Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 240-259)


24 MAY 2006

  Q240  Mr Lancaster: Mr Hutchinson, one of your predecessors, Mr Ewins, has expressed the strong view that he would like to see the Met Office and the Hydrographic Office merged. Is that your view?

  Mr Hutchinson: Would you mind if I passed that question across to Mr Andrews, who as the owner department I think is probably better placed to answer it?

  Mr Watson: If I could just come in and add my initial views on this, we have already said there is a review going on of the way the current funds are structured, and I have heard arguments that the two should merge. I just want to say at the outset that whilst that superficially might look the case it might not necessarily be the case when we delve deeper, and in two weeks what I see are two similar organisations but with very different structures. For example, 80% of the Met Office income is from the public sector and 20% private; the reverse is true for the Hydrographic Office, which is 80% commercial, 20% public. So it might not be the case that there is a fit. However, there is a review going on; I have not seen it yet but when it is over my desk I will consider that. Ian, I do not know whether you want to talk about some of the details.

  Mr Andrews: Just to expand, really, Minister, on what you have said. The organisational merger between the Met Office and the Hydrographic Office is something that historically we have looked at from time to time. Hitherto, the balance of argument has been against doing it, for some of the reasons that the Minister has mentioned. There are, however, real opportunities, I believe, for the scope of sharing technical infrastructure, corporate services and looking again at whether there are in some areas business synergies. Again, we are looking at this as one would expect in the context of preparing for the Comprehensive Spending Review, and the Hydrographic Office does need to invest in new facilities, either where it is or somewhere else. In terms of the attractions, as the Minister was saying, they operate in different markets, they have quite different products, they have different competences and they have different cultures. One is very much science, the other is technical. They are also using quite different business strategies because the challenge, as I see it, for the United Kingdom Hydrographic Office is of sustaining commercial market share in an increasingly competitive digital age; they do not buy charts any more they go for digitised solutions. The Met Office, on the other hand, as the Minister said, very much dependent on government, public funding rather than commercial funding, is looking at growing its commercial income from a much lower base. So there are quite a few issues that need to be raised here against the superficial argument that these are two environmentally focused trading funds in roughly the same part of the country, so does it not make sense to put them together? All of those things we need to weigh. We are weighing them currently in the context of the studies which the Hydrographic Office is doing, in looking at its future investment plans, and one of the options that they are looking at is collocating with the Met Office in Exeter, but they are also looking at potential opportunities in Taunton.

  Q241  Mr Lancaster: I accept that but this is a debate that has been going on now for sometime. In his evidence, Mr Ewins said, effectively, that the reason the merger has not gone ahead (this is not a quote) is that the MoD owners are stalling on it. Given that, what timeframe can you put forward for this review being complete and when will a decision be made?

  Mr Andrews: Speaking purely personally, this is a question I have been asking on a fairly consistent basis. I have been satisfied that the balance of argument until now has been against doing it. I am very strongly in favour of looking for ways in which the shared services can be put together but because of the different nature of the businesses themselves there is not an overwhelming case for doing it.

  Q242  Mr Lancaster: That is the decision. I am asking for a time frame. When?

  Mr Watson: I understand you pressing on that but until I see the review I do not think we can give you a time frame. I can certainly write to the Committee about when the review might land on my desk.[6]

  Mr Andrews: It will again be in the summer because the Hydrographic Agency is one of the trading funds that we are looking at as part of this.

  Q243  Chairman: That is wrapped up in that review, is it?

  Mr Andrews: Yes.

  Q244  Mr Jones: This is just civil servants who do not want to move from Taunton. I can guess what the outcome of this review is going to be. They will not merge. Mr Ewins told us yesterday that the new building at Exeter was designed to have another block put onto it which would allow the office to co-locate there. This is just internal civil servants not wanting to move, is it not?

  Mr Andrews: I do not believe that is the case at all. One of the options which is being looked at as part of this review—this is a Hydrographic Office process—is co-locating with the Met Office in Exeter.

  Q245  Mr Jones: They do not want to move. Why are they leading it? You are the main customer.

  Mr Andrews: It has to be driven by a business case that demonstrates that that is the right thing to do. The Hydrographic Office have very substantial facilities and infrastructure in Taunton. They have their main printing facilities, for example, in Taunton. Do we move those? If we move them into Exeter, are there real opportunities to deliver those sort of benefits that I was talking about in terms of shared services? There are also wider considerations about those who believe—they are not just civil servants—that the Hydrographic Office lives in Taunton. What I am very clear about is that this will be driven through on the basis of the business case and what is the right thing to do for the totality of the businesses. If we believe and ministers are satisfied that the right thing to do is to co-locate them in Exeter with whatever level of rationalisation, given the two different businesses that that involves, that will be driven through.

  Q246  Mr Jones: I will have a bet with you that in six months' time, once this review has taken place, they will not co-locate and they will not merge.

  Mr Andrews: It depends what the outcome of the review is and what the business case is for doing it.

  Q247  Linda Gilroy: Can I take an opportunity and ask the Minister to keep a keen oversight of this? Taunton is approximately half an hour from Exeter. Plenty of people commute from Taunton to Exeter and therefore, if the printing works stayed there and the rest of it moved if that is an issue, there would probably be some synergies around.

  Mr Watson: I had better not take up the bet with you, Mr Jones, as it is me who is making the decision.

  Q248  Mr Jones: Mr Ewins was before us yesterday. It has not been a very happy tale has it, looking at the Met Office's record in terms of in the private sector? I want to do two things in these questions. One, I want to explore some of the issues around weatherXchange but also I want to ask whether or not it made the Met Office more averse to getting involved in the private sector. Clearly from the income it seems it has. In terms of weatherXchange, what lessons have been learned from that? We had Mr Ewins before us yesterday and I was quite shocked at the way in which weatherXchange was set up in terms of governance, for example. One of the things that concerned me was that people were wearing not just two or three hats. Also, there is an accusation that I will put to you in a minute about how it failed. What has been put in place? I personally think the Met Office should go into commercial activities. If the Met Office is going into commercial activities, how can we have confidence in those governance arrangements and also that we are not going to get into the problems that we got into with weatherXchange?

  Mr Andrews: What we should never forget is that the fundamental cause of the failure of weatherXchange was the failure of the business itself to perform anywhere near the expectations—

  Q249  Mr Jones: Can I stop you and put the accusation that was put yesterday to us? One of the reasons why it failed was because when weatherXchange was set up it had an exclusive right to sell the information. What was put to us yesterday was the fact that it was undermined by the fact that the Met Office started selling information in competition to it. What is your reaction to that? That was one of the reasons put to us yesterday as to why it failed.

  Mr Andrews: You are aware, I know, that there are some issues around the background to the weatherXchange saga that we think it would be inappropriate to go into in public session, but I will happily try to answer your question in that context.

  Q250  Mr Jones: Can you give it to us in writing privately if there are issues that you do not want to mention today?[7]

 If it would be helpful for us to understand the sorry saga of weatherXchange, would it be possible to provide them to the Committee on a private basis afterwards?

  Mr Andrews: I would be very happy to do that.

  Q251  Chairman: Within that constraint, could you now give us the answers?

  Mr Andrews: Fundamentally, the proposition to go into this area was a good business idea which had the potential to return a strong, financial value to the taxpayer. The processes in the Met Office and in the department failed to operate as they should in terms of the way in which this entity was governed. The Met Office itself commissioned a post-investment review back in December 2004. It was clear in retrospect that stronger governance both internally within the Met Office and from the MoD would have reduced the risk. What we have done in order to ensure that this could not happen again is to introduce much stronger, more effective governance arrangements. The board of the Met Office is now more empowered. It is independently chaired; it has clear roles and a clear need to address the issues of higher level scrutiny, both from the shareholder executive and the internal team to which I referred earlier. Indeed, it was the mechanism of putting in place that improved governance structure for the office which led to some of the issues around weatherXchange being exposed. We now engage very closely in the oversight of joint ventures but through our membership and our representations on the boards of the trading funds concerned. We have made sure in the office that there are clear delegations, clear accountability, better record keeping, and greater internal financial transparency. In terms of assurance, we have exposed this both to our own internal auditors and to our external auditors from the National Audit Office. They have confirmed that they are satisfied that the appropriate lessons were identified and that the mechanisms that we have put in place with the systems and controls will prevent it happening again. We are also looking as it happens across other joint ventures owned by the Ministry of Defence to ensure that they too have appropriate governance structures in place. Again, the National Audit Office have oversight of that and have said they are content with it. If we found ourselves in this position again, we would certainly take a very different approach to understanding and managing the risks. As far as the particular issue around the office and how it dealt with weatherXchange and the extent to which it did or did not undermine it, I will look to Mr Hutchinson to respond. Can I make absolutely clear from the department's point of view that there was no hidden agenda, no conspiracy to drive weatherXchange out of business. The decisions were quite properly taken by the weatherXchange board.

  Mr Hutchinson: In terms of, firstly, did we undermine weatherXchange and, secondly, are we more risk averse, in terms of did we undermine weatherXchange during the course of 2005, the answer is categorically not. Shortly after I joined in the spring of 2005 I spent many months working to find a satisfactory outcome that would allow the partnership to move forward, including going through a process of formal mediation. The issues that made that outcome unachievable were I think largely down to the fact that the business as originally conceived, which was to develop new products jointly between ourselves and weatherXchange and with those new products to go into a rather specialised, niche market in terms of weather derivatives and the financial markets, simply did not work. There was no money coming out of that particular activity. Around 2005 the company therefore sought to extend their use of exclusive products in markets to a broader definition of "exclusive" across a much wider range of existing products. We simply could not respond in the way that the company wished us to respond in that we are not allowed to put exclusivity on generic weather data. We have to make it available for a wide range of users.

  Q252  Mr Jones: The accusation was put to us yesterday that you were selling information in competition to them. You are saying that is not the case?

  Mr Hutchinson: I am explaining that before we entered into the weatherXchange venture we were selling a range of weather data to a range of private sector users of that data, mainly the operational divisions of companies to make business decisions about stockpiles and such like. Those pre-existed weatherXchange and therefore were not seen to be in conflict with the original aims of weatherXchange because weatherXchange was all about doing something very different from selling weather data into particular markets. It was about developing joint products to specialise in brokerage in the financial markets. That business never took off. It started off reasonably okay and went worse and worse. weatherXchange themselves shifted the focus of the business, or sought to, by looking at a much wider range for their activities with a much wider range of products, some of which were already existing.

  Q253  Mr Jones: Trying to go into areas that you were already covering in the Met Office on a commercial basis, to sell information?

  Mr Hutchinson: I think expanding the scope of what they deemed to be exclusive products and expanding the scope of the markets in which that exclusivity obtained, in areas which we found very difficult for legal reasons to comply with if that was the only way in which the company could be made viable, because of course we had an obligation under competition law to make sure those generic weather data products are made available to anybody who cares to ask for them.

  Q254  Mr Jones: We did get certain answers yesterday but he was a bit cautious on certain things. I did not quite understand his role. I understand what Mr Andrews has just said. I am quite amazed that the MoD has had these structures in place for many years. One of the things that struck me yesterday was the idea that you have a lot of people who are twin hatted in that they had a vested interest in the Met Office and also in a commercial company which was very unusual. Could you explain what happened to Mr Ewins when he left because yesterday I asked him what he did when he left. He continued to be chairman and I asked him whether he would work for commercial organisations still or whether he was debarred from it or went through any rigorous processes in terms of ex-civil servants. He said he did not, which I found a little bit strange. Then he was a bit cagey about what he got in terms of financial rewards from this. Can you enlighten us as to what happened to him and what his involvement was afterwards, either publicly if you can or privately?

  Mr Hutchinson: It might be better to deal with the issues in a private note, if I may.

  Mr Andrews: There is a formal process as you are well aware for former public servants taking up subsequent employment: the business appointments process, which I chair in the department. Mr Ewins did not put a proposal formally to business appointments.

  Q255  Mr Jones: That is what I found very strange. It would be interesting if in the note you could explain the process of his retirement and his remuneration because he was a little vague.

  Mr Hutchinson: I believe he was paid a per diem and then costs.

  Chairman: He suggested to us he was paid costs and expenses, but it is now clear that he was also paid a salary.

  Q256  Mr Jones: Was it the case that people were being paid twice? You can put it in a note but were the people who were working for the Met Office also being paid a second salary from weatherXchange?

  Mr Watson: That was the case and I will make sure that the note you receive is very detailed.

  Q257  Chairman: When you do that, could you compare that with what Mr Ewins told us yesterday because, as I understand it, he told us yesterday that they were not being paid a salary as well as being paid a salary from the Met Office.

  Mr Watson: I will make sure the note is as full and as comprehensive as it possibly can be.

  Q258  Linda Gilroy: I do not know if it is possible for you to say something on the record about it or whether there is any commercial sensitivity about it but, as an insight into the work of the Met Office and what it does, I would be interested to know more about the market that weatherXchange was trying to work itself into. The picture I have is of a visit to the futures market where I saw people trading off a risk of ice cream against heating and summer weather. That was in 2000 so it was probably before weatherXchange was into it. Also, when we were at the Met Office, one of the pictures was of lettuce being very sensitive to weather. I wonder if you can say a bit more on the record—or, if not, in the note—about where the boundary was between the niche market that weatherXchange were going to try and get into and the other products which the Met Office was in before weatherXchange came on the scene.

  Mr Hutchinson: The key distinction is between the operational decisions of business. In terms of the lettuce example, is now a good time to make sure your lettuces are at the front of the store for consumers to buy? Do you bulk buy a lot of ice cream because the weather is going to be hot at the weekend? Those operational decisions are things that we have done for many years, well before weatherXchange. weatherXchange had a unique added value purpose, as the Met Office saw it. The purpose of the joint venture was to go into a perfectly new market to us which was the financial weather derivatives market with a special product. The broker brought together financial companies that wished to hedge against weather dependent risks for their business and those people in the financial service and insurance markets who could provide that insurance. weatherXchange was in the middle of those two people to provide the information and weather data to enable them to calculate probabilities and risks.

  Q259  Linda Gilroy: And insure against them.

  Mr Hutchinson: And make that insurance programme work.

6   See Ev 59-60 Back

7   Not printed. Back

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