Examination of Witnesses (Questions 1-19)
23 JUNE 2004
MR DAVID
YOUNG AND
SIR HOWARD
NEWBY
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 at 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 and do not
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 such as the benefit of
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 sectors, 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 the 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 of 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.[2]
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% 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, Sir Anthony 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 introduction
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.[3]
2 Ev 21 Back
3
Note by Witness: We stated that the investment from Sun
Microsystems Limited was £5.5 million. We understand that
the correct figure is £5.6 million. Back
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