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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