UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 205-iv

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

EDUCATION AND SKILLS COMMITTEE

 

 

UK e UNIVERSITY

 

 

Wednesday 12 January 2005

MR LESLIE STRETCH and MR DAVID BEAGLE

SIR BRIAN FENDER and DR ADRIAN LEPPER

Evidence heard in Public Questions 480 - 653

 

 

USE OF THE TRANSCRIPT

1.	This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.
2.	Any public use of, or reference to, the contents should make clear that neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings.
3.	Members who receive this for the purpose of correcting questions addressed by them to witnesses are asked to send corrections to the Committee Assistant.
4.	Prospective witnesses may receive this in preparation for any written or oral evidence they may in due course give to the Committee.

 

Oral Evidence

Taken before the Education and Skills Committee

on Wednesday 12 January 2005

Members present

Mr Barry Sheerman, in the Chair

Valerie Davey

Jeff Ennis

Mr Nick Gibb

Paul Holmes

Jonathan Shaw

Mr Andrew Turner

________________

 

Memorandum submitted by Sun Microsystems UK Ltd (EU 6)

 

Examination of Witnesses

 

Witnesses: Mr Leslie Stretch, Vice President, Sun Microsystems UK Ltd, and Mr David Beagle, Account Manager of UKeU project, Sun Microsystems Ltd, examined.

Q480 Chairman: Good morning, could I welcome Leslie Stretch and David Beagle to the proceedings of our Committee. Leslie Stretch is Vice President of Sun Microsystems UK, and David Beagle is Account Manager of the UKeU Project, Sun Microsystems Ltd. Thank you very much for coming before the Committee. You will know the role of this Committee is the scrutiny of the Department for Education and Skills and anything in that vast empire is our business. We have been looking at the UKeU experience and there is no doubt as we have conducted our interviews that we have found that Sun Microsystems are a major player in this whole enterprise, so we want to go through the process forensically just to see how your role materialised, as we see from your briefing, from your response to the advertisement in the Financial Times and so on. Mr Stretch, would you like to give us a two‑minute account of your involvement to get us started?

Mr Stretch: I have a short opening statement about Sun Microsystems for people who do not know anything about our company. Is it alright to go through that?

Q481 Chairman: As long as it is not too long.

Mr Stretch: Sun Microsystems employ 3,000 people here in the United Kingdom and we have the largest manufacturing footprint of our company anywhere in the world here in the United Kingdom. We have been involved in the education sector for 20 years. The UK eUniversity involvement came to a contract head four years ago, effectively, when we got involved in an intention to partner strategically with UK eUniversity to provide an e‑learning solution to the UK market place and to the global market. That was our initial involvement and the whole intention there was a strategic partnership for us to also build the e‑learning platform and the technology that supported the solution and then to partner with eUniversity in taking that solution around the world and for us to benefit from that, so we took an investment view of this relationship. We invested initially £5.5 million in kind of services and products into the venture. However, as the venture spun out, our relationship became very much a supplier/customer relationship and the day‑to‑day focus, particularly in the last two years when I was involved closely in monitoring the situation at eUniversity, became a relationship that I would characterise as a supplier relationship where the focus was to deliver the e‑learning platform, and we have got to where we are today. The financial treatment for us is highly confidential because it is commercially quite sensitive, however, we have provided a statement to the Committee on the financial treatment and I am happy to take any questions on that. The headline for me is that we sit here today with substantial losses from the venture, and that includes our initial investment which we wrote out four years ago, and in our last financial year we wrote out some other substantial losses related to the termination of the venture.

Q482 Chairman: Okay. In terms of your involvement in the setting up of this, what was the first point of contact and how did that develop? You started presumably negotiating the contract and the basis on which you would work with the eUniversity before the private company was established; is that right?

Mr Stretch: I will ask David Beagle to answer that.

Mr Beagle: The original contacts were with the selection committee and the selection committee consisted of the interim directors of the University, so that was Nick Winton, Professor John Slater, Dr Keith Palmer who was on secondment as the Financial Director from Rothschild's. There were people from PwC, there was one representative from HEFCE, and there were also people from Ove Arup on that committee, and that was who the original conversations were with.

Q483 Chairman: Which committee?

Mr Beagle: It was called the selection committee.

Q484 Chairman: No, the last thing you said?

Mr Beagle: From Ove Arup.

Q485 Chairman: What about the relationship with the holding company? Did you have a relationship with the Higher Education Funding Council? Did you meet anyone from the Higher Education Funding Council?

Mr Beagle: The person who sat on that committee we met every time the committee met. We were told that it was not proper for us to talk about the University to HEFCE directly without the committee's approval first. We did have a meeting with Sir Brian Fender during the process and occasionally had meetings with Alice Frost, who was directed to look after that but those were infrequent. Pretty much all of the meetings were with people from the selection committee.

Q486 Valerie Davey: Can we just clarify who the member was from HEFCE on that selection committee?

Mr Beagle: Linda Josh.

Q487 Chairman: What we are trying to get at is the legal entity. As we understand from the evidence that we have taken that must mean either HEFCE or the holding company because there was no private company at that time.

Mr Beagle: We were dealing with the committee who were representing HEFCE but the day‑to‑day conversations were with the committee or people from the committee. Most conversations were with John Slater because we were talking mostly about e‑learning and how we could invest in the e‑learning experience.

Q488 Chairman: Look, we are not here to castigate anyone here. Our job is to find out what happened. What is your view, both Mr Stretch and Mr Beagle, of what has gone wrong? Two stories have come to this Committee. On the one hand, people say this was a great idea, and if only it had been given more time it would have worked. Others say it was misconceived from the very beginning. Like a lot of other people, like Columbia University and Cornell and some big players in the United States, they thought it was a goer, they thought it was a very interesting niche to get into, and they got their fingers burnt. Of those two stories to which one do you subscribe? What is your analysis of what has gone wrong?

Mr Stretch: My view today is that the intention behind this was good. My view today is that there was no reference architecture for this business venture anywhere on the planet at the time of start up and initiation, so between all of the entities involved, including ourselves, nobody had the track record of experience of bringing e‑learning to the market in this way by building the platform and so on. There was no off‑the‑shelf solution either from a technical perspective or from a business perspective. There was no other business we could look at and say that is the business model, so it was all based on intuition. Looking at it now, the global market is well‑studied for this service. The opportunity for this service in my view runs to billions of dollars. My view then and is today that the UK has an opportunity to take the lead. The UK has the best branded content to take the lead in this market space and that is why we took an investment view of this venture, but at the time I do believe that the argument that says the parameters of time and money and possibly the measurements were wrong is true, and it is true because nobody had any reference to point to to say this is the way you set up a business venture of this nature (because that is what it was); this is how you manage the relationships with the higher education entities involved; this is the way you acquire customers to the market. There was no reference, there was no text book for anyone to look at. Looking back now I would agree, if I refer to Sir Anthony Cleaver's comments, broadly from a 30,000-foot level that the whole venture was not given enough time and enough money to succeed, and indeed in the original plan the budget allocated to get the venture up and running was substantially more than the £57 million or £60 million that was eventually laid out. We still believe in the opportunity and indeed between ourselves and HEFCE we are in the process of agreeing how we move forward because there is at least a working system here, there is a working platform. That is my view.

Q489 Chairman: What is the reason that people like the University of Phoenix and other players round about the same time have conquered these and launched very successful programmes? Why is it that they could do it and you guys could not?

Mr Beagle: I think you need to see the difference between UK education and education around the world. Most university education around the world is more "here is information; take it and go away and deal with it yourself" whereas the UK university experience is much more about training you how to think in certain ways. Delivering that sort of education over the web is far more difficult than the sort of education that places like Phoenix do, which is more a training sort of activity, and so that is why when we looked at the packages that could possibly be used they were more training packages and could not deliver what was required. In delivering the content they had had an easier run at it than the UK had. By the same token, if the UK experience could be delivered over the web it would be a profitable market, we believe.

Mr Stretch: I have a slightly different view on that, a slightly higher level view, and it is that the UK eUniversity was drawing contact from a number of different players. The governance bodies involved in the set‑up were different. When you have one university moving ahead there is a different set of potential outcomes. There is also a different offer. I think the eUniversity offer was much richer and potentially much deeper. The brands involved were second to none. One university setting up and doing it is fine but, as I understand it, on the timing of a number of universities who went their own road and the level of success they have achieved, the story is not complete there, so I think there is a different case.

Q490 Chairman: What do you say to the critics who would suggest that it was Sun Microsystems' inability to deliver this platform on time that was one of the major reasons for failure and that if you had stuck to the deadlines, if you had produced this platform on time, these problems would not have arisen, the momentum would have been there, and the dynamic would have been a great deal better. HEFCE's eventual feeling was that things were not happening fast enough and they had to pull the plug and it really was down to this problem, everyone talks about this technology‑driven solution that you did not deliver on time. Is that a fair criticism?

Mr Stretch: No, I do not think so. HEFCE have never levelled that criticism at us.

Q491 Chairman: They did when they came to us.

Mr Stretch: They have not levelled it at me directly so my view is that the design of the system, the specification of the system, the requirements definition of the system were not done by us; we were the supplier.

Q492 Chairman: You said you became the supplier but you were really into the discussion right at the beginning, the nuts and bolts of planning it, you were there really early days, were you not? You were there before the chairman and chief executive were appointed?

Mr Stretch: Not designing the specification of the system.

Q493 Chairman: Your contract had been settled before there was a chairman and chief executive of UK eUniversity. That is true, is it not?

Mr Stretch: A contract had been settled but that subsequently changed.

Q494 Chairman: Take us through that. We have got dates here where you should have delivered the platform but you did not, so why did you not deliver the platform on those dates?

Mr Stretch: The contract subsequently changed from initially a time and materials contract to a fixed price contract when Sir Anthony Cleaver and John Beaumont came on board, so that was a key change for everybody. There was a live system and when it was delivered here and was in use through the user experience, as is common on projects of this nature, there were change requests, the market was telling the eUniversity that certain elements and features had to be changed to suit the needs of users and so those came into effect and the contract grew in value from £9.5 million or so to around £11.1 million. As a result we were paid only £7.1 million so I do not quite agree with your analysis of the situation.

Q495 Chairman: It is not my analysis, Mr Stretch, it is what we have been given as evidence, the failure to deliver the platform slowed the whole process up and you are saying that you did deliver on time.

Mr Stretch: We had a working system, we had users using the system, there was no limit to the number of additional customers that could have been taken on to the system, it was there.

Q496 Chairman: And so the system is absolutely, totally complete as at the present moment? It is a platform that could be used by somebody else if there was an opportunity? The whole thing is there, it is done, dusted, complete? It is like buying a beautiful new car, it has got all its wheels and engine, everything, it is all done?

Mr Stretch: I will let David Beagle answer the technicalities.

Q497 Chairman: Mr Beagle, is this platform 100 per cent finished?

Mr Beagle: I think a better simile would be, say, the building of a hotel, where individual contracts are placed for the shell of the building, fitting out the rooms and so on, and we delivered all of those contracts and we have acceptance certificates that say the University accepted those elements and the platform that was delivered just before the eUniversity was closed was a working platform. Saying it is 100 per cent compete --- In all of these things people using it say, "I would prefer it if instead of it being up there on the screen it was down here," and those sorts of things you do after the launch, so apart from those types of activities, yes, it was complete.

Mr Stretch: I think it is probably fair to say that the content of the system goes beyond the original design specification because of the change phases that we got into, so it is not quite like the car analogy; there are iterations of change coming in from different angles, from the user angle, market angle and so on.

Q498 Chairman: You are one of the most prestigious companies in this field, are you not? You are well‑known to us. You do wonderful work in prison education IT that we know of. You are market leaders so you know the nature of these contracts and they are always going to change. You have been there, you have done that with other government departments and other countries so you are familiar with the concept that the contract will change. You seem to be suggesting that they changed the rules so that you could not really perform as you would like to have done.

Mr Stretch: No, I am not suggesting that at all. The whole scenario has not played out. Our contract was terminated, the funding was withdrawn, the funding ran out. The changes were fine and they were all agreed. It was good practice to have users come along and look for changes to functionality to keep up with the needs of the market. That is fine, but the venture was terminated abruptly and I go back to my opening comments, about whether this had the time and money to play out. Who knows how much time and money it would need. I go back to my opening comments about the reference architecture and where we can point to similar experiences because if you look outside of this field and you look at other on‑line dot‑com ventures the spectrum of variables of time, money and measurement is huge. There is no one predictable pattern. I still believe looking back at this now that there were two successful business people drafted in at the chairman and chief executive level to run this. They had strong track records and were more than capable of succeeding with this, but I do not know of any venture that had this type of set‑up in terms of the investment profile, the limit to it, and the measurement of time dynamics of the venture.

Q499 Mr Gibb: SUN stands for "Stanford University Networks"; is that right?

Mr Stretch: That is correct.

Q500 Mr Gibb: Are you still connected with Stanford University? What is the relationship between Sun and Stanford?

Mr Beagle: It is still a very close one because the company is based in Palo Alto so it is geographically very close and the senior members of Sun's executive have very close daily contacts with the university.

Q501 Mr Gibb: Are the shares in the ultimate Sun holding company owned by the university?

Mr Stretch: No, the structure of ownership of the company is in our accounts. It is a public company floated on Nasdaq many years ago.

Q502 Mr Gibb: You are totally spun off from the university but you still have contacts?

Mr Stretch: Still have a lot of contacts.

Q503 Mr Gibb: Does Stanford University, which is a very strong brand, one of the top universities in the world, have this kind of e‑learning platform available or service available to them?

Mr Stretch: I am not sure I could answer that. I do not know the details.

Q504 Chairman: Mr Beagle, do you know?

Mr Beagle: We have been talking with Stanford and other universities in the California area about e‑learning systems like this but over the last few years there has been a freeze in California on spending on that sort of area so those projects have not moved forward very much.

Q505 Mr Gibb: So Stanford University, a leading university in the world, did not really think this was a business venture they wanted to get into?

Mr Beagle: They do want to get into it. It is just they cannot at the moment spend the money on doing so.

Mr Stretch: Let's be very specific. We have had no discussions with Stanford University whatsoever in relation to this type of venture or this venture, none at all, let's be very clear about that.

Q506 Mr Gibb: It just seems odd that you are happy to do it in the UK but one of the leading universities in the world does not want to get into this business. Is that not a kind of warning shot?

Mr Stretch: Who said they did not want to get into the business?

Q507 Mr Gibb: Well, they did not get into the business.

Mr Stretch: I do not know if they wanted to get into the business or not so let's stick with my original answer to the question which is we do not know if they want to get into the business or not but there are other prestigious universities that do and have. We had the example of Phoenix and so on. We believe e‑learning is an excellent opportunity for some sort of entity in the UK, whether it is a single university or whether it is something again driven by HEFCE. We absolutely believe that market is ‑‑‑

Q508 Mr Gibb: --- But you did say, did you not, that Phoenix was more of a training style more suited to this kind of package but for the more academic universities that teach a different style this is a more difficult way of engaging in that kind of teaching?

Mr Stretch: That might be the case. It might be more difficult but that does not mean ‑ and I see your point ‑ that it is not a good venture for them to be involved in.

Q509 Mr Gibb: Why did the eUniversity learning package in the UK fail? I thought that was the reason, that British universities have this different kind of teaching, that they teach students how to think and not just train them in facts and figures. I am trying to work out why it failed if you think it could happen and that the Phoenix example could have been a good example.

Mr Stretch: That goes back to my original point, which is where do we define failure, where do we judge it as a failure. There was no reference architecture at the time for this business venture. My position is that I do not believe there was sufficient time and investment given to this venture. That is my view. There are so many different strands and strata of e‑learning solutions and potential e‑learning solutions and potential segments of the market, I do not think that is the reason. I do believe it is the time and money and perhaps the governance and set‑up, issues like that.

Q510 Mr Gibb: But inevitably the software will be more complex than that used by Phoenix because of the type of training or teaching that takes place?

Mr Stretch: There are totally different elements. I am not familiar with the Phoenix system but a single university drawing on its own content as one example is quite different from the concept, as we understood it, behind the eUniversity where they were drawing on lots of different sources for content and lots of different types of content, so that is a lot more complex but the potential service on offer was much richer than a single university could offer.

Q511 Mr Gibb: Would it have been better therefore for the big universities in Britain to do this individually?

Mr Stretch: I do not know that.

Q512 Mr Gibb: Can I just ask you about the structure of UK investment. Your investment was put into shares and then those shares were vested in a charity. What was the reason for that structure?

Mr Beagle: The shares that were issued were vested by us in a charitable trust for the benefit of UK universities. The reason for that was that the shares issued were quite a small element of the total shares of the company and so we felt it was best to put that somewhere for the benefit of the whole enterprise rather than hold it within Sun which would have been of no benefit to the goals that we had.

Q513 Mr Gibb: So it was nothing to do with getting them off your books, it was to do with lack of synergy with your other activities?

Mr Beagle: To go back to Leslie's original statement that we were looking at this as an investment, the reason we were investing is that we believed very strongly that the e‑learning market‑place was going to be huge in the future but it needed a start into a more open way of doing it and funding to be able to do that, so it benefited us more in the long term for that money to be returned into the sector rather than us hold it.

Q514 Mr Gibb: So how would you eventually profit from this business if it succeeded?

Mr Beagle: The intention was that we would profit by the reimplementation of the platform both within the UK and outside in the rest of the world and also from the reselling of the eUniversity's services outside in the world.

Q515 Mr Gibb: What role did Sun play in incorporating the operating company UKeU?

Mr Beagle: None at all.

Q516 Mr Gibb: What role did the charity have in the operating activity? Presumably nothing, it was just ‑‑‑

Mr Beagle: I cannot answer categorically, I do not know.

Q517 Chairman: You have not said what percentage of shares this charity owned of the company?

Mr Beagle: It varied but the highest level it was at was about 22 per cent, I think was the original, but as the shares diluted it became less than that.

Q518 Chairman: That was 22 per cent of that company but did you have any guarantee if the company had been launched on the stock market that the charity would have had a share in that?

Mr Beagle: I do not know. I am not certain of that.

Q519 Chairman: But you were there, you helped devise this strategy.

Mr Beagle: Yes, but we were not part of the charity, we were not involved in the charity. The board which headed the charity had those sorts of discussions.

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 eUniversity was up and running in the United Kingdom and had reached the milestones which were laid out and which were agreed between the UK eUniversity 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 eUniversity 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 eUniversity or to you directly?

Mr Stretch: Both.

Q540 Chairman: How would that work?

Mr Stretch: The potential engagements from this for us and for the University would have many different shapes. There could be the service that is provided by the University. We could have even looked at providing the service. We could have resold licences for the platform. There are a number of different ways.

Q541 Chairman: So other universities could use a similar platform?

Mr Stretch: Also the commercial sector. E‑learning represents a huge amount of HR investment in the key commercial markets.

Q542 Chairman: You may find some of these questions irritating but we want to nail them. Who could get a share of the profits? It seems a simple question. You are saying that this market would expand, you would have all sorts of contracts but surely that money would flow to UK eUniversity if it was a great success?

Mr Stretch: From the underpinning components that I supply just as a computer hardware and software company. I would expect to benefit mostly from selling my standard, traditional components that would support users and the platform. That is where I would make most of my money ‑ from my core products and services.

Q543 Chairman: Okay, take us back to this £5 million shares put into the charity. Whose idea was the charity idea then?

Mr Stretch: I would have to go back to David Beagle.

Q544 Chairman: Come on, David, whose idea was it? It is a murky idea. As Andrew says, all the time we look at the relationships between government departments and commercial providers and because we have got a lot of experience in this (in individual learning accounts and much else when Capita was involved) we find an "it's not me, gov'" mentality. The private sector comes in and says we were partners at one stage but then we became service providers. We sit here and think come on, the real private sector entrepreneurial group was you so we would have expected you to be the driver in terms of knowing what the market was like, how you run this thing. You were not going to expect a bunch of bureaucrats to know that, were you?

Mr Beagle: The original idea for the charitable trust came out of think-tank that we held with people such as John Slater when we were trying to work out the best way of making this happen. I cannot remember whether it was us or John Slater who had the original idea of the charity but it came out of that meeting. We then assessed that against all the other options and at the time that seemed to be the best way of going forward because a large part of it was, as you said, where we expected to make money out of it. The forecast in the original eUniversity business plan for money coming out as dividends for those shares was for around 2007/2008, that sort of timescale. We were expecting to be doing reimplementation of the platform round about now, that was the original expectation, and we saw that as far more of a significant business for us and that is what we wanted to focus on, and to a degree we thought it would be good PR to put those shares back into the sector so the sector benefited from it, not us.

Q545 Chairman: So if it had been a wonderful success would that be the company as it stood getting dividends or the company after launch?

Mr Beagle: I am sorry?

Q546 Chairman: Well, there were proposals, were there not, to launch this as a company on the stock market if it was a success. We have got that information from Companies House. We know that there were arrangements that on launch certain people would get a percentage of the dividends. You must have known about that?

Mr Beagle: We knew that was the plan but I go back to what I said previously, that was so far in the future and in our view would be much smaller than the real idea which was to benefit from the delivery of extra platform elsewhere.

Q547 Chairman: You are the private sector entrepreneur. You cannot remember whose idea it was to set this charity up but you surely must know who had the share ownership? Who were the other shareholders?

Mr Stretch: One of the points that worried me about that was that the interim chief executive in the start up phase ‑‑‑

Q548 Chairman: --- John Slater?

Mr Beagle: --- The chief executive was Nick Winton.

Mr Stretch: --- was not there halfway through the project. We really were not interested. We are a computer company, we are not an investment bank. We are interested in the education sector and we made an investment. It was uncharacteristic of us to make that sort of investment. We had not done that before. We had built and delivered systems before but our business plan was very simple. It was to get benefit from providing our core technologies to underpin the platform. Making money from the service or the flotation of the company was never on our agenda and that is why a small amount of shares were placed in this charitable trust.

Q549 Chairman: It is not small, you said 20 per cent.

Mr Stretch: It varied. It became diluted over time and it would not have mattered if it was 80 per cent, we did not benefit.

Q550 Chairman: It matters to us, Mr Stretch, because we are trying to understand this very murky area of why this charity was set up and who owned the shares and if they were not owned by the charity who were the other shareholders?

Mr Beagle: All the universities in the UK had shares in the university.

Q551 Chairman: We all know they had a £1 share.

Mr Beagle: The rest of the shares were owned by HEFCE. My understanding is that the rest of the shares were owned by HEFCE.

Q552 Chairman: But were you involved with the discussions about on launch on the stock market different people would have shares of the company at that stage?

Mr Stretch: I was not.

Q553 Chairman: Neither of you?

Mr Beagle: No.

Q554 Chairman: So you would not be aware that the chairman and chief executive would have had a percentage of the company on a successful launch?

Mr Stretch: I was not but it would not surprise me. That is conventional.

Q555 Chairman: This is not a plot, we just want to know. Other witnesses say you were a strategic partnership, you say you were a service provider. That is what we are trying to get at. It seems to me you started off as a strategic partner and then the role changed.

Mr Stretch: There are three pictures you paint there, one, service provider, one partner and then the third picture we started out with strategic intent and ended up as a supplier. That is the picture I have and that is certainly the picture Sir Anthony Cleaver has, as he said in his account.

Chairman: Okay. We will just press on. Jonathan wanted to come in.

Q556 Jonathan Shaw: Mr Stretch, you said in your opening statement that you thought the parameters of the time and money were wrong. Could you just expand on that a little bit. When did you come to that conclusion?

Mr Stretch: It is a conclusion that I come to with the benefit of hindsight.

Q557 Jonathan Shaw: Yes, of course.

Mr Stretch: I started to feel like that in the closing stages. I became involved on a fairly detailed basis when I took on the role of Managing Director for Sun Microsystems UK Ltd two years ago because it had a very high priority in the business and it was really towards the end, towards the termination when we saw the appointment of Robson Rhodes to oversee the business that I started to think about how we had got into that position, and that is when I started to think about the whole issue of investment and time and how we could have made the venture a success, but it is a conclusion I come to with hindsight. I have not discussed it with Anthony Cleaver, but I have noticed he made a similar statement, and I tie it back to the original plan which had a budget essentially of £90 million and that is not where we ended up.

Q558 Chairman: Where did you get that figure from?

Mr Stretch: I picked that out from the written account of Sir Anthony Cleaver's statement to this Committee.

Q559 Jonathan Shaw: When we try and draw together our conclusions when we publish our report there are perhaps two lines of enquiry. Is it that the HEFCE bottled it basically because this was a fantastic venture for education and was going to be hugely profitable or that this was an idea that was never going to take off and everyone is trying to avoid having the finger of blame pointed at them? Those seem to be the lines of questioning. I think you said that you were closely monitoring the delivery of the learning platform. In your discussions with Sir Anthony Cleaver what were those discussions in terms of the relationship with HEFCE? Was there a perceived panic, was there a concern that this was going to go belly-up and there were going to be lots of inquiries such as this, or was it, "We need to remain calm to be able to see this project through?"

Mr Stretch: I think it was the latter. The focus was to remain calm to deliver the system and to see the venture through. I definitely did not get that transmission of feeling from any of the meetings that I had with John Beaumont or Sir Anthony Cleaver.

Q560 Jonathan Shaw: So when you received the phone call or letter to say the plug is being pulled, was that a shock, was that a bolt out of the blue?

Mr Stretch: Towards the termination point it started to become clear that there were those issues. It was not a bolt out of the blue, but our day‑to‑day discussions with the chief executive and the chairman were really focused on delivery and revisions to the system.

Q561 Jonathan Shaw: Can you just tell us towards the end when things were becoming bleak what were the messages that you were receiving that made you reach that sort of conclusion? Was there an inevitability that you are describing?

Mr Stretch: No, there was not an inevitability and in these things there is never an inevitability until you see in black and white the notice of termination. Even when Robson Rhodes became involved to oversee the company we explored many different avenues in order to give continued life to the venture and indeed those discussions are not over because we are agreeing a way forward on the platform with HEFCE where UK education will benefit. So it is really when you see it in black and white that it crystallises it for us. Until then you have to continue running the business venture. I presume that is what the board were doing and we had to continue with the delivery activities and the change control issues that came up and we continued to do that after the appointment of Robson Rhodes.

Q562 Jonathan Shaw: We know that you are in discussions with HEFCE about the future of the platform?

Mr Stretch: Yes.

Q563 Jonathan Shaw: We know that there are commercial issues which you would not want to disclose at this time, and we understand that, but £14 million of public funds has been used to develop this platform. Without, if you can, divulging commercially sensitive information, which we appreciate, can you clarify what you think is going to be done with this learning platform?

Mr Stretch: There are a number of options at the moment. We have a working platform and it has substantial value. The intellectual property of the platform has substantial value in our view. Our objective ‑ and we are almost there with an agreement on a memorandum of understanding with HEFCE ‑ is to see that the system has a life and benefits are delivered back to UK education, not just higher education. In high-level, broad strokes that is the plan at the moment.

Q564 Jonathan Shaw: You said that the intellectual property has got a substantial value. Who is the ownership of that intellectual property with?

Mr Stretch: The intellectual property is assigned to the system in component form so there are self‑contained modules. The majority of the intellectual property is owned by Sun Microsystems UK Ltd.

Q565 Jonathan Shaw: Right, and the rest is owned by?

Mr Stretch: HEFCE, I guess.

Mr Beagle: HEFCE. It remains with HEFCE, we believe.

Q566 Jonathan Shaw: Can you give us a percentage?

Mr Stretch: I cannot give a percentage.

Mr Beagle: No.

Q567 Jonathan Shaw: Okay, well what is going to happen to that intellectual property? Are you keeping it or are you going to give it to HEFCE? Given that it is £14 million that was paid out by the taxpayer to develop the intellectual property, where is it going now?

Mr Stretch: David is involved in the memorandum of understanding so he could answer.

Mr Beagle: We are quite involved in these commercial discussions and so some of them are commercially in confidence, but our main aim is to make the ability to use the platform available to UK education in general at no charge, so where the IPR actually rests is, in our view, not the most important thing, it is how we make the benefits of all that effort available to UK education for the universities, schools, FE colleges, what have you, and what we are trying to discuss with HEFCE is how we make the platform (as is) available to them either in total or in individual modules for them to use.

Q568 Jonathan Shaw: Do you think that this saga has damaged opportunities for global e‑learning? Is this issue reverberating around the world? We like to flatter ourselves and think that people are watching. Maybe that is not right.

Mr Stretch: Not yet.

Q569 Jonathan Shaw: Not yet! Right.

Mr Beagle: I think it is true to say that there was a great deal of interest in the eUniversity project from around the world while it was on‑going and there were a number of places which were interested in taking the platform as and when it became available. Particularly universities abroad were very envious of UK universities and having that sort of project and that sort of investment in making the next big leap in e‑learning and so there is disappointment that it is come to where it has but there is still a lot of interest in what can be got out of this.

Q570 Jonathan Shaw: Do you think that this project is retrievable? Do you think that if there is a will that this project could be put back on road?

Mr Stretch: Absolutely, and that is our intention. I think that the opportunity is there. The market size is well documented and the opportunity is well documented, particularly in the commercial sector where there are some very innovative aspects to the working system that is delivered, and we have a system that is delivered there that we can get to work on immediately, so I think it is. I think it needs very detailed analysis on how we take it forward.

Q571 Chairman: Mr Stretch, just to pull you out on that a bit. I am hearing two voices really. One is that you are an entrepreneur, you are one of the most successful companies in your field, with a high reputation. Many of us on this Committee admire much of the work you do. You are saying here is a damn good project, no‑one should have pulled the plug on it, it is a great commercial opportunity out there, world conditions are changing in its favour. As an entrepreneur I would have thought your company might have said, "The government has got cold feet, why don't we take over and run it. We have got all this money from the taxpayer to subsidise this thing." Why did you not see this as a commercial venture and run with it yourself as a unique entrepreneurial opportunity?

Mr Stretch: The short answer is we still see that today and in the closing stages when Robson Rhodes were involved we discussed a number of different options. I feel that we ran out of time to explore those more fully. We have learnt a great many lessons about the governance, about the key parameters around the business venture, and we do not want to throw the baby out with the bath water. It is a very good working system and it has a lot of value. There is definitely a vehicle that can take this forward so that is an on‑going situation.

Q572 Chairman: So here you have a platform which you say is unique and a really good thing. You have got all the UK universities with a pound share and a commitment. Even going on in that partnership alone and running at some point the systems with UK university ‑ forget HEFCE and the British Government - a) why have you not done that and b) why have you not attracted one single pound or dollar of commercial partnership money in the whole of this venture? It started off that it was not going to be Sun Microsystems' money and UK universities' money and HEFCE money and government money, it was going to be attracting other private investors, if it is so good why has not there been a pound of investment from anyone else?

Mr Stretch: That second part of the question is pretty hard for me to answer, given that clearly halfway through the relationship we became a supplier, as I have said, in terms of delivering the system. At no point was I tasked with participating in investor relations for the business, participating in fund‑raising - at no point did that come up - and we did not take the initiative because we were focused on the day-to-day running. I do not feel that if we had raised that initiative it would have necessarily been welcomed, not for any bad reasons - it just did not come up ‑ but we are now forced into a position where we want to bring life to the platform so we have to look at those options and there is some commercial sensitivity around what those might be.

Q573 Chairman: Are you telling me that there is now still a potential of you with other commercial partners and the UK universities, breathing life into this project?

Mr Stretch: I think there has to be.

Q574 Chairman: As a commercial venture?

Mr Stretch: Yes.

Chairman: We have not heard that from anyone else, but thank you for that.

Q575 Valerie Davey: One of the criticisms of this venture is that it has been so service and delivery driven that the content of what you are delivering did not get the scrutiny in those early stages that it should have done. I had not realised until some of the more recent information you sent us that you have actually got an education involvement and background. I have two questions. First of all, you have analysed in part the difference of what this venture was going to deliver as compared to a single university. Were you at all involved in the content of what was being delivered? Secondly, if you are now thinking that there is life in this for the future, will you be more critical or more involved in what you actually deliver as well as the platform to deliver it?

Mr Stretch: I could answer the last part of the question, then I will ask David Beagle to take the details. There is certainly life in the platform. There is no life in the venture; that is over. There is definitely life in the platform.

Q576 Chairman: I am sorry you seem to be going back on what you said to me. There is no life in the venture?

Mr Stretch: The venture is over, is it not? There is no more UKeUniversity?

Q577 Chairman: I thought you were just saying you could breathe life into it with a partnership between the British universities, your platform and other commercial sponsors to do exactly the same thing?

Mr Stretch: I think technically it is a fresh start. The only thing that is left is the working platform.

Q578 Chairman: And the relationship with universities, and the course presumably?

Mr Stretch: Yes, but there is no UKeUniversity. Yes, I agree.

Q579 Chairman: Everything is there except the old management, is it not?

Mr Stretch: Yes.

Q580 Chairman: All the assets are there, are they not?

Mr Stretch: Yes, as far as we are aware.

Q581 Chairman: The only thing that has changed is the Government has stopped giving you any money to it?

Mr Stretch: Yes, and the management team of the UKeUniversity are not involved any more.

Q582 Chairman: This is what worries the Committee: if it is so good, why did not John Beaumont and Anthony Cleaver and you guys say, "We will do it on our own"? That is the question I asked you, and no one seemed to answer that.

Mr Stretch: As I think I answered in an earlier question, the termination is only real when you see it in black and white, and we were continuing to work, we had our heads down working on the delivery of the system and the changes to the system, the revision, and so on. The time‑frame that we had from the involvement of Robson Rhodes and the direction that we thought the venture was then going to take was very short. We did explore in an unfinished way, I feel, those options. You are kind of asking me why am I not going to become an investment banker and stump up £60 million.

Q583 Chairman: No. I am saying if you were Lord Hanson, you are an entrepreneur, you would say, "Good, there are assets there, the Government has gone away, all that work has been done for free, we are going to take this over and run it. What a wonderful opportunity", but we cannot see evidence of people, you or other people, clamouring to do that.

Mr Stretch: There is a detail why other people would not clamour, and that is that we own the majority. Sun Microsystems UK Ltd owns the majority of the IPR. That makes it very unappealing to anybody else to come forward, because we own the intellectual property, and we put a high value on that; so that would probably deter other companies from taking it over in that sense that you mention; but in terms of us going forward with some ideas that we have developed and are beginning to develop quite seriously with HEFCE, that is another matter, and we want to be able to do that.

Q584 Valerie Davey: Can I come back to the content of what you are actually delivering and how involved you either were or would be in that with the universities?

Mr Beagle: Mr Chairman, from the beginning the ownership of the delivery of the content was with the universities; so the direct relationship was between the eUniversity and the individual university. People from Sun, however, did sit on all those meetings and our role there was to basically say what was possible so the universities would have an idea of how they would deliver their content, and we, as the experts on how the platform actually worked, would say, "Yes, you can do that", or, "No, you cannot do that", or "You could do that but that would require an awful lot of investment."

Q585 Valerie Davey: Was blended study involved at that early stage?

Mr Beagle: Blended is the new way of talking about e‑Learning. It has always been blended; there has always been an element of delivering on hard copy, or CD's, or whatever, in any of the deliveries; so that was from the very early stage. The intent was to be able to deliver a full UK university experience to somebody sitting in Outer Mongolia who could not get to anything else apart from a connection to the Internet. That was the end dream goal, and that was what we were aiming for. Obviously that is the dream goal, but then you come back to what is the realistic goal, and a lot of that was using other methods of delivery, being paper, that sort of thing.

Q586 Valerie Davey: But not in direct contact at any stage with the student?

Mr Beagle: No. There were plans to authorise people more local; so they were making relationships with universities in the countries to act as local tutors. I am not certain how far those negotiations went, but there were plans to do that.

Q587 Mr Turner: The administrator was appointed in March 2004, the plug was pulled on 18 June. Was that precipitate?

Mr Stretch: It felt very intense and rapid to us, but we had never been through that before; so I have nothing to compare it with as precipitate or not, but it felt very intense and very quick and I felt that some of the potential discussions were inexhausted, that some of the options were non‑exhausted, and we had just begun to think in terms of the structure of the university, the governance, the marketing and what the potential really could be. That was a very difficult phase because we were also still delivering revisions to the system.

Mr Beagle: Mr Chairman, I think when Robson Rhodes were first involved they gave us as their remit that they were there to restructure the eUniversity and to restructure it as a going concern, and that is where all our efforts with them were focused in the first couple of months of that period. It was only right at the end that the option of closure suddenly became much more the one that was being looked at. At that point it did seem this was happening very quickly, but most of the effort was put into trying to restructure it as a going concern with a lower cost base.

Q588 Mr Turner: Do you think it was precipitate?

Mr Beagle: I echo what Leslie says. I have not been through that process before. It did seem quick at the time, but that might be the way these things go normally.

Q589 Chairman: When it all happened, what sort of meetings did you hold? In those final days and couple of weeks you must have had pretty high level meetings with whom?

Mr Stretch: We had a lot more high level meetings than we had previously had. We had them with John Beaumont initially and then with Bob Stubbs, who was Robson Rhodes' representative, the administrator's representative, and they were happening sometimes on a weekly sometimes on an almost daily basis looking at different options; so it was quite intense.

Q590 Chairman: There was a holding company chaired by Sir Brian Fender. What role did they play? Did you meet Sir Brian and did the holding company have any‑‑‑

Mr Stretch: I did not meet Sir Brian.

Mr Beagle: We had one meeting with Sir Brian and a lot of the HEFCE Board Members right at beginning of that process where we were asked about our views of the platform and how it could be used, but after that we were dealing with Bob Stubbs.

Q591 Chairman: But you are a commercial company. You were a strategic partner, as you said, Mr Stretch. You changed halfway through to a service deliverer. You must have had opinions. One thing that has astounded this Committee is that quite shortly before HEFCE decided to pull the plug on this, when there were a tiny number of students, the company decided to award bonuses, in the case of the Chief Executive and the Chairman very substantial bonuses. Does that surprise you? We are talking of a 35 per cent bonus on salary.

Mr Stretch: We were not in that discussion, we were not making judgments on the governance of the business, and there was some debate. There were various different reports on the level of students using the system. We were not involved in any of those discussions at all, and we would not be involved, given our position, in judgments on the governance. Had we gone back to an earlier point, if we were doing this now a lot of different promises would change, and if we were going to make the investment we would insist on seeing the Board and would have taken a view, but looking back now it is hard to take a view. At the time we were not privy to that, but we also were not privy to the state of the bank account. We were not kept up to speed until the very late discussions with Bob Stubbs on the real financial position; so a lot of the time we would be guessing. That could waste a lot of energy. We focused the energy on continuing to work on the system and on the user experience.

Q592 Chairman: The Minister when he was in front of us said you might give a substantial amount of money back to the government, £14.5 million. Is there any likelihood of that?

Mr Stretch: I presume the Minister does now understand the true financial treatment I have laid out here. I think if he looks at that he will understand that we have faced substantial losses. They were all written out in previous financial years for our company, thankfully, but they were unprecedented in the 20‑year history of Sun Microsystems UK Ltd and very painful. Inflicting more pain on us is not something I want to look at. I think what we need to look at here is what we do with HEFCE and the intellectual property and the platform going forward. In terms of giving money back to the Government, I think it is important to understand that our entire software portfolio, or most of our key software portfolio, including our desktop software, is provided to the UK education sector free of charge, and that is not a practice that is followed by any of our competitors. That has substantial commercial value. I feel that we delivered to the best of our ability on the obligations and I do not feel that we are in a position to be handing money back.

Q593 Chairman: Mr Stretch, Mr Beagle, I thank you for being so candid with the Committee. We have learnt a lot from your evidence. Thank you indeed for this reasonably long session.

Mr Stretch: Thank you.

Witnesses: Sir Brian Fender, former Chairman, and Dr Adrian Lepper, Secretary to the Board, e-Learning Holding Company, examined.

Q594 Chairman: Sir Brian, can I welcome you and Dr Adrian Lepper to our deliberations and thank you for coming. You know what this inquiry is about. You have been sitting at the back while Sun Microsystems gave their evidence. You are an extremely distinguished academic and university administrator and you have played so many roles in so many organisations that the Committee is involved with. As they say, we have history. I have always admired you, both as an academic but also because of your reputation as a bit of a buccaneer and an entrepreneur. I say that in the nicest way. You have a reputation of making things happen, and one of the things that you seem to have made happen from most people's point of view is that you were the inspiration for the UK eUniversity. Is that true?

Sir Brian Fender: I think to some extent it is, and it is a disappointment for me to be here because of the demise of UKeU, and I think a fair amount of responsibility for that falls on my shoulders.

Q595 Chairman: Did you persuade the then Home Secretary, David Blunkett, to go with this? In a minute I am going to ask you if you want to make a more general statement, but I just want to clear those two things up?

Sir Brian Fender: Yes, I will do that. I came to the view, and discussed it, of course, with my senior team in the Funding Council, that we needed at that time (1999) to send out a strong message about the importance of e‑Learning to the higher education community, and we formulated ways in which that might happen. The best way, in our view, was to try to harness all the resources of UK universities and make those available really to three groups of people, three markets, if you like: the overseas market on the one hand (a very obvious way of adding value, if a project was successful), I think I always thought that in the end probably the most important market was the corporate market (businesses more generally), and finally, if you had successful operations, if you had successful programmes, they were bound to filter back into the UK higher education experience itself. In some ways the UK higher education market was the easiest, because you had students there to support it and staff there to support the programmes, but, of course, it was more difficult if you made that the first goal in the context of trying to get all universities to work together in one place because to some extent it would then be a competition for existing universities. It seemed very sensible to focus on this overseas market, this very big market. There was a lot of interest at that time. You have to take it in the context of 1999/2000 in which there probably was too much hype. After all, telecommunications companies paid £22 billion for 3G licences for which commonly now they pay a tenth of that. There was some feeling, I think, that digital technologies would move more quickly than they have turned out to do, and I can give you some reasons why that has turned out to be so, but the concept of using the skills of all the universities focusing in this way on an e‑Learning delivery seemed a very attractive way of sending out a message that British higher education was up to speed in modernity as well as in its conditional deliveries. There were some good reasons why the UK could be expected to lead. First of all, we have this very successful collaboration of Janot (?) with the production of a high band-width network and with it the associated development of middle ware, the supporting technologies, and, in addition to that, a rather high experience of collaboration. Universities did get together ‑ there were a number of good examples in the teaching area, the learning support network, and so on - so there was a good prospect that universities would be able to combine and make the most of the opportunity. That is quite different a model from the Open University. The Open University was a single university adapting, of course, e‑Learning into its programmes, because its programmes essentially are not printed on paper, and, as a single university, I think we had discussions with the Open University, we kept in close touch with them all the time, and although the eUniversity started with a small capital base and a big development programme ahead of it, nonetheless I think they recognised the potential power of having all universities engaged.

Q596 Chairman: Thank you for that. Can I take you back to the question. Did you persuade the then Secretary of State‑‑‑

Sir Brian Fender: What we did was put in a bid in the spending round, and we said this was important, we thought it was an initiative. After all, there are several initiatives that you put forward before any spending review, and we said this was an important one. It was one of several, I might say. We produced the arguments for it rather along the lines that I have given you just now, and the process was dealt with by my colleagues in the Funding Council and civil servants and, in the end, the Department did decide to put it on its agenda and the Secretary of State, as you well know, in February 2000 made a statement saying that he personally thought this was a project worth support.

Q597 Chairman: Sir Brian, you are a brilliant net-worker. Do answer the question though. Did you talk to David about it?

Sir Brian Fender: Not directly, no.

Q598 Chairman: Never directly?

Sir Brian Fender: No.

Q599 Chairman: Or to the Chancellor of the Exchequer?

Sir Brian Fender: No.

Q600 Chairman: But you were a passionate advocate of doing it?

Sir Brian Fender: Yes.

Q601 Chairman: That comes through. That is not a criticism?

Sir Brian Fender: You have to understand though, I always thought it was better if the Funding Council kept as much independence as reasonable. That does not mean to say that we were kind of bolshy with respect to what the Government wanted to do. We were very conscious of the Government's agenda, we wanted to support that as much as possible, but in developing projects of this kind, or initiatives of any kind, it is helpful if you have as much internal challenge as possible, people questioning us, saying, "Why are you doing it that way?" You want to try, if you like, to create as much debate as possible. I think in retrospect one can see there was not quite enough challenge here about the basic assumptions, first of all, about the way of taking it forward and the probability of success, but, of course, it is easy to say that now.

Q602 Chairman: Of course. It is easy to have hindsight on these things. When Howard Newby, your successor, or one of your successors, came in front of the Committees, what he highlighted was that it was very unusual. The Higher Education Funding Council has a role, as you know, and reports to this Committee. This is a very unusual thing for it to be put in charge of. He thought it was very unusual.

Sir Brian Fender: I would I not expect funding councils just to be boring and do exactly the same thing. It is not quite as unusual as all that; it depends which aspect you are talking about. It is certainly not unusual for a funding council to come up with an initiative which it thinks will help with teaching or research or for that matter a third mission.

Q603 Chairman: But not then to run it itself.

Sir Brian Fender: There are other models. In the way that it was set up, because the Funding Council was not running this directly, as you know, it set up a rather complicated structure in order that it could be some distance from it. Actually I noticed in the earlier evidence that there seemed to be some suggestion that this was extremely unusual. I do not think it is entirely. UKER(?), which is very successful at buying and creating the network for Janot (?), was a private company set up with certain freedoms to develop in the private sector. Fortunately, I think, they were persuaded that was not a sensible thing to do and they should stick to their main task of creating a really high‑class network, but in fact that was a private company with an intermediate in JISC (Joint Information System Committee), as you well know, and the Funding Council keeping an eye on it and, of course, is well used to working with autonomous bodies in the sense that the Funding Council has relationships with 130, or whatever it is, universities and higher education colleges which are autonomous bodies. You are still used to having a dialogue with them and expecting responses either way.

Q604 Chairman: But you will accept Howard Newby in his evidence did think it was rather an unusual initiative?

Sir Brian Fender: Yes; I thought it was rather less unusual.

Q605 Chairman: Looking back, you have heard the evidence, you have probably read the evidence?

Sir Brian Fender: I have read the evidence, yes.

Q606 Chairman: What is your reflection on the trajectory of this thing that was really very much one of your initiatives? As I say, this Committee is not here to do a ghastly job on the thing. I think all the Members of this Committee would very much have liked this initiative to have succeeded and thrived ‑ that is the truth of it, I think ‑ but can you just peel away why it has gone wrong?

Sir Brian Fender: I think you cannot apportion blame. If you are going to put any blame you should put it on me, I think. I will try to explain why. You had a very good and forceful defence of UKeU by Tony Cleaver and John Beaumont, and they were right, they had made a lot of progress, they did need more time. On the other hand ‑ and I am sorry I sound like an Observer leader ‑ the Funding Council was right to say, "But hang on, what are the probabilities of success even if we provide more time and some more money?", and then I think you get into a rather difficult area for judgment. I will try to say why. As I said, Tony Cleaver and John Beaumont and the whole UKeU team made a lot of progress, but they were essentially dealing with four big issues. As well as advocating what I think is an important strategic important aim, and I think is still an important strategic aim, I should have given a little more thought to the difficulties associated with these four tasks. Let me say what the four tasks are. The first task - let us pick up on the last point we were listening to - was to create a platform which did push forward the potential for e‑Learning. I had little thoughts about the way that the interim management team and the PricewaterhouseCoopers' advice went. You have to. You do not accept everything that is given to you. They were experts; they put a lot of time and effort into it. One of my concerns was the question of this platform, because a lot of resource was going to go into it, and I went to George Town University and talked to the Blackboard people there and listened to the users of Blackboard at that time. At that time I think there was Blackboard use in FE colleges but not in any higher education institution, or maybe just one. It was a clearly valuable platform for on campus working. You have to kind of think of e‑Learning developing, I think. It is not my definition of the stages of it, but they are helpful, I think, to consider. The first is that you simply use digital technologies to add convenience. This is a question of using PowerPoint and email and relatively simple things which do not change the culture of teaching and learning significantly at all. The next stage is that you bring in onto the platform the management of both the teaching staff and the students in the whole learning/teaching experience, and that is what Web-seating and Blackboard do and did at that time successfully on a campus basis, but you have to go further than that. You have got to try and produce a platform which is easily usable by a much wider audience than the familiarity of a particular campus, and you have to also make it easy to move forward to the third stage of adaptation to e‑Learning, which is the incorporation of material outside that which is available to the normal teaching and learning coordinates. Of course, as digitisation goes on a long time - we have recently read about Google getting involved with universities to digitise books, and so on - the number of learning objects which are available and which can be incorporated into a teaching programme are increasing rather rapidly, and you want a platform that is well capable of doing that. Even on the second level of a management tool, the ability to be able to incorporate a sophisticated range of missions and assessment, and so on, into one package is very helpful. Then there is, finally, a fourth stage, which hardly anybody has reached, but there is a goal that needs to be considered, which is when you have got sufficient familiarity with the use of digital e‑Learning that is when it begins to change the very nature of how you do teaching and learning, but we are a long way from that yet. One of the difficulties, I think, in a sense that UKeU faced was the relatively slow change of both the student learner and staff members in moving up that hierarchy of increasing sophistication. So we have a difficult platform to build, there was this cultural change necessary by teachers as much as anything else, and, although you could be rather hopeful that the UK had dabbled in this through the teaching and learning technology programme, rather a lot of money went and encouraged a lot of individual groups to develop software and understand better how e‑Learning might take a part, I underestimated, I think, the difficulties there. We have only done two of the three difficulties. There are four difficulties. The third difficulty is in understanding our market well enough, particularly if it is overseas: what the students want; how much customising we have to do; what are the cultural changes? I mean in terms of the material level, I mean just the way we were operating, and although you might consider trying to deal with the isolated student in Outer Mongolia, as referred to earlier, in practice that means establishing relationships with higher education bodies in a variety of countries. That is not easy to do, I think, and we probably underestimated that as well. There are now three major under‑estimations. The fourth is attracting the private sector, and that in itself is a difficult exercise. Although in all three of those areas, apart from attracting private money, the UKeU made significant progress, took us further forward and it was entirely reasonable for Tony Cleaver and John Beaumont to say, "Give us more time. We are getting on top of this and we have built a good deal of momentum", the hanging cloud of insufficient student numbers meant that it was going to be difficult to carry on that momentum and they would almost certainly need more money and more time than perhaps it was reasonable to give them.

Chairman: We have a very good picture, Sir Brian.

Q607 Valerie Davey: Thank you for sharing your vision, because I think it is visionary and we value your contribution to all of this. As the Chair has already said, there is nobody sitting round here who would not have liked it to succeed. The one area which we have homed in on, as you have heard earlier, and where perhaps you might add five, although it is probably incorporated in one of your four, is the very pragmatic element of feet on the ground setting the whole thing up initially and getting the right people onto that interim management. Can you tell us how you went about that and who, in fact, was chief executive of that interim management?

Sir Brian Fender: Yes, I agree with you. That was important, though there were two elements. There is the Pricewaterhouse team, as expert a team as we could lay our hands on, who were there, if you like, to help set up the structures, to produce a business plan, though this early in the game I do not think you would put a lot of credibility on that. It would clearly be for the real managers to reform that business plan, but at least it was something to start with. The Pricewaterhouse team was important, and that, I think, was the strongest team we could lay our hands on. Then there was an interim management team: Nick Winton was appointed by the Funding Council as Chief Executive, they had John Slater - very experienced, nobody more experienced really - from JISC who has been doing this kind of thing for a great many years, understood the higher education system in this area as well as anybody, and then we had a secondee from Rothschild's. They had their views. Again we did our best to find a team which would be‑‑‑ You will remember that we were exercised to try bring in private money as much as possible; indeed, you might say, "Why did you not do it the conventional way, which is to start with public funding, of course allocate money in the normal process and build up that way?" If you turn the clock back, that is what I would do, but in 1999/2000 you would not have got the money for that, I believe. People said, "No, no, we have got lots of people willing from the private sector to throw money into this area. You have got a very good proposal. Surely people will want to do it." Unless you have been in the game of raising money from the private sector, I think it is easy to think how easy it is. First of all, they are necessarily very hard‑nosed and they would be a good deal more hard‑nosed by the time the company was set up and looking for it. Secondly, they wanted a lot of control. Anybody who has had any conversation with venture capitalists will realise that they let you do next to nothing. So there was clearly a blank here. Put the blame on me if you like for not pointing out forcibly enough the essential potential serious conflict between higher education institutions used to doing it their way and we have had strong views about how e‑Learning could be exploited. One of those strong views was that they wanted to control the whole system from entry to graduation, because that is what universities do, a lot of their brand, their reputation, is associated with that longitudinal process from beginning to end, but, of course, a private investor into e‑Learning is much less interested in that and much more interested in the fragmentation advantages which you get from e‑Learning and would want the control to be able to say, "No, I am not interested in that. What we want is a module that we will sell wherever we want to at whatever price we want to." I think the conflicts there are quite reasonable, and I certainly had conversations and the interim team pursued those with Pearson. Pearson was a very attractive strategic partner in this. I think, as we have heard, there were discussions with Sun and they realised the potential for them as a strategic alliance partner, but in the end, as we have seen, the actual operating circumstances meant they became much more of a supplier. Pearson was attractive for a variety of reasons, but it was pretty apparent early on that we would not be able to come to an agreement. Even if they wished to invest money at a significant level it would be pretty impossible to produce an agreement which was satisfactory to universities because they would want far more control than was willing to be conceded. So you then left, in terms of attracting private capital, and the company was set up. I will come to why it was set up in the way it was in a moment, an additional reason. Having not been able to bring in an alliance partner, you are then faced with saying, "Let's make a success of this operation sufficiently so, demonstrating it is commercial, that indeed you can create a partnership in which private sector needs are met just as well as the university needs. Do it by demonstration, lead by example and then try to draw people in", which is where we were. The second reason, I think, why the Interim Committee was so committed to the private approach, which was one of my nagging doubts, because I did actually understand how difficult it was to raise private capital ‑ I had a nagging doubt about it ‑ was because they wanted to inculcate into the HEIs in order to make this successful, a high business approach; in other words they wanted universities to be properly business‑like and, therefore, in their commercial dealings to deliver on time, etcetera, etcetera - all the things that actually universities are quite good at doing, but there will still be certain a nervousness about whether they will always do that in the most effective way - and, if you are going to go out globally, you need to be able to be sure that you will get those deliveries. I think UKeU demonstrated that it was not all that easy to come to contractual agreements with universities, and I did not understand that.

Q608 Valerie Davey: You have just raised so many questions, I think I will come back to the one you posed yourself. Why did you set it up in this way? Given that you had obviously had doubts very early on as to the relationship which you were trying to forge between the private sector and the universities and HEFCE, why did you go forward with the plan that you did?

Sir Brian Fender: You cannot let personal doubts dominate when you have hired people that are the best you can get and listen to their expert advice. If I as Chief Executive of the Funding Council had run off on my personal whims, that would have been quite wrong. That is not my job to do. It is not my money, it is the tax‑payers' money, and I have to have proper processes for making the best decisions that can be made. I set up, I think, with the help of my colleagues, the right kind of groups to provide that advice and take it forward, and I have to live with that.

Q609 Paul Holmes: Sir Brian, can we go back briefly to one of the opening questions from the Chair. He was asking what role you played in initially creating the idea of setting the system up and in talking to ministers, and you said that you did not talk directly to David Blunkett. Your successor as Chair of HEFCE, Sir Howard Newby, said to the Committee, "My understanding is, yes, HEFCE was involved at that stage. My predecessor, Sir Brian Fender, was quite heavily involved in discussions with ministers at the time about the form which UKeU might take, and one of HEFCE's obligations is to advise ministers on the needs of the sector. I have little doubt that some of HEFCE's thoughts at the time were indeed incorporated into David Blunkett's speech." How big a role did you play? Did you talk ministers, if not to David Blunkett?

Sir Brian Fender: No, I did not sit beside David Blunkett and say, "You should shove this up your agenda when you make your speech." What we did was to make a submission, as I said, to the Spending Review which outlined the arguments and the advantages of pursuing the e‑Learning initiative, and then, of course, there was the toing and froing which takes place between my colleagues in the Funding Council and the civil servants. Certain questions came from ministers which were discussed, because they did their proper job of challenging certain proposals - for example, the question would we be selective in the number of universities that we brought in to move the EU requested project forward in the early stage - and it was the view of ministers we should try to restrict that to a small number of universities with higher ground. Indeed, we did pursue that in our consultation with universities, who were rather quick to wish the project to be inclusive, and there are good arguments for that. Particularly good programmes for e‑Learning are not necessarily associated just simply with brand; brand is much more associated, as you well know, with research ability rather than teaching ability; so I think we were right to be open and to have a big range of universities contributing. There was that kind of dialogue which took place between my colleagues and the civil servants and leading on into ministers, but did we have a round table discussion with ministers? No, we did not. I am not sure that that would have been particularly helpful. I think there was a perfectly good discussion between the Funding Council and the Department in the way that I have described.

Q610 Paul Holmes: So Sir Howard Newby is wrong when he told us that you were heavily involved in discussion with ministers?

Sir Brian Fender: It depends on what you mean by "heavily involved." If you looked in the correspondence between the Department and the Funding Council you would find, no doubt, a full record of discussions on this topic, as you would on any other topic where we were proposing an initiative or responding to a policy from the Government. All I am saying is that there are different styles, different ways in which chief executives of funding councils operate. Mine was to keep as much clarity and perspective from the Funding Council as was desirable, in my view, in order to have the best possible debate with government if there was an issue that needed debate.

Q611 Paul Holmes: In all the dialogue between government ministers and HEFCE, where did the initial initiative come from, the initial idea? Was it from you and HEFCE to the ministers or did the ministers come to you and say, "We have had this great idea for an electronic university"?

Sir Brian Fender: I think ministers would say that, indeed, the first proposals came from the Funding Council decision.

Q612 Paul Holmes: Came from?

Sir Brian Fender: Came from the Funding Council. If you look at the spectrum of activities in higher education, you would find some which initiated with the Funding Council. You can read the text. It is there easily if you look. In those days, in the Blunkett era, the letter of guidance from the Department was a full and lengthy one, and you could see it very clearly - there was no attempt to hide it - where the Department was welcoming initiatives taken by the Funding Council and where we were being told what we should do.

Q613 Paul Holmes: Within HEFCE where did the idea emerge from? Did it just emerge from a collective group or was there one key person who said, "Let's look at this"?

Sir Brian Fender: Why I am taking a good measure of responsibility for this is that I was influenced. I went with my Head of Policy to Aspen Colorado, where they have regular meetings of largely but not exclusively private universities in the States, well‑known universities in the States, and there was a rather good debate around the strategic changes that higher education faced, and included in that was the role that e‑Learning would play. I came away from that, a three/four day conference, and I talked direct with the Director of Policy and others of my colleagues and was rather resolved at that time. I think it has to be said that we needed to raise the profile of e‑Learning; we needed to make sure that universities were fully aware of the changes which we now accept as happening all the time. What you cannot predict in a period of rapid change is exactly how it is going to happen and at exactly what rate, but everybody knows that digital invasion, if you like, of practice is taking place very rapidly and I just wanted make sure that higher education was not caught flat‑footed.

Q614 Paul Holmes: In December 2000 an interim management team was set up. Who was the interim chief executive officer?

Sir Brian Fender: Neil Wyndam.

Q615 Paul Holmes: Where exactly did the idea come from of having this complicated system that we have already talked about of the holding company and the operating company?

Sir Brian Fender: That was a recommendation from the Pricewaterhouse team who looked at structures and devised this. The operating company was expected to operate as a private company would. That was to make it attractive to private investors, and it is modelled in quite a conventional way as a private sector company, and, indeed, with governance which would be appropriate for a listed company; but then, of course, there had to be a way of relating to the public funding, and so in the holding company this was created really for two reasons. The most important, in a way, was to resolve any potential conflicts between the commercial drive of UKeU and the reputation of institutions in terms of what was offered, the quality of the programme. The holding company was there to hold the licence, so if UKeU went off and did things that did not maintain or add to the reputation of British universities, then we could withdraw the licence, and we held the trademarks and the web addresses, and so on, as a means of being able to do that. I think that was a sensible safeguard. If you set up a commercial company, you may make short cuts and you do need to have a handle on that. What we also created was the Committee for Academic Quality. We had a lot of debate about who that should report to. In the end it was, I think rightly, decided it was a committee of UKeU but it would report through UKeU to us ‑ by "us" I mean the holding company ‑ and would have the right to come to the holding committee if it had concerns. So one of the big roles for the holding company was that whole issue of quality, reputation and the licence. It did have another role, and you will see the Funding Council expected the holding company to be aware of value for money when passing money from the Funding Council through to the operating company, and I think that is a role we accepted, but we have to do it in a rather limited way, as you can imagine, because this is a voluntary or an unpaid Board with a part‑time and modestly paid, I might say, Chief Executive, and there is a limit to how we could investigate the value for money of the operating company. We were not powerless in that. We had the right, and took it with great care, to nominate the Board members of UKeU. It was entirely our right to do that, and we exercised it, as I think you have seen, in producing as good a Board with a range of experience. Particularly if I think of the university representatives, not only were they extremely experienced academic and university administrators, but they had an interest in setting up companies or in e‑Learning, and they proposed a Chairman which with Tony Cleaver's experience it was easy for us to accept, and private sector nominees, again, were, I think, as strong as we could get. So that was one way we had an influence over the operating company, an important one, but we did monitor. They came and they presented to the holding company, which meant about three or four times a year they made presentations. We received information from them, we made sure that they did have governance practices which were acceptable in the wider world and I like to think we did what we could with the time and resource available, but you could question Adrian about his diligence. He and I met once a month. We exchanged issues and looked at issues. When it came to this difficult period in the autumn of 2003 when we were all waiting, the Funding Council was waiting, the holding company was waiting equally avidly for a revised business plan and there was, I think, a misunderstanding which arose from the fact that they were operating as if they were a private company and we were expecting information as if they were a body spending public money. So we got a set of figures, which were projections, without which I would have expected, looking at it from a public sector perspective, a whole series of supporting arguments. They, of course, following private practice, rarely do that.

Q616 Chairman: They rarely do?

Sir Brian Fender: They rarely provide you with a strategy. The new legislation introduced by Patricia Hewitt, which comes into force on 1 April requires an operating and financial statement, so you will get in future a glimpse into the strategy of private companies, but it is perhaps not quite so surprising that UKeU, set up in the way it was, rightly or wrongly, was a bit reticent about what its approach was.

Q617 Paul Holmes: One of the points of the holding company was to keep HEFCE distanced away from the detail of what was happening. Is that right?

Sir Brian Fender: Yes.

Q618 Paul Holmes: Was it therefore wise that on 29 March HEFCE appointed yourself to be Chair of the holding company?

Sir Brian Fender: No, it did not. It was the Board who elected the Chairman.

Q619 Paul Holmes: So HEFCE played no role in appointing you as Chair?

Sir Brian Fender: They might have expected me to be appointed as the Chair, but it was up to the Board. Some Members of the Board of the holding company were appointed by the Funding Council and some by Universities UK, and there was a SCOP representation as well. To be honest, I think it may well have been expected that I would be appointed Chairman. I was independent; I did not have a university to run, etc.

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 UKeU 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 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 UKeU. 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 UKeU, kept renegotiating the contract, making new specifications?

Sir Brian Fender: The holding company had nothing to do with the relationship with Sun. 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 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 UKeU's own programme, if you like. I think UKeU 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.

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 UKeU, 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 UKeU 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 said today was not entirely accurate. What happened was that they made available to UKeU 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.

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, 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 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 UKeU 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 UKeU 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 UKeU 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 UKeU 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 UKeU.

Q640 Mr Turner: But private sector universities across the world control admission, they control the programmes, they presumably limit the available teaching resources to individual students according to some agreement. What I do not understand is why it was felt that this could not be a private sector operation?

Sir Brian Fender: I am sorry, it could. There is no difficulty of operating in that way through UKeU as a public/private exercise or a fully commercial one. What I was raising was an issue which you can easily see in e‑Learning, which is that, because of the flexibility in delivery, you can take part of the programme and sell it to who wants it when they want it. It is this ability to learn when you want to as a learner which is one of the attractions of e‑Learning, and it also means ‑ and there is some evidence that is what students want to do ‑ that you will take only the bit that you need. Sometimes you might want the whole lot, including the delivery programme, but in other cases you might not.

Chairman: I am afraid we are running out of time for this session and we have got two or three important questions that we want to quickly ask you, Sir Brian and Dr Leper.

Q641 Mr Turner: Fair enough. I will try and limit it to one further question. There is nothing inherently contradictory about this project being run by the private sector.

Sir Brian Fender: No.

Q642 Jeff Ennis: Sir Brian, why was UKeU reporting directly to the ministry every six months if HEFCE was running the UKeU project and it was the role of the holding company to keep them in the account?

Sir Brian Fender: I did not catch the first part of your question.

Q643 Jeff Ennis: In previous evidence we have been told that UKeU were reporting directly to the Minister every six months. Why were they doing that if it was the role of the holding company to do that?

Sir Brian Fender: I think "reporting" may be the wrong word. I think UKeU almost certainly recognised that the DfES and the Funding Council were, of course, important stakeholders, so they went and they talked to them. I think I would have done the same to be honest. The formal route goes through to the holding company ‑ there is no doubt about that ‑ but they took an opportunity to go and explain what they were doing both to the Funding Council and the DfES. That is sensible; they had the money. It would be wise of them to keep those bodies up‑to‑date.

Q644 Jeff Ennis: Did the Minister ask them to do that or was it just a courtesy thing that they did?

Sir Brian Fender: I have no idea. I should have thought, just as I have said, there was an advantage to the UKeU in going and explaining to the principal stakeholders, more importantly than the holding company, what they were up to, I would have thought the Minister or ministers and the Funding Council were equally interested in what the e‑Learning company was doing, I mean the operating company.

Q645 Jeff Ennis: Have you any thoughts why the holding company did not identify any earlier the major failings that patently became obvious later on from UKeU?

Sir Brian Fender: I have said, and this is an issue, you always have a subsidiary company, which in effect, UKeU became; and I know that in other worlds you have this delicate judgment between giving them a chance to get going, giving them encouragement and then stepping in, if you like, and steering, but I can tell you, that judgment is a really difficult one. If you do let them off and go native too far, you can get into difficulty. If you stifle them by over managing them through this supervisory role, the parent company squashing, if you like, the initiative of the subsidiary company, that clearly is a bad thing too. We try to find a route between them. I do not have any doubts that we would. As I started to say, in June we thought the structure should be changing in terms of the nature of the funding and I think we go on from there that, as a consequence of that, the supervision would have to change. I think that is inevitable. I say, in practice, I think the model that would have had to be adopted had UKeU gone on was something much closer ‑ I am going to use the Met Office as an example ‑ significantly public money fulfilling a public and an important public purpose but at the same time, under strict circumstances, operating in a commercial way.

Q646 Chairman: Dr Lepper, the thing that would stick in to core for a lot of my constituents is the fact that we had a Chief Executive and a Chairman. The Chief Executive was paid £180,000 a year. That is quite generous even in terms of a Vice Chancellor, is it not, Sir Brian?

Sir Brian Fender: I think in earlier correspondence it was said it is in the upper region of Vice Chancellor.

Q647 Chairman: As a holding company, did it ever cross your mind when there were so few students, the platform was not even delivered, that this bonus payment was a bit rich coming from taxpayers' money?

Sir Brian Fender: If you ask me personally I was not happy about the bonus payments that were made. I do think we had to recognise that we had set this body up as a commercial operation to look in the outside world as if it was a start‑up company and had recruited people in who had those skills and who would expect that type of remuneration package in the type of companies for which they sought employment.

Q648 Chairman: But when Sir John Beaumont read out his target it sounded like the job. All of us on this Committee were astonished. He went through: "Do this. Market it. Get the platform". It was the job, and out of that came a bonus of £40,000. That astonished the Committee. Did it not, Sir Brian, worry you?

Sir Brian Fender: I am afraid that I realise that it is normal practice to do that. What it was doing, in effect, was setting targets which were milestones for the progression of the project. You might say it is the job. It is customary to have bonus payments which should be sufficiently challenging, I do not deny that, and it was not our job to scrutinise those and it was not our remit to do that. I would have expected, because I do that in another world, to set challenging milestone targets and those to be achieved in order to get the bonus, but the notion of bonuses for something intermediate before the delivery of the students does not altogether surprise me. Of course, if you UKeU had gone on into 2004/05 in terms of delivery, then, of course, I would have expected bonus payments to be heavily weighted towards the recruitment of students.

Q649 Chairman: Absolutely, but you were there as the holding company. You are not only, as I described, a bit of a buccaneer and entrepreneur, you are also a diplomat. I have really got to push you. Do you think this enterprise should have been given a little bit more time?

Sir Brian Fender: Our advice on the lines of the PA Consulting report was, of course, to try to maximise the value we could get from the company and what had gone into it so far. I think that implied more time. It is no good dealing with hypothetical situations.

Q650 Chairman: Howard Newby must have phoned you up and said, "I think we are going to have to pull the plug on this, Brian." What did you say?

Sir Brian Fender: We gave him advice which said‑‑‑ No, it was not quite as simply as that; life is not. What they had and had considered were effectively two options: one was immediate termination and the other was a restructuring wind-down operation and I think within that third option, which we were in favour of, we wanted, of course, as much restructuring and as little wind-down as possible - I think that is fair enough - basically to extract as much as one could from the work that had gone in, but you do then get into a judgment between that, and it was not for me to second guess. They had the money. The Board of the Funding Council is a highly competent Board with a lot of experience on it. They are entitled to make the judgment. It is their money. Am I being diplomatic?

Q651 Chairman: I have got the message.

Dr Lepper: Would it help if I read out what the Board actually reported to HEFCE at this time?

Q652 Chairman: Yes?

Dr Lepper: It said, "The Board was in no way surprised by the current trading position of UKeU, nor that problems have arisen in the implementation of the learning platform; neither reflected adversely on the commitment or competence of the senior management or staff of UKeU. The Board did, however, recognise, as acknowledged by UKeU, that the projections of students under the revenue had no objective base and were subject to a high level of uncertainty. The projections could be exceeded, but significant risk existed that a shortfall would occur. In these circumstances, the break‑even point for UKeU would recede further into the future with the prospect for private financing receding in parallel and additional financial support from public funds would be necessary if UKeU were to remain business." That is what we reported in December 2003 to HEFCE. Obviously in that situation it would be for HEFCE to decide if it wished to continue and provide additional funding. We have given our advice.

Q653 Chairman: What was your personal view? Would you like them to have had more time?

Dr Lepper: I think I would have preferred there to be more time to resolve this issue because I think the whole thing remains unresolved at the moment as to whether it could have succeeded or not. It also remains unresolved what is the role of e‑Learning in distance teaching for UK universities.

Chairman: Dr Brian, Dr Lepper, it has been a pleasure to have you before the Committee and we have learned a lot in the process. Thank you very much indeed.