6 Government Advisers
74. There are a number of key players in the privatisation
process: Ministers, the Shareholder Executive (which is part of
the Department for Business, Innovation and Skills), Lazard (the
Government's independent advisers) and the Global Coordinators
UBS and Goldman Sachs.
75. In evidence, the Secretary of State told us that
the Shareholder Executive took the lead for the Department:
The Shareholder Executive, which is an important
part of my Department, has been managing this whole process. They
have been leading the conversations. They rely on external advice,
which I have indicated, but they are the key players within Government.[85]
That external advice was provided by Lazard, who
were appointed as the Government's financial advisers for the
sale, and who were selected through a Government procurement process
which was overseen by the Shareholder Executive, alongside the
Treasury.[86]
76. Concerns were raised by the NAO that having appointed
Lazard, the Department became "dependent on the professional
judgement of its advisers with respect to valuation".[87]
The NAO also raised concerns about the level of responsibility
delegated to Lazard:
The Department delegated a comprehensive range
of responsibilities to Lazard & Co, including: a review of
strategic options; arranging the selection process for the syndicate;
capital structure advice; an independent valuation of the Royal
Mail business; and advice on pricing and oversight of the syndicate's
allocation of shares.[88]
77. The Secretary of State acknowledged the range
of expertise supplied by Lazard and the Shareholder Executive
but tried to assure us that final responsibility remained with
Ministers: "We had the independent advisers and, in the final
analysis, Ministers were required to approve and pass judgment
on those decisions".[89]
This was echoed by Michael Fallon, who acknowledged that Ministers
relied on advice but asserted that both he and the Secretary of
State challenged it "throughout the process".[90]
78. In supplementary evidence the Secretary of State
sought to clarify the lines of responsibility restating the position
that Secretaries of State have "overriding responsibility
for what happens in their departments". However, in his subsequent
paragraphs he appears to try to distance himself from that responsibility;
The institutional investors were not identified
by ministers, but by the financial advisers to the transaction.
The advisers were in turn not selected by ministers, but by a
competitive procurement (separately for the Global Coordinators
and the Government's independent adviser) operated by the department's
Shareholder Executive, according to Government Procurement rules.
Both Mr Fallon, who oversaw the privatisation
process and I had opportunities to challenge the key decisions,
notably on price and did so. But in the final analysis, we endorsed
them. And on value for money, responsibility lies with the Accounting
Officer, the Permanent Secretary, who gave unambiguous advice
that the transaction did represent value for money for the taxpayer.
Therefore, we both believe that in the circumstances in which
the sale occurred, without the benefit of hindsight, the judgements
were correct.
79. The NAO, however, doubted the ability of the
Department to challenge and interrogate recommendations made by
independent advisers. It recommended that "Departments should
examine ways to reduce reliance on professional advisers for judgments
affecting taxpayer value". The Secretary of State did not
believe that there was a "lack of expertise" inside
Government and that the Shareholder Executive was "full of
very highly skilled people who understand these things and have
a background in financial markets".[91]
80. The National Audit Office say that the appointment
of a multidisciplinary team of professional advisers was appropriate,
given the scale and complexity of the transaction, but it questioned
the extent to which the Department relied upon external advice.
It concluded that "Departments should examine ways to reduce
reliance on professional advisers".
81. Mark Russell acknowledged that there were limitations
to what the Shareholder Executive could to—in particular
speaking directly to investors—and that there were "skills
in a massive exercise like this that you have to use experts for".
However, he acknowledged that the NAO's view that the Department
needed to have the skills to be able to challenge the advice was
"a fair comment". But he went on to argue that the opinions
of experts were challenged "not just the Shareholder Executive
and other members of the Business Department; it was Ministers
as well".
82. A key part of the work of the advisers was the
valuation of the company. In evidence to us Mark Russell, confirmed
to us that in advance, no formal valuation of Royal Mail was undertaken
by the Shareholder Executive:
No, we did not; we felt advisers were best-placed
to do that, but we reviewed those models for assumptions. In many
ways, our own valuation would be somewhat irrelevant. We would
be in particular relying upon the Lazard valuation.[92]
83. It should be of concern to Ministers that
the NAO concluded that they were too dependent on the professional
judgement of its advisers, and that such a reliance on external
advisers should be reduced. We do not believe that Ministers were
well-served by their Departmental officials, the independent adviser
or by the Shareholder Executive. Their blanket refusal to acknowledge
a single mistake in spite of a critical auditor's report does
little to inspire confidence in their organisations.
84. We recommend that the Shareholder Executive
should be required to undertake a detailed valuation of any proposed
sale so that the Shareholder Executive, Government and select
Committees have a baseline against which to subsequently judge
valuations made by independent advisers;
Lazard and Value for Money
85. The NAO also concluded that the terms of Lazard's
involvement did not give sufficient prominence to value for money:
In this instance, the Department delegated a
wide range of responsibilities to its independent corporate finance
adviser and aligned its incentives with the policy objective of
achieving a sale. The taxpayer interest was not clearly prioritised
within the structure of the independent adviser's role.[93]
86. The Secretary of State acknowledged that his
interaction with Lazard was "fairly limited" but he
insisted that value for money was "central to their terms
of reference". William Rucker asserted that the NAO conclusion
referred to the absence an incentive fee, which was in contrast
to the book runners all of which had "incentive fees".[94]
87. The NAO is clear in its recommendation that
"the taxpayer interest was not clearly prioritised within
the structure of the independent adviser's role". We do not
believe that this refers solely to an incentive payment structure.
Prioritising value for money should not be motivated by financial
incentives, it should be a central aim of all of those involved
in the sale of public assets. That value for money was not a clear
priority in Lazard's contract is unacceptable.
Perceptions of conflicts of interest
88. In its Report, the NAO noted that the banks involved
in privatisation of Royal Mail were subject to "an overarching
duty to pay due regard to the interests of their customers and
treat them fairly, and to manage conflicts of interest fairly".[95]
As we noted earlier in our Report, Lazard Asset Management was
one of the Government's 'preferred investors'. In evidence to
the Committee of Public Accounts on 30 April 2014, Mr Rucker explained
that he was unaware of the fact that LAM was on a list of investors
talking to Royal Mail. When he became aware of this, he told the
Shareholder Executive that: Lazard should "have no input
whatsoever into any discussion about allocations for LAM".[96]
However, Mr Rucker acknowledged that there was a "question
of perception" about Lazard advising on the price of Royal
Mail and its investment arm buying Royal Mail Shares.[97]
UBS and Goldman Sachs were also questioned at that session on
potential conflicts of interest between their role in determining
the price of Royal Mail and the commission received from trading
those shares on behalf of clients. Both banks explained that as
large equity traders many, if not all of the preferred investors
would be their clients. They also acknowledged that higher volumes
of shares traded would give the two banks greater fee revenue
than they received from the Government for their advisory role.
89. Both banks were clear that they had policies
in place to manage conflicts of interest between different arms
of the banks. However, they acknowledged "the existence of
potential conflicts" in institutions having these two roles.
90. While we have no evidence of inappropriate
behaviour by those companies employed by the Government, it is
clear to us that any perception of financial advantage must be
removed from the privatisation process. Therefore we recommend
that the Department give serious consideration to excluding any
company involved in the selection of preferred investors, as a
preferred investor, even if the appropriate "Chinese walls"
remain intact.
85 Q 28 Back
86
Q463 Back
87
National Audit Office, The Privatisation of Royal Mail, HC (2013-14)
1182, page 28, para 3.11 Back
88
National Audit Office, The Privatisation of Royal Mail, HC (2013-14)
1182, page 27, para 3.6 Back
89
Q462 Back
90
Q463 Back
91
Q466 Back
92
Q247 Back
93
National Audit Office, The Privatisation of Royal Mail, HC (2013-14)
1182, page 28, para 3.7 Back
94
Q465 Back
95
National Audit Office, The Privatisation of Royal Mail, HC (2013-14)
1182, page 27, para 3.8 Back
96
Oral evidence taken before the Committee of Public Accounts on
30 April 2014, HC (2013-14) 1221, Q158 Back
97
Oral evidence taken before the Committee of Public Accounts on
30 April 2014, HC (2013-14) 1221, Q159 Back
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