Examination of Witnesses (Questions 160-179)
21 JULY 2004
SIR ANTHONY
CLEAVER AND
MR JOHN
BEAUMONT
Q160 Chairman: You have just said it
was £63 million committed?
Sir Anthony Cleaver: No, that
was including these other projects that were ring-fenced. So we
believed for the normal operation of UK universities we had £55
million. That was our understanding. We saw it as our job as the
thing progressed and it became clear that private funding was
something that I fully believe we could have obtained in time,
but we needed to have a track record with several thousand students
and so on to do that. For that reason, what we tried to do was
to rein back the budget. If I could slightly modify what you may
think you heard earlier. We did produce a formal business plan
in April 2002 and we have got a copy of that here, and that was
submitted and we then updated it from time to time, but, at any
rate, we saw it as our role, therefore, to reduce the spending,
as far as we could, consistent with continuing to grow the business
effectively. We tried when we got to the 2003 budget in the November
to see what we could do with £55 million, and we found that
if we were going to continue at the same speed we needed £57
million. I have to say, after many years of experience in business,
the concept of £57 million £55 million looks very close
to me when we are talking about something as complex as this and
several years ahead. We therefore said, in our view it would be
prudent to assume it would require £70 million, but the plan
actually shows £57 million. I would have expected, for example,
had we had proper discussions, that it would have centered on:
"Can you actually manage for £55 million?", and
we could have done something for that.
Q161 Chairman: But you just mentioned
£90 million. What was that?
Sir Anthony Cleaver: That was
in the original PwC plan.
Q162 Chairman: Was it?
Sir Anthony Cleaver: Yes. So we
constantly reduced the cost of this as we went through.
Q163 Chairman: So really you thought
you were running the staff up over a number of years, you thought
you had the £62 million as really ball park—what you
could expect to have got from HEFCE—and, before you got
anywhere near that limit, they pulled the plug on you?
Sir Anthony Cleaver: Yes.
Chairman: Good. We have got some basis
on which to work.
Q164 Mr Chaytor: Sir Anthony, you have
written a fairly forceful letter to the Chairman of HEFCE about
this issue and in the letter you claim that the PA consulting
review was wrong or misleading on over 100 points. Can you tell
us on how many of those points was it unequivocally wrong? Which
were the most serious inaccuracies?
Sir Anthony Cleaver: I think honestly
to do that I would have to go through and deal with the individual
items. I have here the annotated version of the PA plan which
we sent back to HEFCE, and I am very happy for the Committee to
have access to that. My biggest concern over the PA report was
that they did not talk to the people I particularly asked them
to talk to, ie the commercial non-executive directors. It seemed
to me that insofar as what they were focusing on was risk, those
were the people who sat on our Board, saw the information and
from their broad commercial backgrounds were in the best position
to take a view on that. The other point that I would make is I
do not think there are any risks outlined in the PA report that
were not covered in our own risk register. I ran the company according,
I think, to the very best principles of commercial corporate governance.
One of the things nowadays that good companies do is to have a
complete risk register. We started that as early as the end of
2003[1]and
we carried on reviewing it quarterly, and that was, of course,
also available to anybody who was interested in it.
Q165 Mr Chaytor: But those are criticisms
of process rather than of fact. Can you tell us where the report
was wrong in matters of fact?
Sir Anthony Cleaver: For example,
some of the names of the people that they quoted were attributed
to the wrong organisations. There were those sorts of errors which
in some senses—
Q166 Mr Chaytor: The inaccuracies are
inaccuracies of comparatively minor detail. Is there anything
substantive in which the report was inaccurate?
Sir Anthony Cleaver: Not in the
fundamental sense in that, as you see in the letter, I do not
know whether you saw the covering letter that I sent to HEFCE
with our response to the PA report, but in that I said that the
general thrust is that this is a high risk venture, and that is
something that we have known from the beginning. What we are doing
is mitigating those risks as fast as we can.
Mr Beaumont: There was very little
analysis of the platform and the pedagogic approaches that could
be supported for the universities. Really all that was looked
at technically was the infrastructure to provide a service, and
I think it would have been more pertinent to look at the scope
of the platform because that was the major asset that was being
created.
Q167 Mr Chaytor: But that is again an
omission?
Mr Beaumont: It is an omission,
yes.
Q168 Mr Chaytor: Could I clarify one
thing. You have said—you say it in your letter and you have
said it in your opening statement—that you presented regular
reports to HEFCE in terms of the business plan and constantly
revised the business plan at regular intervals, but the report
says that you did not publish your business strategy. Sometimes
it may be an issue of being too late to continue, is it not, but
could you clarify this? Are you saying that you did, as far as
you are concerned, publish a business strategy in addition to
giving regular reports on the revised plans as things developed?
Sir Anthony Cleaver: We published
a business plan and there was a narrative with that business plan.
Q169 Mr Chaytor: Would you describe that
as a strategy?
Sir Anthony Cleaver: Yes, I believe
anybody reading that would say: what are they trying to do in
marketing? They are trying to go to these countries; they are
trying to get these sorts of students, and so on. That, it seems
to me, in the context of this sort of business, is what I would
expect to see.
Mr Beaumont: It is also consistent
with the original three objectives that HEFCE stated.
Q170 Mr Chaytor: But the report criticises
you for setting an impossibly ambitious business model. Would
you agree it was too ambitious?
Sir Anthony Cleaver: No, I think
our objective was always to go as fast as we could, for the sort
of reason that brings us here today. We understood that the pressures
on funding in higher education are enormous and that they would
wish to see a return as soon as possible. I also had another major
concern. This is a huge international opportunity for UK Plc and
I felt that we needed to get there. What I found in all the countries
I went to—I went to Singapore Malaysia, Taiwan, the Philippines,
Hong Kong, Vietnam, Korea—in all those countries I found
the same thing—the Americans are there and the Australians
are there with various e-learning opportunities. None of them
compare with what we had potentially, none of them have something
that pulls together a national capability, which was unique, and
I felt that this was something we had to drive as fast as we could;
and the way that you do that, in my experience, is you set targets
that are ambitious and, at the same time, you set a business plan
underneath financially which is one that you believe that you
can achieve; and that was the process that we followed, but our
understanding changed constantly. I found, for example, on two
visits to neighbouring countries one of them had just issued a
new ministerial edict that said, "For e-learning we want
no local involvement. If somebody come here and offers a course,
we want it to rest on the quality of their provision back in the
home country and the support and the accreditation that they have
there." In the next-door country they said, "You appreciate
we are not going to allow any e-learning unless there is some
local support provided so there is a spill over benefit to us."
Both of those I understand as tenable ministerial positions, but
nobody was able to tell me that either of those existed until
I went.
Q171 Mr Chaytor: But in retrospect, and
if you were doing all this over again, would it have been wiser
to go for more quick winners in your business plan rather than
operating in a fairly segmented area of the market alone. Maybe
your targets were too ambitious?
Sir Anthony Cleaver: We did not
know at the beginning what quick winners would be. Again, part
of the objective of the trips was to understand the subject areas,
for example. I think you have seen stated, we focused on seven
areas eventually which were important. Again, to get a quick winner
the course has to be available, the university has to be ready
to support it and provide the quality of teaching. We were just
on the brink of getting the first courses that we could honestly
say were what we really wanted, based on our own marketing understanding.
So, for example—and, of course, this was not known to PA
because they did their work back in December/November and never
came back and asked—it was not known to HEFCE because they
would not talk to me between December and February. We were on
the brink literally the next week of signing an agreement with
City University for their MBA. I have no doubt that that would
have been successful, it was already successful internationally
with the Bank of China, and that we saw as one of the key planks.
We were in the final stages and had signed the first agreement
with Cambridge University for a course called "English at
your Fingertips". Wherever I went I found that, whatever
their stage of development in education, they wanted English.
Korea is probably the best example. On my first visit to Korea
I met the Minister of Education. His opening words to me were,
"You do realise, Sir Anthony, that we have 17 cyber universities
in this country", and I said, "I think that your infrastructure
here is well-known to be in advance probably of anywhere in the
world, but are there things that you need?" He said, "Well,
of course we need English. We as a country are not strong in English
and internationally that is financially detrimental to us",
and so on. What we had developed with Cambridge, I think, would
have met that need. So we were just on the brink, I believe, of
being able to provide what was really needed and hence get the
volume.
Q172 Mr Turner: I found two possible
break-even dates, one from your original business plan, which
was 2006, 2007, that is the plan produced in 2002, and the other
of 2007 and 2008, which is the plan you produced in November 2003?
Sir Anthony Cleaver: Yes.
Q173 Mr Turner: Did you inherit any kind
of estimate of when the scheme could break-even from Price Waterhouse
Coopers?
Sir Anthony Cleaver: There undoubtedly
was a break-even date in there. I think it was . . . It was one
of those two years, I believe, but I am not certain.
Mr Beaumont: I do not think our
first change to the Price Waterhouse plan made any fundamental
changes to the break-even date. I can check that.
Sir Anthony Cleaver: So it was
probably 2006-07.
Q174 Mr Turner: On your sort of background,
Sir Anthony, have you experience of establishing a business of
this kind, one which is wholly dependent on public funding but
is a risk business?
Sir Anthony Cleaver: Depending
on public funding, no.
Q175 Mr Turner: Do you think that the
members of Holdco understood the risk?
Sir Anthony Cleaver: I find that
very difficult to answer. I met Sir Bryan Fender roughly once
a quarter and I certainly talked to him in this context, and Sir
Brian, as you may know, is Chairman of a company that trades in
intellectual property, which is a very risky area, so I think
it was reasonable to assume that he had a fair understanding of
those sorts of issues. I cannot talk for the other members of
Holdco.
Q176 Mr Turner: Could you answer the
second question, in respect of the HEFCE Board?
Sir Anthony Cleaver: From what
little I saw of the HEFCE Board I would not anticipate any great
understanding of commercial affairs or risk, and I think from
the Chairman's action and his comments in his letter, it is quite
clear that he did not understand the operation of a commercial
company. To be surprised that the directors resign when they are
told that somebody else is going to take the decisions from now
on and they would therefore be left with the liabilities strikes
me as astonishing.
Q177 Mr Turner: Can I put a suggestion
to you which you can then respond to. It seems to me you can either
say that the people who did not understand the risk were putting
up a good deal of money but had no clear appreciation of how long
it would to take deliver a return on that money and subsequently
got cold feet when they did not see the return as quickly as perhaps
their opponent, or there is another explanation. If you have got
another explanation I would like to hear it, but what would you
say to the first explanation?
Sir Anthony Cleaver: I think the
first explanation is plausible. I think that probably what happened
was that having had a vision, which, as you have heard, I subscribe
to totally, "There is a huge international opportunity. We
ought to be exploiting it", and so on—and I think that
was absolutely right—I think they then set about implementing
it and, as you saw, it took two years from the vision to appoint
me and hence start the operation. So that perhaps tells you something
about the difference between the commercial world and the pace
at which these things move, but that is fair enough. I think then
they obviously hoped that we would be able to demonstrate very
rapidly that we were absolutely on track with the original plan,
etc, and from my very first meeting I said, "The original
plan we cannot deliver, but we will deliver as fast as we can."
I fully sympathise with the fact that HEFCE must find themselves
under enormous pressure with all the universities concerned about
funding. I also Chair a higher education institution and I know
exactly how the pressures are there, and I am quite sure therefore
there will always be people who said, "Do we really need
to continue putting this money here when we have got people with
immediate problems closer to home?" My conclusion, sadly—and
I think I put that in my letter to David Young—is that either
one should have given this the chance to succeed or you should
not have started it. I think, having started it, they owed it
to us to give us long enough to show that we could be successful,
and another year would clearly have demonstrated one way or the
other and effectively cost, relatively little.
Q178 Mr Turner: Despite the concerns
which you expressed at your meeting in November 2001 you accepted
the estimated break-even point at 2006-07. I am not quite clear
when the Price Waterhouse report was written, but you did so in
the context of it having taken 18 months to appoint you from the
point at which they were handed this?
Sir Anthony Cleaver: Because I
thought that we were going to drive the timetable from then on
rather than them, and I thought that we should do it as aggressively
as we could, and the break-even that we were talking of achieving,
as you have heard, was in any case to be achieved on a smaller
number of students than in the original plan, so in that sense
it could be said to be less ambitious.
Mr Beaumont: The original Price
Waterhouse business model was 2000.
Q179 Mr Turner: 2000?
Mr Beaumont: Yes, but there were
some subsequent reports done as well.
1 Note by witness: We stated that as early as
the end of 2002, not 2003 as stated. Back
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