Examination of Witnesses (Questions 620-639)
12 JANUARY 2005
SIR BRIAN
FENDER AND
DR ADRIAN
LEPPER
Q620 Chairman: It was your baby?
Sir Brian Fender: I was experienced
and I had had some hand its initial formulation; so I think it
was probably expected that I would be Chair.
Q621 Paul Holmes: There is a puzzle about
that, because if the holding company is supposed to keep HEFCE
at a distance but it appoints as Chair of the holding company
the person who is Chair effectively, whose idea largely it was
to set the whole idea up in the first place and who remains Chair
of HEFCE for another six months, for a while you have been both
Chair of HEFCE and Chair of the holding Board, yet the holding
Board is supposed to keep HEFCE at a distance. I do not quite
understand the logic of that?
Sir Brian Fender: I am looking
at the timing. The first meeting of the Board took place on 29
June 2000. I left the Funding Council at the end of September.
So that overlap which you refer to was only two months, three
months. Yes, I think, again with a bit of hindsight, it might
have been better if I had not accepted that chairmanship, but,
on the other hand, at the time, given that the holding role was
rather restricted in the way I have demonstrated, it seemed a
useful element of continuity.
Q622 Paul Holmes: The Chairman early
in the meeting was referring to (and some might say it was normal
business practice) the fact that the Chair and the Chief Executive
on the launch of the company would get a certain number of shares
as a dividend. Is that correct and would that apply to you?
Sir Brian Fender: No. No, I was
totally unpaid. I did it as a pro bono activity out of
the goodness of my heart! No, I was interested clearly in it being
a success, and this was a contribution I could make, but, no,
the UK e-U is a different matter. That was an operating company,
operating, as we have described, in a private sector manner, even
though—this is the difficulty—it was receiving public
funds. As it evolved as part of our monitoring process (and remember
that, if I have got it right, Tony Cleaver was appointed in November
2001) John Beaumont came in in March 2002, and, of course, you
give people quite a period of time to get going, to familiarise
themselves with the issues and to formulate their own plans),
around the middle of 2003, I think Adrian will testify, we began
to look at the kind of issues that it (the Holding Company) should
be doing even in our rather limited diminutive role, and one of
these was the structure. Given that the structure was set up as
if there were 50:50 funding from the public purse and the private
purse, we said, "Hang on, what we have got now is essentially
a publicly funded body and the prospect of private investment
receding." So I asked Adrian to look at models of publicly
funded bodies which nevertheless had a trading arm. The Met Office,
I think, was one that I suggested you look at, and that has a
significant trading arm, but there are others: the British Library,
the BBC. It is not uncommon for there to be this commercial activity.
We decided—we raised the issue with the holding company
Board—that we ought to be contemplating this change in structure.
I remember raising it with Howard Newby, I think on 9 October,
if my memory serves me right, and said, "Look, we have got
a mismatch now between the structure and the funding", and,
of course, the Funding Council then set up, it was always going
to set up, a review. I might say that if the Funding Council had
not set up a review, the holding company would have set up a review.
It was clearly necessary to do that at the end of 2003. This issue
then, in a sense, was subsumed by the bigger issues about the
viability of the business plan; but it is absolutely clear to
me that at the end of 2003 we needed a new structure which reflected
the fact that it was tax-payers' money that was going into this
project and not a 50:50 mixture.
Q623 Paul Holmes: Were you the Chair
of the holding company right through to the end when the plug
was pulled?
Sir Brian Fender: Yes; I am still
there.
Q624 Paul Holmes: Did you argue with
HEFCE that they should not pull the plug and should continue?
Sir Brian Fender: I think I have
given my answer very clearly on that. I understand very fully
the evidence given by Tony Cleaver and John Beaumont about more
time. I understand equally well both the bigger political picture
and the risks associated for HEFCE with continuing, given, if
you like, the issues which were still being developed in UK e-U.
I am sorry to be, as it were, not pointing one way or the other,
but it is a complex issue and I think I can see the perspectives
of both sides very clearly.
Q625 Paul Holmes: One last question.
From your point of view as somebody who was there with the initial
idea, who was there when it was being set up, who was Chair of
the holding company all the way through, I wonder if you could
clarify: the technology platform itself was due to be operating
by April 2002, but it was not actually operating until September
2003, 18 months later. Was that a failure of Sun Microsystems
in technically developing the platform or was it because, as some
of the evidence suggests, because the various people involved,
like the holding company and UK e-U, kept renegotiating the contract,
making new specifications?
Sir Brian Fender: The holding
company had nothing to do with the relationship with Sun Microsystems.
That was entirely a matter for the operating company. Our role
really was limited. As I have said to you, I am taking a lot of
responsibility for this, unfortunately, but not in the day-to-day
running of the company. That was the operating company's responsibility.
Again, I have indicated that we perhaps under-estimated the difficulty
of the issues in these various areas, and the platform was one.
I think it is entirely reasonable (and PA Consulting drew attention
to this) when you bring in a better bit of software, and I do
not have problem about that, as I said, I went through the exercise
of trying to say should we take a commercial platform and I thought
the balance of arguments was for pushing on, but you need a lot
of investment to make that develop gradually over time. You got
a very clear answer from Sun Microsystems about that, I think.
They said, "We have got something which works, but we would
expect to make it better, we would expect to take account of the
users' input into that, we would expect to have reports from the
universities as to how they felt it was operating", and so
on. I think they were right that if you go through that development
process, if you have got the time and money to do that, you have
got a really interesting product with a potential use which was
outside UK e-U's own programme, if you like. I think UK e-U were
right to look at the diversification of their resource, their
income, as they got more into the job, but I feel for them rather
because they had as an operating team less than 18 months before
PA were into them and they were being crawled over. One set of
low figures was quite a dramatic result for that; on the other
hand, there was no guarantee that the figures would pick up in
the way that I wished.
Q626 Chairman: In terms of the holding
company, how often did it meet?
Sir Brian Fender: I think we scheduled
either four meetings and then typically held three. There were
more meetings held at the beginning, but in the routine operation
we met, I think, three times a year.
Q627 Chairman: Dr Lepper, you would agree
with that?
Dr Lepper: Yes.
Q628 Chairman: Can we have a note of
how often you met?
Dr Lepper: Yes, I will give you
a complete list of the dates of meetings[3]
Q629 Chairman: Were you happy about the
relationship between the holding company and the operating company?
Dr Lepper: No. I think, as Sir
Brian has said, at a fairly early stage the holding company became
the parent of UK e-U, and a number of us, including the directors,
were not particularly satisfied with that situation, because it
did mean that the Board was actually responsible for the actions
of UK e-U when it was not set up to take that responsibility.
That is, I think, why Sir Brian said we had to look for an alternative
structure.
Q630 Chairman: But it never came?
Sir Brian Fender: It was taken
over by the force majeure of PA Consulting's report and
the HEFCE actions.
Q631 Chairman: But in terms, Dr Lepper,
do you have any regrets in terms of your oversight? Were there
views expressed about this thing, not just the structure, but
let me give you one example. On the evidence from Sun Microsystems,
they started off as strategic partners and, as the Chief Executive
said, halfway through, changed to being a service provider. Would
that have been discussed at Board level? In a sense you were losing
your partner: someone who looked like a partner at the beginning
was stepping down to be a service provider. Did that worrying
the holding company?
Dr Lepper: I think you have to
be careful what you mean by "strategic partner" and
what you mean by "supplier".
Q632 Chairman: Yes, but the evidence
we were given by John Beaumont and Sir Anthony described them
as a strategic partner. We are using their language; we are not
inventing this language?
Dr Lepper: I am not suggesting
you are inventing it, but I am saying you have to be very careful
what you mean by this term. What Sun Microsystems said today was
not entirely accurate. What happened was that they made available
to UK e-U certain services and licences to be provided in the
future, and for that shares were vested in a nominee company under
an escrow arrangement where they could be released when these
services were actually provided. Can you say that means a partnership?
Obviously these services that were vested, services that were
going to be provided in the future, could only be released on
the basis of other investment and other payments to Sun Microsystems.
Q633 Chairman: How does that relate to
the charitable element of all this?
Dr Lepper: Under the escrow arrangements,
when these services were actually provided by Sun Microsystems,
then the nominee company handed them over to the charitable trust.
A very small amount of shares were handed over to the charitable
trust because most of the provision for Sun Microsystems was for
licences which would be taken up when students were studying,
and, as we are only too well aware, the number of students studying
was very small, therefore the licences taken up were also very
small.
Q634 Chairman: As the holding company
you had a supervisory function of sorts. Were you concerned about
this complicated structure of the charity, and so on?
Dr Lepper: I am not concerned
about the structure of how these shares were allocated or the
charity because it did not concern us as a holding company. I
was concerned because, of course, at the beginning the shares
purchased by the e-Learning Holding Company were the same as the
number invested to the nominated company, so it was a 50:50
arrangement, and UK e-U were therefore an associate company. When
the next investment was made and there was no parallel private
investment, then we became the parent company; so that was a matter
for concern.
Chairman: Good. I am glad that we have
cleared that up
Q635 Mr Turner: There are a lot of different
layers to this and I am not sure that there are not a lot of onions!
Could I quote something? I will tell you where it comes from later:
"The targets underpinning the project were unachievable.
The project was conducted under unreasonable time constraints.
The speed of delivery was given undue prominence in the contract.
The contractors never looked likely to complete within the agreed
timescale. Pressure of speed made it an over-priced contract.
Premiums were added on and there was not adequate supervision.
There was failure to transfer the risk from the public to the
private sector." I underline that because it so closely reflected
my view of what happened to ILAs. How reflective would you say
those quotes are of what happened in this case?
Sir Brian Fender: I would not
have put it in that language exactly. I think if you set a business
plan which was as demanding as UK e-U set, then, in effect, they
were putting themselves under considerable pressure given the
various obstacles that they had to overcome. They were capable
people, so they could have overcome those obstacles, but, of course,
they were very demanding and you could describe the demands on
them a little in that language. I have referred to the problem
of the private and public dimension earlier. You would go about
it in a different way if it were purely private funding. Does
that answer the question?
Q636 Mr Turner: It does indeed. It comes
from a report by the Prison Service Ombudsman, something the Home
Office did in respect of Yards Wood, in fact; but what it seemed
to suggest to me was that there is an endemic problem in this
relationship between the public and private sector, I was interested,
therefore, in what you said in answer to Val Davey when she asked
you, "Why did we not do it the conventional way?", and
you said, I think, or you took that to mean "by public funding"?
My response to the conventional is by private funding. There is
clearly a difference of culture there?
Sir Brian Fender: I think I meant
the conventional route as far as the funding aspect was concerned.
Q637 Mr Turner: Right. What we actually
got is a third way, neither private nor public but a combination
of the two. Do you think that the universities got the control
that you said was the justification for the significant involvement
of public money as against private money in this operation?
Sir Brian Fender: I think in certain
areas, no, they would have some disquiet, and the Committee has
addressed some of those issues—the question of bonuses,
the question of salary levels, and so on—and I think they
are ones which would not have applied if it had been a publicly
funded operation from the beginning. If you took a relatively
poorly paid academic, you might say, "Hang on, what is going
on here? They are using tax-payers' money to get rewards which
are better than we would expect", and I understand that perspective,
but the truth of the matter was that the company, as I have said,
rightly or wrongly, was set up as a private looking vehicle, a
private operating vehicle, in order to maximise the chances of
getting private investment.
Q638 Mr Turner: But the reason you gave
earlier for the public sector, for the universities retaining
what they thought was going to be an element of control—you
said you did not point out forcibly enough the conflict between
HE and private—was because of the dangers of fragmentation
which the private sector may see as an advantage, whereas the
universities would want to control entry, process and graduation?
Sir Brian Fender: Yes.
Q639 Mr Turner: Did they ever get to
the point? I know the project did not get to the point, but did
UK e-U get to the point where it was clear that the universities
did control entry, process and graduation: because, given the
composition of the boards of the two companies, I cannot see for
the life of me how any university could control entry or process.
They could control graduation?
Sir Brian Fender: The admission
of students they can control. The programme was their programme,
so therefore the process was theirs. What UK e-U was doing was
providing the platform, providing the 24 hour by seven day back
up to that service, and it was providing the marketing arrangements.
In fact the marketing you could describe as a joint exercise,
because the universities themselves would be marketing these programmes,
but in terms of outreach to parts of the globe that the universities
could not reach, then that was a role that was to be taken by
UK e-U.
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