Royal Mail Privatisation - Business, Innovation and Skills Committee Contents

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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Prepared 11 July 2014