Examination of Witnesses (Questions 1-19)
DEPARTMENT OF
TRADE AND
INDUSTRY AND
ADVANTAGE WEST
MIDLANDS
20 MARCH 2006
Q1 Chairman: Good afternoon, welcome
to the Committee of Public Accounts where today we are considering
the Comptroller and Auditor General's Report on the closure of
MG Rover. We welcome to our Committee today Sir Brian Bender,
who is the current Permanent Secretary at the Department, Ms Catherine
Bell, who is the former Acting Permanent Secretary and was Permanent
Secretary at the relevant time, Mr John Alty, who is the Director
General of the Fair Markets Group, Mr Mark Russell, who is the
Director of the Industrial Development Unit and from Advantage
West Midlands we have Mr John Edwards the Chief Executive. You
are all very welcome. Sir Brian, could I please ask you, almost
by way of a brief opening statement, to tell us what lessons we
have learned from this and what we can take into the future?
Sir Brian Bender: We were dealing
here with a major car producer with a long history that the Committee
will be well aware of and which had changed ownership in the year
2000. As the time passed after 2000 and the Department was monitoring
the situation, there were three alternative contingencies that
the Department needed to prepare for; I state them in no particular
order. The first was that the company would need a strategic partner,
which was evident from 2000, and might need the facilitation support
of the Government to find it. The second was that the company
might need some financial support. The third contingency, which
was the one that eventually happened, was that the company would
go into administration with all the implications for the region.
Therefore the lessons for the Department are around the quality
of the contingency planning in what was an evolving situation
and did involve some unprecedented situations, and what lessons
we can learn looking forward. The Committee will clearly ask a
number of questions around that. I have, internally, asked for
a lessons-learned report on this and clearly the Report of this
Committee and the Report of the Trade and Industry Committee will
feed into what those lessons are. I hope the Committee will feel,
as a result of this afternoon's hearing, that the Department was
pretty well prepared in what was a complicated and unprecedented
situation.
Q2 Chairman: Thank you very much
Sir Brian. Ms Bell, as you were there at the time, do you think
you could just give us a chronology of events and your overall
view of the events as they unfolded?
Ms Bell: I took responsibility
as Permanent Secretary and Accounting Officer on 1 March, at which
point it was very clear that MGR was in difficulty in terms of
its cash flow and indeed there was a request to the Department
for help with a bridging loan. In terms of the events which then
flowed forward, we saw those in the context of the attractions
of MGR succeeding in the joint venture negotiations with the Shanghai
Automotive Industry Corporation, SAIC, and we were keen to support
that in so far as it was appropriate for the Government to do
so in relation to negotiations which were essentially between
two private sector companies. We were certainly very conscious
of the time pressures because of the cash flow difficulties. At
the same time, it was important that we should get a very accurate
sense of where the position of MGR was, what the commitment of
the directors was, what indeed the cash flow position was in detail.
Equally, we were very keen to understand the position not only
of SAIC but also NDRC (National Development And Reform Commission),
who would need to approve the joint venture, on the Chinese side
and indeed the Chinese Government. It was therefore a matter of
urgency that we should consider how we could address the risks
in this situation, including the risk to the taxpayers' funds,
if taxpayers' funds were going to be exposed to supporting the
joint venture through a bridging loan. In the middle of March
we canvassed conditions for such a loan first to MGR and a few
days later to the Chinese company SAIC. At the same time, on 17
March, we sent accountants KPMG into MGR to look at the cash flow
position and, as is reflected in the NAO Report, later that month
we also sent DTI officials to Shanghai to get the most accurate
understanding we could of how matters stood on the Chinese side.
There were continuous commercial negotiations, but, as the Report
also reflects, eventually it proved not possible for a joint venture
deal to be agreed and we then faced the dilemma of the company
moving into administration. Going briefly over the timetable,
that happened, it was announced on 7 April and the administrators
were appointed on 8 April. The company was then in administration
and we needed to consider whether any jobs could be salvaged at
that time, hence we came to the decisions of 10 April, looking
at a situation where there were 6,000 jobs at issue in an assisted
area on one site, the biggest potential redundancy in one place
that had been seen for a very long time and probably as many jobs
again at issue in the supply chain behind MG Rover.
Q3 Chairman: All right. I shall view
those as two helpful opening statements. I am now going to go
back to try to shed some light on this Sir Brian, if I may, and
start with you. We go right back to 2000 where you started in
your short opening statement. If you look at paragraph 2.2 on
page 27, you can see as early as May 2000 that the Department
was aware that, although MG Rover might be financially secure
in the short term, it needed an industrial partner. This was obviously
quite clear in 2000; this was a very small volume car maker in
terms of world production and clearly it needed a strategic alliance
to survive. Why did you not immediately draw up plans to assist
it?
Sir Brian Bender: This was a private
sector company, as I am sure you will appreciate. Therefore it
is for the judgment of the company and its directors how to proceed
and the Government's role is to facilitate, to make contingency
plans and not actually to get into the position of running the
company. The Department did track the progress of the company
against its understanding of the milestones and in 2001 made an
assessment which said that it was secure until probably 2004-2005.
Q4 Chairman: Of course, you could
put that the other way that it was even clear then in 2000 that
the money, the very generous dowry which came from BMW, would
only sustain it until 2004.
Sir Brian Bender: Correct, Chairman.
Q5 Chairman: So this was clear to
you way back in 2000.
Sir Brian Bender: Indeed it was
and, when invited by the company, we did support them on alliances:
we did so in relation to activities in Poland; we did so in relation
to China Brilliance, but at the end of the day it has to be for
the company itself to decide what alliances it wants with the
Department facilitating, rather than the Department trying to
form a view for it.
Q6 Chairman: A private company which
eventually soaked up the best part of £1 billion of public
money.
Sir Brian Bender: I repeat what
I said. At the end of the day the Department's role is to try
to engage in those circumstances, try to facilitate. We offered
help and, in the course of the final few months, intensive help
was given in relation to the Shanghai Automotive Industry Corporation
but it has to be for the company to make the overture to the Department,
rather than the Department to try to run it.
Q7 Chairman: Okay, you have made
that point. Let us travel forward then to 2004. If we look now
at page 32 and paragraph 2.15, it says "The Department concluded
that it would commence planning to mitigate the impact of a potential
collapse". It seems then that although obviously finding
a partner would have been preferable to closure, you were focusing
on closure. Why did your contingency plans in 2004 focus on closure
with all the difficulties that would inevitably entail?
Sir Brian Bender: I would assert
that the Department did not solely focus on that as an option.
It did look at that as an option, it put a lot of work into it
and I would assert too that it was as well that we did. Indeed
in the period between 2000 and 2005, the dependence of the West
Midlands economy on MG Rover reduced significantly. The number
of companies which were dependent for their supply chain purposes
on the company was reduced as a result of the work which Advantage
West Midlands and the Department had done over the previous few
years, though that was not the only activity the Department was
doing. We were also, by late 2004, actively trying to engage with
the Chinese authorities on the SAIC negotiations.
Q8 Chairman: Let us travel forward
now then Ms Bell to April 2005, the key period when you were actually
responsible for the Department. Shall we look at paragraph 2.34
which you can find on page 38? "During the first week of
April, the Department considered relaxing some of its loan criteria,
in particular whether to make available a loan facility".
You see that paragraph, do you Ms Bell?
Ms Bell: I do.
Q9 Chairman: So you actually offered
£100 million, did you not? You were actually saved from giving
£100 million by SAIC, the Chinese company, which actually
made clear then that they were not going to proceed with this
deal. The question we have to ask you is why you relaxed your
own criteria? You drew up these detailed criteria that helped
you to manage these risks, but then you apparently were prepared
to ignore your own criteria to give a loan facility of £110
million, which we now know would just have gone into a bottomless
pit.
Ms Bell: No conclusion was reached
in these complex commercial negotiations and it was our constant
endeavour to explore where there could be movement on the negotiations
to see whether there was a prospect of taking this forward in
order to find a future for MGR, but in fact no agreement was reached
in those commercial negotiations.
Q10 Chairman: Let us look at this
£6.5 million that you actually did make. Shall we look at
page 40 now, paragraph 2.43, the second bullet point? "However,
the Department's discussions with the administrators on 10 April
suggested that at that point the prospects for selling quickly
the assets in administration (in part or whole) to SAIC or another
purchaser as a going concern were `remote'". Given that the
prospects of getting this money back were remote, would not the
proper way of terming this £6.5 million be not as a loan
at all? It was a gift was it not? It was a grant or a gift? The
prospects of getting it back were remote. You knew that at the
time did you not?
Ms Bell: That was not my own view
on Sunday 10 April. We took advice from a number of quarters,
looking at what the options might be in terms of the assets then
in administration. One view we took was from the administrators
and the administrators had been appointed on the Friday lunchtime
and had been in charge of the business for a very short period.
At that time they took a reserved view about what the prospects
were for sales out of MGR. At the same time the Department had
been in charge of negotiations, or rather had been tracking the
negotiations for several months. We thought that there was a prospect
that SAIC might indeed buy the company out of administration.
Q11 Chairman: After all these years
you thought that just by giving them another week, when apparently
you had already been told by SAIC that they were not going to
buy it ... Surely if there were a realistic chance of them buying
it, you should have taken three months, which might have cost
the best part of £70 to £80 million. What was the point
of keeping the company going for just another week, knowing that
the chances of ever getting the money back were remote?
Ms Bell: The situation was fundamentally
altered by the company going into administration in that it was
possible for bidders coming forward to take a package of assets
and leave liabilities with the administrators, which was a different
situation.
Q12 Chairman: So you never sought
a direction on this matter?
Ms Bell: I was entirely content
that it was a measured risk to take for one week and one week
only.
Q13 Chairman: Sir Brian, just summing
up, it could be said with the benefit of hindsight that if they
had sold to Alchemy in 2000, it would have kept part of Rover
going. Those who lost their jobs would have had proper redundancy
payments, full pension assignments, that is right it is not? This
is going back to 2000.
Sir Brian Bender: You are dealing
with a hypothetical situation and the discussions with Alchemy
broke down between the parties. It was at that stage that PVH
(Phoenix Venture Holdings) came forward, so it is not appropriate
for me to comment on what might have been if those negotiations
had not broken down.
Q14 Chairman: Let us see what did
happen. Let us go through the costs, this is a value for money
Committee, we are supposed to be looking after the interest of
the taxpayer here. The cost of supporting Rover and dealing with
the consequences of its decline: £247 million. That is shown
on page 24, table 6. VAT and PAYE loss: £18 million. That
is shown on page 35 of the NAO Report. The cost of company inspection
to date: £3 million. Total cost to Government: £268
million. Then we go to trade creditors' loss on page 51 of the
Report: £109 million. Pension Protection Fund may need to
spend £500 million, mentioned on page 50. Six thousand jobs
were lost. The Phoenix four directors walked away with £40
million in their pockets. Are you proud of this performance Sir
Brian? The best part of £1 billion of public money for what
you say was a matter for a private company.
Sir Brian Bender: One of the aspects
I am proud of is the work that was done in that intervening four
or five years to help the supply chain diversify. That meant that
when the company finally collapsed the impact on the West Midlands
economy was far, far less. As to what the directors may or may
not have done, that is obviously a matter for the Companies Act
inspection.
Q15 Chairman: Mr Edwards, this is
a positive part of the Report and I want to congratulate you on
what you did to help the workforce. It is a positive part of the
Report and I congratulate you. But the fact still remains that
after nine months, January 2006, over two fifths of MG Rover's
workforce were still unemployed. Do you know why that is?
Mr Edwards: The current state
is that some 4,000 out of just over 6,000 people made redundant,
both at Longbridge and in the supply chain, are now in work. We
should anticipate normally 12 months after a major closure that
some 75% of the workforce would be back in work and we are on
track at the moment to get to around 73% of the workforce back
in work at the first anniversary of the closure of MG Rover at
Longbridge. I should regard it as a very positive outcome given
the scale, the immediacy and the concentration of job losses that
occurred because of MG Rover's closure in April of last year.
Q16 Chairman: Very lastly then, Sir
Brian, why did the Department not take action when you knew that
the PVH directors had paid themselves £40 million? This is
mentioned, by the way, if colleagues are interested, in paragraph
2.11 on page 30.
Sir Brian Bender: The PVH directors
were subject to the same corporate governance arrangements as
anyone else in a private company, and there was no particular
basis for the Department to take action beyond what subsequently
happened when Patricia Hewitt asked the Financial Reporting Council
chairman to do a Report which led to the Companies Act investigation.
Q17 Mr Khan: There are two areas
of policy I want to focus on to start off with. The first one
is the policy that your Department should facilitate substantial
inward investment into the UK. The second area of policy is the
one that says that you should not interfere with the market. Now
clearly there is a balance to exercise between those two. How
do you decide how to balance those two policy areas?
Sir Brian Bender: The intervention
in the market is essentially in areas of market failure and therefore
the intervention schemes the Department has will be used when
there is a judgment that there has been a market failure or, in
the case of a collapse of a company like this, in order to help
the local and regional economy adapt. We should not otherwise
normally intervene in the market.
Q18 Mr Khan: So there are exceptional
circumstances where you would interfere.
Sir Brian Bender: They would be
exceptional circumstances, and the sort of circumstances when
the bridging loan and the £6.5 million were being considered
were those exceptional circumstances.
Q19 Mr Khan: With hindsight, did
you get the balance right?
Sir Brian Bender: My belief, and
I look at this only with hindsight, is that the Department did
get it right in these circumstances. Had a negotiation with SAIC
been successful, then that would have been a benefit to the West
Midlands economy and to car production in this country. SAIC has
a record of doing joint ventures with companies in other countries;
if I might put it this way, that was a horse worth backing but
it was not successful.
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