Select Committee on Public Accounts Forty-Second Report

1  The Status, Location and Profile of the Shareholder Executive

1. The Shareholder Executive ("the Executive"), an operational group within the Department of Trade and Industry ("the Department"), has a government-wide mission to be an effective shareholder of public sector businesses owned or part-owned by government.[2] It is responsible for the management of shareholdings in 17 businesses either on behalf of (in an executive capacity) or in co-operation with (in a "joint leadership" role) government departments. It advises departments on a further 10 businesses.[3] In 2005, these 27 businesses had a combined turnover of £21.45 billion, and had an estimated value in excess of £16.6 billion (Figure 1). It also advises departments on issues relating to corporate finance and assistance to non-government owned businesses.[4]

Figure 1: The Turnover and Value of the Executive's Businesses
Business Government ownership[5] Type of Business
(Legal Form)
Shareholding Department Role of Shareholder Executive Turnover 2005/06 (£m) Valuation Range as of 30th June 2006 (£m)
             Low  High
Actis 40%[6] Limited Liability Partnership DfID Executive 48 182 535
BNFL 100% Companies Act Company DTI Executive 1417 2322 2823
British Energy 0-65%[7] Companies Act Company DTI Executive 2593
CDC 100% Companies Act Company DfID Advisory 387
ECGD 100% Government Department and Pilot Trading Fund DTI Executive 88
Northern Ireland Water Service 100% On Vote Executive Agency Dept Regional Development, NI Advisory 41
Business (continued) Government ownership[8] Type of Business

(Legal Form)

Shareholding Department Role of Shareholder Executive Turnover 2005/06 (£m) Valuation Range as of 30 June 2006 (£m)
QinetiQ 19.3% Companies Act Company MoD Joint leadership 1052 1190 1190
Royal Mail 100% Companies Act Company DTI Executive 9056 1029 3184
Scottish Water 100% Statutory Corporation Scottish Executive Advisory 1019 2259 2994
UK Atomic Energy Authority 100% Statutory Corporation DTI Executive 361 172 185
Service Businesses [9]
ABRO 100% Executive Agency & Trading Fund MoD Joint leadership 137    
Channel 4 100% Statutory Corporation DCMS Advisory 894    
DARA 100% Executive Agency & Trading Fund MoD Joint leadership 166    
Dstl 100% Executive Agency & Trading Fund MoD Joint leadership 353    
NATS 48.9% Companies Act Company DfT Joint leadership 687    
New Covent Garden Market Authority 100% Statutory Corporation DEFRA Advisory 11    
Ordnance Survey 100% Government Department and Trading Fund DCLG Advisory 118    
Royal Mint 100% Government Department and Trading Fund HMT Executive 115    
Business (continued) Government ownership[10] Type of Business

(Legal Form)

Shareholding Department Role of Shareholder Executive Turnover 2005/06 (£m) Valuation Range as of 30 June 2006 (£m)
Tote 100% Statutory Corporation DCMS Advisory 2208    
Workings Links 33.3% Companies Act Company DWP Executive 55    
      Service businesses valuation range   962 1238
      Valuation range for 20 businesses   16646 21249
Businesses for which values were not available
British Waterways 100% Statutory Corporation DEFRA Advisory 191
Fire Service College 100% Executive Agency & Trading Fund DCLG Advisory 22
Forensic Science Service 100% Companies Act Company HO Joint leadership 158
Met Office 100% Executive Agency & Trading Fund MoD Joint leadership 170
Partnerships UK 44.6%
(HM Treasury), 4.4%
(Scottish Ministers)
Companies Act Company HMT Executive 16
QE II Conference Centre 100% Trading Fund DCLG Advisory 11
UK Hydrographic Office 100% Trading Fund MoD Joint leadership 75
Total Turnover         21449    

The data and methodology used to generate the valuations above were produced by the National Audit Office and their advisors. Neither the valuations nor the methodology have been verified nor endorsed by the Shareholder Executive nor any of the businesses concerned. The Shareholder Executive bears no liability to any party for the use or interpretation of this data.

As stated in the NAO's Report 'The Shareholder Executive and Public Sector Business', the NAO commissioned advisors to develop valuation ranges of the Shareholder Executive's businesses at 30 June 2006 using a multiples methodology. The valuation ranges exclude liabilities that the advisors considered equivalent to debt obligations, such as pension liabilities and significant operating leases. These valuations are broad brush, based on multiples analysis using comparator businesses which, in a number of cases, are limited. The figures are therefore not an automatic indication of the market value of each business.

In carrying out the valuation exercise, the advisors identified a number of close comparators for seven of the businesses and moderate comparators for a further nine businesses. Two businesses have stock exchange listings, providing market valuations. Finally, seven businesses (marked 'n/a' above) did not have appropriate listed comparators.

2. Since its establishment in 2003, the Executive has improved the way in which government shareholdings are managed. Its approach is based on highlighting the importance of shareholder issues within Government, recruiting staff with commercial and financial skills from the private sector and closely scrutinising the performance of public sector businesses.[11] Its most notable success came from its role in the 2006 sale of Westinghouse which in part led to the taxpayer receiving an additional £2 billion more than was anticipated.[12] But there are a number of ways in which the Executive's status and profile in government could be strengthened so that it is in a position to provide independent advice on shareholder issues.

3. The Executive was initially set up in the Cabinet Office but was moved to the DTI as a condition of it being given executive responsibility for the Department's businesses. Whilst this move resulted in an expanded remit, the Executive gave up its central department location and relinquished its independence. It is now located within a Department which has policy interests in some of the largest—and most problematic—businesses in public sector ownership, and which need not heed the Executive's advice on shareholder matters if it conflicts with departmental policy objectives.[13] Greater independence would also enable the Executive to undertake other activity that would make use of its commercial expertise, such as advising government on how best to keep the National Asset Register up-to-date to make it a useful management tool.[14]

4. The Executive reports to a Stakeholder Group, consisting of senior officials from a few of the major shareholding departments, for the delivery of its overall objectives (Figure 2). The representatives on this body are not independent of policy considerations, making it difficult for the Group to give the Executive strategic guidance and to hold it to account for its performance as a shareholder. The Department intends to appoint an external part-time Chairman and three to four directors to address this deficiency.[15]

Figure 2: The Shareholder Executive's accountability

Source: National Audit Office

5. There is a lack of clarity about the role of the Executive in respect of the postal services industry. The Department said that in the run up to the announcement to Parliament on the postal network on 14th December 2006,[16] the Executive advised the Secretary of State for Trade and Industry on the government's shareholder interests alone, with policy advice coming from other departments. Yet the Executive has conflicting responsibilities for the postal industry, which include DTI policy for the postal network and oversight of the government's shareholding in the Royal Mail.[17]

6. The Executive has recruited public and private sector staff with a mix of skills and expertise so that it can act as an intelligent and effective shareholder.[18] At the senior level, 70% of the Executive's Directors are external recruits and are employed within existing civil service pay bands.[19] Those recruited externally generally accept lower rates of pay in the government service than they could command in the financial services sector. The Executive believes that the remuneration it is able to offer appears sufficient to attract the right calibre of staff. It nevertheless recognises that it needs to keep pay under review because its success is dependent on having sufficiently skilled staff.[20]

7. External recruits tend to be employed on fixed-term contracts or are seconded from a private company. The resulting turnover among staff, particularly at the senior level, has the advantage of providing scope for the Executive to bring in people with up-to-date knowledge and experience. On the other hand, there is a risk that corporate knowledge and experience could be lost, and relationships with businesses need to be re-built following staff departures.[21]

8. The Executive has a government-wide remit but has no mandate to bring businesses into its portfolio, relying instead on marketing the services it has to offer to Departments. There is uncertainty about which public sector businesses should fall within its portfolio and currently the Executive is unable to explain all of the omissions from its portfolio which in total had a combined turnover well in excess of £4 billion in 2004-05.[22]

9. A number of government departments are involved in transactions with the private sector which result in the government taking on ownership interests. In carrying out these transactions, a department has to purchase advice on commercial and financing issues to ensure that the taxpayer gets the best value from the deal. The Executive provides its corporate finance and other services as a free good to government[23] and is able to demonstrate that it has brought about savings for the taxpayer.[24] The Committee has taken evidence at a recent session[25] on a case where the Executive could have helped with the creation of joint venture involving the Department of Health.[26] The Department spent over £1.7 million on external advice but was unable to demonstrate that the joint venture was the best structure to meet its needs, or that it represented good value for money. Whilst the Executive might not be able to advise on every case, it could help departments by negotiating tighter terms of engagement with professional advisors.[27]

2   C&AG's Report, paras 2.19 Back

3   C&AG's Report, para 1.4 Back

4   C&AG's Report, para 1.9 Back

5   Source: Shareholder Executive Annual Report, 2005-06 Back

6   Until 2009, H.M. Government retains an 80% economic interest in the LLP. Back

7   As of June 2006, through the Nuclear Liabilities Fund, the Government had a cash sweep of 65% of the annual adjusted free cash flow of British Energy, which was convertible into shares up to 65% of the equity of the company.  Back

8   Source: Shareholder Executive Annual Report, 2005-06 Back

9   These valuations are provided in aggregate owing to reasons of commercial confidentiality surrounding the Tote figure. Back

10   Source: Shareholder Executive Annual Report, 2005-06 Back

11   C&AG's Report, paras 2.6-2.13. Back

12   Qq 33-34, C&AG's Report, case study, p.19 Back

13   Qq 9, 11-12, 113, 120-121 Back

14   Qq 39-40 Back

15   Q 35; C&AG's Report, para 3.9 Back

16   HC Deb, 14 Dec 2006, Col 1026-27 Back

17   Qq 58, 116-117 Back

18   C&AG's Report, para 2.11  Back

19   Qq 68-72 Back

20   Qq 24-25, 38, 110-112, 122-125 Back

21   Q110; C&AG's Report, paras 3.14-3.15, Figure 13 Back

22   Qq 10, 23, 104-106 Back

23   Q 51 Back

24   C&AG's Report, para 2.14 Back

25   Committee of Public Accounts, Fortieth Report of Session 2006-07, Dr Foster Intelligence: A joint venture between the Information Centre and Dr Foster LLP, HC 368 Back

26   Qq 10, 23 Back

27   C&AG's Report, paras 2.14, 2.22 Back

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Prepared 20 September 2007