Select Committee on Education and Skills Minutes of Evidence


Examination of Witnesses (Questions 520-539)

12 JANUARY 2005

MR LESLIE STRETCH AND MR DAVID BEAGLE

  Q520 Chairman: Who was the chairman of the board of the charity?

  Mr Beagle: I do not know.

  Q521 Chairman: Who was on this charity then?

  Mr Beagle: The set-up of it was to be arranged by HEFCE's lawyers.

  Q522 Chairman: So this is a theoretical charity?

  Mr Beagle: The charity existed but I do not know who the people were.

  Q523 Chairman: You could give us details of the charity—

  Mr Beagle: I could find out.

  Q524 Chairman: You could give us the charity trustees?

  Mr Beagle: I could find that out.

  Chairman: You could, jolly good.

  Q525 Jeff Ennis: Just a supplementary, Chairman, to the question about the setting up of the charitable trust. Were there any alterative models considered instead of the charitable trust?

  Mr Beagle: Yes, we reviewed things like Sun taking the shares into ownership and setting up a separate company to own those shares, things like that, most of which did not fulfil the strategic goal or were too expensive to go forward.

  Q526 Jeff Ennis: Looking back in hindsight would one of the alternative models have been a better option, do you think, in terms of delivery of the project?

  Mr Stretch: Yes, I think so.

  Q527 Jeff Ennis: Which one would that be?

  Mr Stretch: I am not sure but I think the whole governance needs to be reviewed and I think we could have taken a stronger role in the governance. As it was we did not want to participate directly in the financial benefits if any accrued there, which is why we got into the charity discussion. Looking back now had we taken a seat on the board, for example, then the original intent of the strategic partnership might have followed through, so I think that is one thing that has occurred to me since—

  Q528 Jeff Ennis: You seem to be indicating to me that you just went along with the setting up of the charitable trust rather than supporting it from a Sun perspective?

  Mr Stretch: No, we had not been there before, we had not done this before and we thought that was a good vehicle to produce value for the UK education sector. Our main focus had to be on delivering the system and then benefiting from partnering in the sale of the system. Holding the shares at the time did not register with us as something that was going to be that interesting. It looked like a long-term venture and it was important for us not to be seen to be profiting from it.

  Q529 Jeff Ennis: Did you signal any warning bells at the time?

  Mr Stretch: At the original start of the—?

  Q530 Jeff Ennis: At the suggestion to set up the charitable trust?

  Mr Stretch: I did not hear any warning bells from the suggestion to set up the trust. There were certainly warning bells around. In any project of this nature there are concerns and we did a risk assessment and it was a difficult risk assessment getting into this, but we felt that the potential gains and we still feel the potential gains based on the platform that exists today and what we resolved with HEFCE are substantial, so we decided to take the risk.

  Q531 Mr Turner: Accepting that this is a one-off and that neither of these analogies of the hotel or the car is perfect, it seems to me that you were asked to tailor a system to the requirements of a client and, as when any suit is made, the client comes back occasionally and has it adjusted, but basically that was the model. It was not a partnership. It was you making something at the client's request. Is that correct?

  Mr Stretch: That is what it became and if I refer to Sir Anthony Cleaver's account, he makes the same assessment. It became a supplier/customer relationship. At the outset the intention was more strategic but once we got into developing the system, the day-to-day focus was delivering that system and that is where all the energies were put.

  Q532 Mr Turner: So what was your picture of the strategic nature of the partnership and did that disappear or did it just go below the surface with the expectation that it would re-emerge while you were dealing with the detail of construction?

  Mr Stretch: That is a very good way of putting it. My view is that when Sir Anthony Cleaver and John Beaumont came on board we had two capable people driving the marketing mission, bearing in mind that there had been no entity that they could follow that had successfully marketed this service, it did not exist, and there was not a lot for them to draw on, and I believe that they were capable of taking the business forward. I believe that our focus (and indeed we were directed to focus) was on delivering the system, and that was the number one priority, but I did also believe that ultimately when we had got to the situation through the change control phases where we had a stable number of users and students and so on using the system, there would be a point where we could take a breather and re-look at our involvement in the strategic marketing plan and we were keen to do that, but it felt right then to focus on delivery of the system.

  Q533 Mr Turner: The reason I ask these questions is because we have time and time again a history in the Department for Education and Skills of private companies entering into what appears to be a partnership with government which turns out to be a contract for delivery of the project. On the one hand that might be because government is incapable of partnership or on the other hand it might be because private companies are not willing to run risks in dealing with government, which if you watched Dragons' Den last night on telly, involve them losing some income now in the expectation of gain later. You have been paid for a project which you undertook. You did not invest, you did not lose money now for the sake of gain later in that partnership, did you? What is your observation on those two different reasons for these partnerships not getting off the ground?

  Mr Stretch: I do not think that we can draw general conclusions about the ability of government and the private sector to partner based on this experience, in my opinion. We were playing with a lot of money here. Dragons' Den, which I watched last night as well, was playing with £50,000 and I thought they were a very risk averse group of entrepreneurs indeed. We invested £5.5 million of ours in kind in products and services. The system had a value on the renegotiated fixed price contract of £9.5 million. When the change control elements came in that moved up to £11.1 million. We received £7.1 million. Our costs to deliver, involving our contract staff, our products and components and third party contract staff and products and components, substantially exceeded that in an unprecedented way for Sun Microsystems in the United Kingdom. We have never done that before so we were not paid for the system.

  Q534 Mr Turner: Was that intentional or unintentional?

  Mr Stretch: It was not intentional to go quite as deep. The original £5.5 million was the intention and then we hoped we would break even on the project. We did not expect to face the losses that crystallised in our previous financial year (these are not current losses) and we did not expect to be in that position at all.

  Q535 Chairman: Let's tease it out a bit because we represent the taxpayers in this Committee and there is a lot of taxpayers' money which seems to have been lost. You are saying that you lost as well, but looking at the figures you received £11.1 million?

  Mr Stretch: No.

  Q536 Chairman: How much did you receive?

  Mr Stretch: £7.1 million.

  Q537 Chairman: What is the nature of the investment of the £5 million? You did not stump up £5 million in cash, this was in kind?

  Mr Stretch: We provided in kind products and services and we placed a value on those products and services of £5.5 million. We believed that HEFCE at the time had an independent body place, a value of £11 million on what we contributed in kind. We took a book value four years ago and wrote it off at £5.5 million. That is as real to us as cash.

  Q538 Chairman: When you say it is an investment, Mr Stretch, most people who would invest in your company would say here is an investment, so when did you anticipate the return on that investment? You said you invested. When you started where was the return going to come?

  Mr Stretch: The return was going to come at the point in the business plain when e-University was up and running in the United Kingdom and had reached the milestones which were laid out and which were agreed between the UK e-University and HEFCE in terms of numbers of students and users. At that point we thought we would be in a good position to launch with UK e-University a global marketing campaign to sell both the system and the service so at that point, which was four or five years from the original agreement, we would begin to see substantial returns from a global market that is still there today.

  Q539 Chairman: The returns would flow into UK e-University or to you directly?

  Mr Stretch: Both.


 
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