HM Treasury: The creation and sale of Northern Rock plc - Public Accounts Committee Contents


2  Learning lessons from the sale

7. The NAO reported that the sale was handled well by UKFI but still lost the taxpayer an amount currently estimated at £469 million.[16] The £1.4 billion taxpayer shares were sold for proceeds which are currently estimated at between £886 million and £976 million. The proceeds include cash of £747 million received on 1 January 2012, further cash of £73 million received in July 2012, debt in Virgin Money worth £66 million to £117 million, and a clawback clause valued at up to £39 million. The midpoint of this range values the sale at £931 million and implies a loss to the taxpayer of £469 million.[17]

8. There was little competition to buy Northern Rock plc. UKFI was fortunate that Virgin Money had a strategic interest in immediately purchasing a small retail banking operation in 2011.[18] Only two bids were available at any one time during the sales process,[19] and had the sale been delayed it is not certain that any more would have been received. Indeed, current market conditions are less favourable than at the end of 2011.[20]

9. Whilst the timing of the sale and the lack of strong competition are important factors, a much larger portion of the mortgage assets remain in public ownership, and it is the handling of these assets which determines the overall cost to the taxpayer.[21] UKFI expects to recover the loss on the sale and all the taxpayer support provided to Northern Rock from the profitable redemption of mortgages in NRAM.[22] However, once risk and the time value of money are considered, the economic loss to the taxpayer of the intervention is currently estimated by the NAO to be £2 billion. This figure is the net present cost to the taxpayer of all the support provided, including the loss on the sale of Northern Rock plc.[23]

10. But the final reckoning will depend on how well UKFI manages the wind-down of NRAM. NRAM had £38.9 billion of mortgage and other lending assets remaining as at June 2012.[24] UKFI may have opportunities to increase the return, for example by selling additional mortgages.[25] It is in the taxpayers' interest that it manages the run-down for value, not necessarily just looking for a quick exit.[26]

11. Since the sale, UKFI has shrunk further. The head of the wholly-owned section has now left and not been replaced, and the officer now responsible for oversight of NRAM also has the much larger task of managing the taxpayer shareholding in RBS and Lloyds.[27] In effect, UKFI is placing greater reliance on the management of UK Asset Resolution, the holding company established in October 2010, which combines NRAM and the remains of Bradford & Bingley.[28]

12. We heard that the Treasury has started building up its skills.[29] It has set up UKFI with a small cohort of staff who have commercial skills and it has added an additional Second Permanent Secretary to strengthen senior management at the Treasury.[30] It has also conducted and published a review of its skills, the White Review, in response to our previous recommendations.[31] The Treasury committed to updating us on its response to the review by June 2013.[32]

13. The sale of Northern Rock plc is not directly comparable to other potential sales, but lessons may read across. The taxpayer has invested £66 billion in RBS and Lloyds shares[33] and it seems inevitable that their "temporary public ownership" will last for some time if getting value for our investment remains the most important objective for Government. We were not convinced that the taxpayer would be making a profit on these banks any time soon.[34]

14. The Treasury has hived off the responsibility for managing the shares to UKFI, but has other objectives for its shares in banks.[35] In 2007, we warned that "Reconciling public policy with shareholder value objectives can be difficult because the cost of meeting the former can have a negative impact on the latter".[36] The Treasury told us that UKFI would continue to focus on value for money, having regard to financial stability and competition while the Treasury took a broader view in line with its role as the nation's economics and finance ministry.[37]


16   C&AG's Report, para 15 Back

17   C&AG's Report, para 3.10 and UKFI Press Release, http://www.ukfi.co.uk/releases/UKFI%20Press%20Release%202012073_FINAL.pdf Back

18   Q 66 Back

19   Q 68; C&AG's Report, paras 3.2-3.7 Back

20   Q 66; C&AG's Report, para 3.15 Back

21   Q 4 Back

22   C&AG's Report, paras 3.22-3.24 Back

23   Q 96; C&AG's Report, para 3.25, Figure 17 Back

24   UK Asset Resolution, Interim results, June 2012, http://www.ukar.co.uk/~/media/Files/U/Ukar-V2/Attachments/press-releases/2012-07-27-report.pdf Back

25   Qq 45, 53 Back

26   Q 60 Back

27   Q 57-61 Back

28   Q 60, C&AG's Report, para 3.22 Back

29   Qq 17, 63 Back

30   Q 18, 62, 63 Back

31   Review of HM Treasury's management response to the financial crisis, March 2012, http://www.hm-treasury.gov.uk/d/review_fincrisis_response_290312.pdf Back

32   Q 64 Back

33   The Certificate and Report of the Comptroller and Auditor General on HM Treasury Resource Accounts 2011-12, (part of HM Treasury, Annual Report an d Accounts 2011-12, HC 46 July 2012),Figure 4 Back

34   Qq 27, 37, 55, 69, 85 Back

35   Q 27 Back

36   Committee of Public Accounts, Forty-Second Report of Session 2006-07, The Shareholder Executive and Public Sector Businesses, HC 409, para 1. Back

37   Qq 79-87 Back


 
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© Parliamentary copyright 2012
Prepared 16 November 2012