‘Borderline Dodgy’ [my title] Committee of Public Accounts, analysis and oral evidence, June 2007 Summary The Department’s advisors, KPMG, gave Dr Foster Ltd an indicative valuation of between £10 and 15 million. In February 2006, the Information Centre paid £12 million for a 50% share of the joint venture company, Dr Foster Intelligence. This was 33–53% higher than its financial advisors’ indicative valuation of a half share, and included an acknowledged strategic premium of between £2.5 million and £4 million. The other half of the joint venture is owned by Dr Foster LLP, a holding company set up by the shareholders of Dr Foster Ltd. Conclusions and recommendations: 1. By failing to advertise the deal or hold a competition, the Department and Information Centre let it appear that the joint venture offered an advantage to one company at the expense of others. 2. Without an open competition, the Information Centre cannot demonstrate that it paid the best price for its 50% share of the joint venture, as there are no tenders or other benchmarks for comparison. 3. In developing the joint venture deal, the Department’s Commercial Directorate did not follow established good practice in public sector procurement. 4. The cost of professional advice on the joint venture (Dr Foster Intelligence) increased from an initial estimate and contract for £284,000 to between £1.75 and £2.5 million on a £12 million investment. 5. The Department and Information Centre could have reduced the need to rely so heavily on professional advice by making use of wider government experience on forming public private partnerships. 6. It is unclear what benefits the Information Centre will receive from the joint venture. 7. In the first year the joint venture made a loss of £2.8 million compared with the expectation that it would make a small profit. Formal minutes. Extracts. Evidence of Witnesses: Mr Hugh Taylor CB, Permanent Secretary, Department of Health and Professor Denise Lievesley, Chief Executive, the Information Centre, gave evidence. Q2 Chairman: Why was there not a proper competitive process? Mr Taylor: We decided not to move forward with a competitive process, largely because of the way the project started, which was as a result of discussions with Dr Foster. Q3 Chairman: Did you get into bed with Dr Foster too quickly? Mr Taylor: No, I do not think we did do that. § Q10 Chairman: Normally if you pay a strategic premium in the private sector you are paying that to get a brand name, but it seems to me that you were paying way over the odds, Dr Foster got the NHS brand name and you got the Dr Foster brand name. I do not think that is a fair synergy, is it? § Q11 Chairman: Why did you pay Dr Foster £50,000 for advice from him on establishing commercial relationships with the private sector when you had already entered into exclusive discussions with his company? Is that not a conflict of interest? […] Q12 Chairman: As I understand it, normally if you pay £50,000 for advice it is because you want independent advice, is it not? You do not pay £50,000 to somebody you have already entered into a commercial relationship with. Mr Taylor: We had not at that stage entered into a commercial relationship with them […] Q13 Chairman: But you had entered into exclusive discussions with them; nobody else was involved. Mr Taylor: We had entered into discussions with them at that stage. Q14 Chairman: No other company was involved. Mr Taylor: That is true. Q15 Chairman: You may be now in breach of EU state aid rules because you ignored the competitive process. Mr Taylor: As you know, we took very careful legal advice on the advice of NAO and we do not believe we breached state aid rules. Q16 Chairman: You think this was a good deal, do you? Mr Taylor: I think it is a good deal. § Mr Taylor: I believe that the approach was justified. I have to say 18 months of interrogation on the subject has cooled my ardour for it somewhat and perhaps there is a lesson there about discouraging civil servants from unusual moments of entrepreneurialism. Personally, I feel this was a justified course and I have no regrets about doing it. MrWright: I do not share the enthusiasm, Chairman, and I think it is borderline dodgy. § Q53 MrKhan: I suspect that the Chief Executive [Mr Kelsey]whom Mr Wright referred to probably gets paid more than Jose ́ Mourinho over the period of the contract… § Q59 Mr Dunne: Okay, the business was loss- making, you do not know what its assets were, its turnover was somewhere in the region of a quarter of the value placed on 100% of the joint venture, is that right, so you paid four times revenues; that is the only multiple I can calculate. § Professor Lievesley: Could I add to that because I actually take responsibility for a lot of that increase [in legal costs]. We did actually go through a second stage of due diligence, we wanted to make sure that this really was the right deal for the Information Centre so the board of the Information Centre asked me to get KPMG to go through another market test— Q 68Mr Dunne: All I can say is I used to be an investment banker and I wish you were my client and I had clients like you all the time. § Q 98 MrMitchell: I am not quite sure why you are so cheerful. You are in the position of somebody who has gone into a second-hand car sales yard and bought a perfectly good, probably reliable car, but it is a Ford and you have paid a Bentley price and you are now explaining it to the manager. Is your good cheer a kind of bravado exercise, an expression of confidence, or can you be genuinely satisfied that you have not paid over the odds for this deal? Mr Taylor: I have to be satisfied.[…] § Q103 Mr Mitchell: But you want to encourage them all to participate more with the NHS and I do not see how you do that by going to bed with one company. You say the others really do not really know the NHS but you want to get out and get to know them and there you are sat in bed with Dr Kelsey waving to them. Professor Lievesley: This is not an exclusive relationship and in fact we do have relationships with other companies. Q104 Mr Mitchell: But it is very much a one-way relationship. Professor Lievesley: No, I think it is a partnership. We are working very closely with Dr Foster Intelligence but we are also working with other companies, so it is not an exclusive relationship and that is one of the aspects of the deal I negotiated. Q105 Mr Mitchell: Okay, let us leave it there because I still do not understand. § Q107 MrMitchell: […]You paid £12 million, as you said, for 50%, a somewhat hypothetical valuation, and you say that is half of the hypothetical valuation. Advisers seem to think you paid 33% over the odds. You also put into it all the research you had had done, you put in the NHS assets and you demanded no return on the NHS brand, which is a marvellous brand, for which you would in the private sector make a substantial charge. You paid a strategic premium of between £2.5 million and £4 million and spent £2.5 million on professional fees. You are shoving a lot of money into this. The Dr Foster people are not putting all that much in and yet if they want out in three years you have to buy their shares back. What kind of a deal is that? § Q109 Mr Mitchell: Dr Kelsey is the man who sold the idea and scoped the deal, but he is now employed not at the Information Centre but by Dr Foster Research which took 5% of the assets related to the private sector out and is seconded to you for three years. What happens if he leaves because the value of the joint deal is going to be significantly reduced if he walks out? Professor Lievesley: We have an arrangement that we have to have a year’s notice if he is going to leave. He [Kelsey] is committed to the future of Dr Foster Intelligence, very committed. [Left the minute he could, went to McKinsey, now the government ‘transparency tsar’. SM] Q 114 Mr Mitchell: […]The Information Centre therefore does not receive any measurable benefits from its association with a private company, other than a share in future profits. Again, it looks like a bum deal. Q126 Mr Davidson: According to this, though, the Information Centre made a commitment as part of the joint venture agreement to promote the business of Dr Foster Intelligence. That would indicate to me that you are actually giving them the inside track, because what else does it mean if you give it to promote the business of Dr Foster Intelligence? Presumably it means that you are treating them in a manner different from others. Professor Lievesley: No, we do not treat them in any way differently. They do not get any favourite treatment in respect of access to data, privileged access, early access or anything of that sort. […]Q127 Mr Davidson: Okay. As part of the joint venture agreement you made a commitment to: “generally use its endeavours to promote business and the interests of Dr Foster Intelligence and its subsidiary undertaking”, and also to “use Dr Foster Intelligence as the principal vehicle and channel for NHS market research and knowledge”. That is in paragraph 1.60. That does not seem to me, on reading that, to be a situation of equality between suppliers. Professor Lievesley: We do have relationships with a wide range of organisations. Some organisations might have particular expertise in respect of certain parts of the NHS and we might be working— Q128 Mr Davidson: But you have signed up to a deal here which says to: “use Dr Foster Intelligence as the principal vehicle and channel”. Professor Lievesley: Whenever we are determining whether or not we have services we put them out to competitive tender. Q129 Mr Davidson: In that case you must be breaking the agreement. You cannot on the one hand be even-handed and on the other hand use Dr Foster Intelligence as the principal vehicle and channel. Professor Lievesley: We are being even-handed. Q130 Mr Davidson: So you are breaking the terms of the agreement then? Professor Lievesley: I think that the terms of the agreement were really about trying to ensure that the Information Centre was going to work in co- operation with Dr Foster Intelligence in order to— Q131 Mr Davidson: It does not say that at all. It says to: “use Dr Foster Intelligence as the principal vehicle and channel”. It does not say anything about just working with them. It says using them as the main vehicle. Professor Lievesley: We have a non-exclusive arrangement with Dr Foster Intelligence. Q132 Mr Davidson: Yes, but they have got to be, as the result of the deal that you signed, the principal vehicle and channel. If I were a competitor I would say, “This is a rigged market”. It is obvious. You have either signed this agreement with Dr Foster in good faith, in which case you are obliged to deal with them as your principal vehicle, or you did not, and if you did then it means that it is not an even playing field for other people. I think you can understand the circumstances if you are another company. Here is the NHS giving its brand name and its prestige to one particular company and you have got others wanting to compete in the field and you have got a commitment to deal with this company before all others. How can that be fair? Professor Lievesley: The situation is that in practice we are working with a range of companies. We have put work out to contract where we need services. We certainly do work in co-operation as part of Dr Foster Intelligence. We need Dr Foster Intelligence to be a success, of course. Q133 Mr Davidson: Okay. We are not going to get much further with that. Can I ask about this being a cosy relationship? It seems to me that this is a very cosy relationship that has evolved. Is there anybody in Dr Foster, either then or now, who could be considered to have had some sort of inside track to the NHS or to government by being a special adviser or anything similar? Mr Taylor: I am not sure I understand your question. § Q150 Mr Bacon: Because it was KPMG, I take it, was it, who, in paragraph 1.54, predicated the business case on sales growing by over 1,000% over three years. It says in paragraph 1.54, “These projections of financial performance have since been lowered, as following the formation of the joint venture, the estimates were considered to be ambitious. For example, the projected sales for Dr Foster Intelligence . . . were lowered by 24% between the valuation carried out in August 2005 and ... [the] Business Plan produced in early 2006”. The difference between those sorts of growth rates and the original 1,000% would produce a significant decline in estimated performance, would they not? Professor Lievesley: They would. § Q152 Mr Bacon: Thank you; I just wanted to check that. The market analysis, which is referred to in paragraph 1.13b on page 15, “Workstream 2”, says that Workstream 2 is to undertake market analysis. Mr Taylor, which companies did you talk to when you were doing the market analysis? Mr Taylor:KPMG who did, I think, the market analysis with our Commercial Directorate, I do not think did talk to other commercial companies. Q153 Mr Bacon: That is my information as well. Why did they not talk to CHKS [competitor]? Mr Taylor: They carried out a review of what CHKS were doing. Evidence received, not printed. Q154 Mr Bacon: Just desktop-based research, was it? Mr Taylor: It was essentially, yes. Professor Lievesley: If I could add— Q155 Mr Bacon: In a minute. Can I ask which company, Dr Foster or CHKS, had the larger share of the NHS market at that time? Mr Taylor: My understanding is Dr Foster. Professor Lievesley: In England Dr Foster. Q156 Mr Bacon: National Audit Office, would you like to comment on that because I have been told the reverse, that CHKS had a larger share of the NHS market at that time? Ms Taylor: Certainly CHKS had a share of the market in Wales. Our understanding—and I will have to ask one of my colleagues—is that they had a margin greater in NHS in England. Mr Fisher: In certain benchmarking products. Q157 Mr Bacon: Right, but nonetheless, as it makes clear in paragraph 1.53, “the turnover of the two biggest specialist companies by far,”—this is presumably a global figure—“Dr Foster Ltd and CHKS, were ... £6.8 million and £5.1 million respectively”, so they are both quite large businesses and by far the biggest players; that is right, is it not? Mr Taylor: Yes. Q158 Mr Bacon: But you only talked to one? You did not talk to the other? You did a market analysis, but you did not talk to the other, and you spent £2 million on advice. Mr Taylor: Yes. Q159 Mr Bacon: Including this market analysis, but you only talked to one company? Mr Taylor: That is right. § Q180 Mr Bacon: You took him [Matt Tee] on as Acting Communications Director at the Department of Health? Mr Taylor: Yes. Q181 Mr Bacon: When you took him on as Acting Communications Director did he have a financial interest in Dr Foster’s? Mr Taylor: He did, yes. Q182 Mr Bacon: He was the Business Development Director of Dr Foster’s? Mr Taylor: He was. Q183 Mr Bacon: Does he still have a financial interest in Dr Foster’s? Mr Taylor: At the time we took him on he was an employee of Dr Foster, and we took him on secondment. He is now no longer an employee of Dr Foster and he has a small shareholder interest, effectively, in the company. Chairman: [...].I should say that this Committee has no objection to joint ventures between the public and private sectors as long as they are based on a fair and competitive and open process, and my initial conclusion is that this was glaringly lacking in this case. There was also blurring of lines between the position of Dr Foster as an adviser and as a joint venture partner. Lastly, in the absence of a competitive process it is unclear whether or not the taxpayer paid over £4 million more for this than he should have done, so I am afraid, given all we have heard this afternoon, despite your convincing and calm demeanour on a difficult wicket, that you can expect a very tough Report. Thank you very much. Ends. Appendix Structure Until January 2006 when the JV commenced there was only one company. Dr Foster Ltd. Disclosed below is information about the shares in Dr Foster Ltd from November 2004 to January 2006. Following the JV deal, Dr Foster Ltd became wholly owned by Dr Foster Intelligence Ltd. Dr Foster Intelligence Ltd is in turn 50% owned by Dr Foster Holdings LLP and the Information Centre. Dr. Foster Research Ltd is wholly owned by Dr Foster Holdings Ltd. There are no shares in an LLP; members have interests. From January 2006, individual ownership was in Dr Foster Holdings LLP. November 2004 to January 2006—Dr Foster Ltd The table below details the interests in Dr Foster Ltd (then the only Dr Foster company) in November 2004. Shareholder/LLP member Tim Kelsey Roger Taylor (Herald Ventures Limited Partnership Close Brothers Investments Ltd Bamboo Investments (Isle of Man) Ltd Herald Ventures Limited Partnership II Jake Arnold-Forster Roger Killen Herald Ventures Limited Partnership III Barton Street Ltd (Barchester Group) Vavasseur Overseas Holdings Ltd Mr John Brown Close Brothers Corp Finance Frank Hollendoner Steven Bellamy Ms Anu Vilganen Nigel Medhurst Yili Holdings Ltd Mr Julian Jarman Mark Butt Double Eight Limited Bittar International Inc Nexus Structured Finance Ltd Luton Investment Establishment Lady Kate Salomon NCL (Nominees) Ltd Gryphon Trading SA John Reilly Mr William Salomon Matt Tee Mr Michael Cook Mr Ray Pattison Mr Peter Buckley Mr John Randolph Stewart Millman Aeon Management Establishment Mr Geoffrey Bowden Ellen Klaus Ms Adele Collins Mr Jonathan Holborow Mr John Horner & Barnett Waddingham Mr Charles McIntyre Ms Carolyn Townsend Federated Trust Corporation Ltd Arglen Properties Ltd Mr John Horner Mr Jeremy Bailey Mr Egon Vorfeld Mr David Charters Mr Gavin Henderson Mr Mark Gardiner Mr Dennis Killen Mr Richard Lamb Forna Ltd Mr Adrian Stevensen Mr Derek Morgan Mr Peter Apps Ms Claire Read
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