Examination of Witnesses (Questions 240-259)
MR TOM
WATSON MP, MR
IAN ANDREWS
AND MR
MARK HUTCHINSON
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.
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