Conclusions and recommendations
Objectives of the Sale
1. It
is clear that the Government met its objectives in terms of delivering
a privatised Royal Mail with an employee share scheme. However,
it is not clear whether value for money was achieved and whether
Ministers obtained the appropriate return to the taxpayer. We
agree with the National Audit Office that the Government met its
primary objective. On the basis of the performance of the share
price to date, it appears that the taxpayer has missed out on
significant value. (Paragraph 14)
Offer Price
2. Ministers
placed great emphasis on the negative aspects of the industrial
relations between Royal Mail and the Communications Workers Union,
and in particular on the threat of strike action. While this was
a significant factor for investors, we believe that the Government
over-emphasised the risk. The share price before, during and after
the Union's acceptance of a pay deal demonstrates that industrial
relations were less of an issue for the market than they were
for Government. (Paragraph 27)
Demand for Shares
3. The
level of the upper limit set for the potential price of shares
gave investors a price above which they had no incentive to declare
an interest. The Government's advisers must have been aware of
this but failed to gauge demand at higher price levels. The fact
that many long-term investors bought shares later at a far higher
price is evidence to us that there was demand for Royal Mail shares
at a higher price. We therefore do not accept the Ministers' assertion
that the demand for shares would have disappeared at an offer
price above 330p. The fact that both Ministers and officials have
refused to acknowledge any level of demand for a higher price
is, to say the least, disappointing. (Paragraph 35)
"Froth"
4. The
Secretary of State noted that the valuation of shares reflected
the information that is available at the time. He also argued
that "froth" had, in some way artificially inflated
the share price. Unfortunately, he was unable to provide us with
a meaningful explanation of its impact on the share price in terms
of time and value. The Secretary of State's initial use of the
term referred to the "immediate aftermath" of the flotation.
This was subsequently extended to months and then possibly years.
As a result we do not find the argument of "froth" as
a credible response to the significant increase in the share price.
(Paragraph 42)
Level of Discount
5. It
is accepted that all IPOs will be floated at a discount, with
the share price expected to rise when shares are traded. This
is important because a fall in the share price on flotation would
inhibit the company from raising further investment. However,
the rise in Royal Mail shares in the immediate aftermath was significantly
higher than the normal percentage increases described by the banks.
(Paragraph 50)
6. We conclude that
the Department underestimated the market value of Royal Mail and
that the sustained increase in the performance of Royal Mail shares
points to a pricing decision that was too influenced by perceived
risks and fear of failure rather than maximising value for money
for the taxpayer. (Paragraph 52)
Priority Investors
7. We
agree that it is sensible to identify, in advance, companies which
are committed to investing in an IPO. However, we fail to see
the benefit to the taxpayer of embarking on a policy of identifying
long-term investors without either a criterion on which to judge
them or any undertaking given by investors to support Royal Mail
in the medium or long-term. The current ownership of Royal Mail
by long-term investors has little to do with Secretary of State's
actions. Unlike those preferred investors who bought cheaply and
sold quickly at a profit, if the current investors are long-term,
many of them may have bought at a price far higher than the one
set by the Government. (Paragraph 63)
8. We welcome publication
of the list of priority investors. However, we are disappointed
with the handling of this by the Secretary of State. Twenty-four
hours before publication, the Secretary of State told us that
such action would result in legal action against his department.
We find the speed of this U-turn surprising. (Paragraph 64)
9. The Government's
publication of the names and allocations of the preferred investors
only provides one part of the picture. We recommend that the Government
update that list to include information on which investors sold
their shareholding, when they sold and the share price of Royal
Mail at that time. (Paragraph 65)
Royal Mail Assets
10. We
note the conclusion of the NAO that the Government has not extracted
the full value of the surplus assets owned by Royal Mail. What
is more disturbing is that the Government ignored established
NAO recommendations either to remove such assets from the privatisation
process or to insert claw-back provisions on the future sale of
the properties. The absence of claw-back provisions means that
the taxpayer will not reap any benefit should the Department's
valuation be proved to be wrong. (Paragraph 73)
Government Advisers
11. 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. (Paragraph 83)
12. 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;
(Paragraph 84)
Lazard and Value for Money
13. 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. (Paragraph 87)
Perceptions of Conflicts of Interest
14. 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. (Paragraph 90)
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