted just 900 students against a target of 5,600. Furthermore, despite it being a condition of grant, UKeU failed to attract significant private investment. The following summary of UKeU progress against its targets is taken from the Business Review of the UKeU, conducted from September to December 2003 by PA Consulting:

'From initial incorporation in 2001, the e-University didn't move from its initial start-up into its business launch phase until September 2003, when the first tranche of 16 courses were made available on-line and the first wave of 900 students signed up. However, this position was still significantly behind that originally targeted for this stage of the business plan agreed with UKeU in April 2002.[12]

'The original business plan forecast rapid growth to 110,000 students within the UKeU's first six years, reaching over 250,000 by Year 10. Revenues were forecast to grow commensurately, breaking even by Year 5 (2006-07) and generating gross profits of more than £110m by Year 10. Even by Year 2 (2003-04), the original plan forecast student enrolments of more than 5,600 (downgraded from 12,600 in the first PwC plan) and revenues of £2.7 million. In practice, the UKeU has underperformed against the results forecast by the original plan in respect of courses available, students enrolled, platform delivery and external investment secured.

'A new and substantially revised business plan was approved by the UKeU Board[13] in November 2003, containing updated forecasts for enrolments, product launches and operating costs. The revised plan was based on significantly lower business volumes than the original plan, targeting growth towards 45,000 students and revenues of £40 million by 2009-10. Expected break-even was forecast for 2007-08.

'The revised plan was predicated on the availability of a further £30m of capital from HEFCE in addition to the £27m already invested. Unlike the original plan, the revised business plan contained no provisions for private sector investment within the next six years, although this option was still being explored.'[14]

24. The original Government objectives, and the original HEFCE/PwC business plan, stated that the UKeU was meant to be an effective partnership with HEIs, and that it was meant to be a joint public-private venture. Indeed, one of the conditions of grant was that the business should seek 50/50 public/private funding to put commercial drive and accountability into the venture. Other than Sun Microsystems, who signed a strategic alliance with UKeU in October 2001 to develop the technological platform, and one relatively small private investor (around 1% of the HEFCE grant),[15] UKeU did not secure any private investment. Furthermore, many HEIs pulled out of their partnership with UKeU in the later stages of the project.

25. On 25 February, the HEFCE Board considered a review of the company's business plan by PA Consulting. The HEFCE Board had to decide whether UKeU's new business plan justified further public investment. The Board decided that in future HEFCE funding should support the development of e-learning in universities and colleges rather than through UKeU. In February 2004, HEFCE announced it was holding immediate talks with UKeU on restructuring activities and services—in effect the HEFCE terminated UKeU and set about deciding which activities should be maintained and transferred to HEIs.

26. In evidence to the Committee, Sir Howard Newby, Chief Executive of the HEFCE, explained that the advice to the Board came essentially from him:

'… in light of the …disappointing recruitment, and in the light of what was going on in the financial markets, the risk…had tilted the other way. This was an unacceptable risk for us…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 light of that.'[16]

27. Project management of the successful e-China project has been transferred to the University of Cambridge. The e-learning research centre will continue as a partnership between the Universities of Manchester and Southampton and the Higher Education Academy.

28. £62 million was allocated to the e-Universities project for the period 2001-2004. Of this £62 million, £50 million has been spent. The expenditure breaks down as follows:

Table 1 Public expenditure on the e-University project to date

Public Good Activities e-China project £3 M

e-Learning research centre £1 million

Research studies and other disseminations £2 million

Advisors: legal and business £1 million

Commercial Activities Technology platform development £14.5 million

Learning programmes development £10.9 million

Sales and marketing (including overseas) £4.2 million

UKeU operating costs £12.9 million

Total expenditure £49.5 M

Source: HEFCE

29. According to the HEFCE, it plans 'to use the balance of the £62 million originally provided by Government, alongside other funds, to support the development of e-learning in universities and colleges.'[17]

Salary, bonuses and share packages

30. The UKeU Annual Report 2002-03, published in March 2003, stated that John Beaumont's basic salary was £180,000 and that he received a 'performance related bonus' of £44,914. In March 2003, the Learning Environment (platform) was running a year late and no courses had been launched—initial pilots due to be launched in Spring 2003 were delayed until Autumn 2003. Despite this, Sir Anthony Cleaver was very clear in his evidence to the Committee that, in his opinion, best practice had been adhered to.

'All the bonuses were awarded against defined criteria which were set in advance and people's performance was assessed against them. In the same way, the bonuses that were paid to John Beaumont and myself were based on specific numeric objectives agreed in advance by the Remuneration Committee composed entirely of non-executive directors with wide commercial experience who looked at the targets and said, yes, for this year, those are the things that it is realistic for you to achieve. If we achieve those, they will in turn provide the foundation on which we will build in the future. I have absolutely no qualms about either the process or the outcome of the bonuses.'[18]

31. Sir Anthony Cleaver and Mr John Beaumont would also have received a bonus of 0.5% and 1% respectively of the market value of the company if it had been floated or sold at any point in the future.[19] In evidence to the Committee, Mr Stretch from Sun Microsystems UK Ltd said that he was not surprised by this and described the arrangements as 'conventional.'[20]

32. Whilst the practice of large bonuses and share packages might be standard procedure in the private sector, UKeU ended up being an almost wholly publicly funded venture. The bonus scheme and potential share packages are examples of the anomalies that were caused by the fact that the structure and systems were set up under the assumption that private investment would be part of the project. When little investment was forthcoming, the structure and systems were not changed to reflect the circumstances in which UKeU was operating. At the very heart of the failure of UKeU was that systems and structures that may have been considered appropriate when set against the original plan became inappropriate for a venture that was almost entirely publicly funded.

33. We consider that for either the private sector or the public sector the bonuses paid to senior staff were wholly unacceptable and morally indefensible. The argument that they reflect private sector practice does not stand up to scrutiny. Any company which paid bonuses of this kind having underperformed in the way that UKeU did would face severe criticism from its shareholders. The non-executive directors who approved these bonuses through the Remuneration Committee cannot escape criticism.[21]

34. We are also unable to accept the view of the Chairman and Chief Executive that they were involved in a risk business which made such bonuses appropriate. The company was involved in a new and relatively untried sector, but it carried no market risk. It was backed with £50 million of public money; the risk was to that public investment, not to the company.

1 Q 373 Back

2 Q 1 Back

3 'Radical changes will prepare HE for the 21^st Century', Blunkett, 15 February, 2000, speaking at the University of Greenwich. www.dfes.gov.uk - press notices. Back

4 Q 373 Back

5 HEFCE 00/44a Business model for the e-university, HEFCE, 2000. Back

6 'Radical changes will prepare HE for the 21^st Century', Blunkett, 15 February, 2000, speaking at the University of Greenwich. www.dfes.gov.uk - press notices. Back

7 Commonwealth Higher Education Management Service Back

8 HEFCE and the funding councils in Scotland and Wales consulted all publicly funded HEIs and the universities in Northern Ireland. Back

9 Ev 1, para 7 Back

10 Q 375 Back

11 Q 367 Back

12 UK eUniversities Worldwide: 10 Year Business Plan, 1^st April 2002 to 31^st March 2012. Referred to as the 'original plan', although it was in fact a substantially revised version of the first eU business plan produced by PwC Back