Examination of Witnesses (Questions 20-39)
DEPARTMENT FOR
ENVIRONMENT, FOOD
AND RURAL
AFFFAIRS & THE
CARBON TRUST
5 DECEMBER 2007
Q20 Dr Pugh: Presumably included
in that figure of £7.1 million are the performance bonuses
that the staff get as well, is that right?
Mr Delay: I believe so, yes.
Q21 Dr Pugh: Does everybody get a
performance bonus?
Mr Delay: Everybody is eligible
for a performance bonus.
Q22 Dr Pugh: Does everybody get it
every year?
Mr Delay: No.
Q23 Dr Pugh: You do discriminate,
some people will get it and some people will not.
Mr Delay: Absolutely, we discriminate;
there are some people who will get no performance bonus and some
people will get a performance bonus and then we discriminate between
those who do, quite significantly between high performers who
contribute very significantly to the company's success over the
period and those who do not.
Q24 Dr Pugh: So some will get a lot
more and some will get a lot less.
Mr Delay: Yes.
Q25 Dr Pugh: The average wage of
your staff though is in the region of £50,000 to £60,000,
is that right?
Mr Delay: That is right; the overall
salary cost is £50,000 as an average. If you strip out relatively
junior staff and consider managerial staff and professional staff
only that goes up to £56,000. The NAO review compared that
to Defra staff of similar grades and indeed our own internal benchmarking
that we carry out—
Q26 Dr Pugh: Do you have similar
grades in the Carbon Trust to the civil service?
Mr Delay: We do not have comparable
grades so it is a question of trying to assess the level of seniority.
Q27 Dr Pugh: Do you feel you can
make a fair comparison between a private company for the Carbon
Trust and the civil service?
Mr Delay: In comparison with Defra
we appear to be very much in the same position. If you strip out
junior staff from both Defra and the Carbon Trust the salary costs
are virtually identical. The Carbon Trust has a performance-related
bonus, Defra has a non-contributory pension scheme; that is a
significant difference between the two. If you then look at the
Carbon Trust our actual parameter against which our remuneration
committee and indeed the company assesses and benchmarks our salaries
is against the private sector, against private sector companies
of a similar scale, energy companies. Again, on all the benchmarks
that we have done we are within the ranges.
Q28 Dr Pugh: I understand. Now looking
at the general financial picture of the organisation, I was quite
impressed when I read in the key findings about how for every
£1 committed £2 came from the private sector and on
the innovation programme it was £1 and £10. Then I looked
to page 11 and it looked to me then—and clearly the figures
are not to do quite the same thing—as if actually all you
are really doing in a sense is spending a lot of public money
and bringing very little other money to the table apart from that
because the figure is about £3 million in terms of income
acquired from loans and other sources, compared with about £80
million odd from the public sector.
Mr Delay: There are two kinds
of funding that we need to consider here. The £3 million
essentially is the Carbon Trust's own funds that it can reinvest
in the business. We are a public good company, we are a not for
dividend company; therefore when we make a return we reinvest
it in the business, and that is the £3 million figure that
you see there. The leverage figures that you see are the private
sector leverage that goes hand in hand with our public sector
intervention in particular areas, so in an innovation area—
Q29 Dr Pugh: That is the amount of
money you encourage the private sector to spend as well, but in
terms of your own activities you only accrue about £3 million.
Mrs Ghosh: Yes.
Mr Delay: In terms of returns
that can be reinvested, yes, that is correct.
Q30 Dr Pugh: Thank you for that.
I wonder if you could perhaps explain to me diagram 17 which is
on page 28. I spent a lot of time this morning over this, trying
to figure out what it was about and what it told me. There appears
to be in the right hand corner a very strange partnership that
consists of two Carbon Trust employees—it is not very strange
but it is essentially a venture capital partnership, is that right?
Mr Delay: It is a small FSA-regulated
fund management company, yes.
Q31 Dr Pugh: Am I right in thinking
the two Carbon Trust employees would be the chief executive and
the finance officer?
Mr Delay: No, the chief investment
officer of that group actually left the Carbon Trust a few months
ago and is now actually employed in the civil service, so the
two employees who are mentioned there are two investment partners
of the company who have been there for about five years each.
Q32 Dr Pugh: What I am concerned
about is if you follow the diagram through it looks like those
two investment partners are going to get 75% of the carried interest,
which of course is notional at the moment but could at some point
be very, very substantial, yet looking at it from a general structure
point of view they mostly seem to be administering public money—am
I correct in my supposition?
Mr Delay: I do not think so because
they are actually investing money, be it public or indeed private
going forward.
Q33 Dr Pugh: They are going to put
their own money in, are they?
Mr Delay: Firstly they have made
their own investment into Carbon Trust Investment Partners as
a business.
Q34 Dr Pugh: So when it says 25%
there, they are going to put in 25% of the capital, are they?
Mr Delay: They have put in 25%
in cash of the capital in Carbon Trust Investment Partners. The
way in which the carry is structured is that essentially an investment
portfolio has to deliver a return in excess of 6% IRR to get any
carry whatsoever. Anything that is in excess of the 6% is then
divided up, with 20% of that being available to Carbon Trust Investment
Partners and a proportion of that is then fed back to these two
partners as a part of their remuneration package.
Q35 Dr Pugh: So would you not say
they have got rather a good deal if they put 25% of the capital
in but they get 75% of the carried interest? That on paper looks
a pretty irresistible deal to most of us.
Mr Delay: The carried interest
is only the very top slice of the returns that we would make.
Q36 Dr Pugh: How much do you anticipate
it being, how much could it go to?
Mr Delay: How much could it go
to?
Q37 Dr Pugh: Yes.
Mr Delay: If we take £10
million as being an investment sum and we assume for one second
that that investment is made over a three year period, with a
return over seven years of three times its money—that would
be an outstanding performance in venture capital terms, a three
time return over a seven year period. The Carbon Trust would earn
returns of £26 million, Clean Tech Venture Partners would
earn returns of about £2 million, if that were the case.
Q38 Dr Pugh: So we do not have the
scenario, as we seemed to have on Monday, of people making themselves
inordinately rich by the clever use of public money.
Mrs Ghosh: No.
Mr Delay: It would be extraordinary
if you were to have a scenario similar to that you discussed on
Monday.
Mrs Ghosh: Indeed. Looking at
the Carbon Trust as a whole, you certainly could not have that
because it is a company limited by guarantee and could not turn
itself into a plc. The other thing that is worth emphasising,
and it is something of course that we as a department are extremely
focused on, there are the right kinds of Chinese walls between
the investors and the people who are taking the decisions about
innovations to invest in, so we are very confident that there
are Chinese walls.
Q39 Dr Pugh: Can we move on very
quickly then to two final questions? How much do you spend on
publicity for the Carbon Trust? I think I have received a few
brochures from you in my time and others have as well.
Mr Delay: The overall budget in
the period that was reviewed for marketing activity generally,
including direct marketing, on-line and so on, below the line
was I believe about £9 million. Of that about £3.9 million
was awareness-raising of climate change as a business issue.
| 
