Department of Transport: Sale of the National Bus Company
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Report by the Comptroller and Auditor General NATIONAL AUDIT O-ICE Department of Transport: Sale of the National Bus Company Ordered by the House of Commons to be printed 20 November 1990 London: HMSO E5.45 net 43 DEPARTMENT OF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY This report has been prepared under Section 6 of the National Audit Act, 1983 for presentation to the House of Commons in accordance with Section 9 of the Act. John Bourn Comptmller and Auditor General National Audit Office 13 November 1990 The Comptroller and Auditor General is the head of the National Audit Office employing some 900 staff. He, and the NAO, are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies use their resources. DEPARTMENT OF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY Contents Pages Report Introduction 1 Arrangements for the sale 1 The outcome of the sale 5 Other sale matters 9 Summary 11 Appendices 1. Advertisements for the Sale of the National Bus Company 13 2. National Bus Company: Estimated net receipts from the sale 17 3. Description of seven operating subsidiaries 18 DEPARTMENT OF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY Report Introduction 1. The National Bus Company (the Company) was formed in 1968 to take over the bus assets and shareholdings in England and Wales of the Transport Holding Company and certain bus interests of the British Railways Board. By 1985 it employed some 49,000 staff, had an annual turnover exceeding E800 million and, after the receipt of operating subsidies of El21 million, had an operating profit of some El8 million in 1985. At this time the Company accounted for almost 50 per cent of local bus mileage in England and Wales. 2. In 1984 the Government published the White Paper “Buses” (Cmnd 9300) which proposed major changes to the bus industry. The main objective was to open the industry to competition through the deregulation of local bus services outside London and the introduction of competitive tendering for non-commercial services. To ensure competition a major restructuring of the industry was proposed, including the privatisation of the National Bus Company into smaller free standing parts. The Government considered it important to the success of the policy that each of the changes - deregulation, competitive tendering, restructuring and privatisation - be carried out on broadly the same timescale so that no one operator could dominate the market. 3. The sale of the Company differed from all previous sales of public enterprises in that the Company was charged under the Transport Act 1985 with privatising its component parts in accordance with a programme agreed with and monitored by the Department of Transport and subject to the approval of each sale by the Secretary of State. This Report concentrates on the Department’s arrangements for overseeing the sale, the outcome and related issues. The National Audit Office observations are set out at the end of the Report. Arrangements for (i) The sale objectives tbe sale 4. The legislative framework for the sale was set out in the Transport Act 1985. This required the Company to submit a programme to the Secretary of State for the disposal of the whole undertaking. The Company’s main objective was to promote sustained and fair competition, both between the Company’s subsidiaries and between them and other bus companies. The Company was also required to have regard to the net value that might be secured from all disposals and to give all employees a reasonable opportunity of acquiring a controlling interest in that part of the organisation for which they worked. 5. The Act required the Secretary of State: (i) to approve the Company’s disposal programme or modify it as he saw fit; 1 DEPARTMENT OF TRANSPORT: SALE OF TEE NATIONAL BUS COMPANY (ii) if necessary, to formulate proposals of his own in substitution for the Company’s proposals; and if necessary, to vary the approved programme; (iii) where necessary, to give directions to the Company as to the manner in which it was to carry out its main objective and associated duties; (iv) to give consent to all disposals either generally in relation to disposals of any specified description, or specifically in relation to particular disposals. The Act also required the Company to complete the sale within three years of the legislation coming into force, ie by 6 January 1989. (ii) The disposal programme 6. In 1984 the Government had announced its intention, as part of its policy of increasing competition in the industry, to reorganise the Company into smaller free-standing parts prior to privatisation. In the autumn of 1985 the Company’s preferred option was to dispose of itself as a single unit. It considered this would be the best method of promoting fair and sustained competition and of giving employees the best chance of gaining control of their companies. 7. The Secretary of State’s view, however, was that to maximise competition within the industry the subsidiaries should be sold individually and should, if necessary, be restructured to provide greater local competition. The Company proposed that five operating units should be restructured. The Secretary of State’s decision was issued in a direction in February 1986, requiring the Company to divide four further subsidiaries into 12 new operating units. 8. In April 1986 the Secretary of State issued a further direction instructing the Company to sell its operating subsidiaries as individual units and to dispose of as many as possible before 26 October 1986 when bus deregulation outside London would become effective. 9. In May 1986 the Company submitted a disposal programme to the Secretary of State which complied with the above directions and met the conditions set out in the Transport Act. The programme set out the Company’s intention to offer the individual subsidiaries for sale and actively to pursue negotiations with local management and employees. The Company would also continue, where appropriate, to advertise for sale all subsidiaries and to review progress with the Department each month. This programme was approved by the Secretary of State without modification. (iii) Incentives to employees 10. At the end of 1985 the Company invited management teams to prepare bids and, early in 1986, the Department of Transport sponsored a series of seminars on management buy-outs for employees. The Secretary of State, with Treasury consent, agreed that the Company could: 2 DEPARTMENT OF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY (a) exercise up to a five per cent pricing preference to management or employee groups when considering bids, and (b) meet a proportion of the costs of mounting unsuccessful bids up to a maximum of E48,415 per bid. (iv) Monitoring of the sale 11. The Department appointed Price Waterhouse in May 1985 to advise on all aspects of the sale. In May 1986 they also appointed Richard Ellis to advise on property matters. Both advisers were appointed following competition. The Company employed and were advised throughout by the merchant bankers, Barclays De Zoete Wedd. They also employed their own legal advisers, Slaughter & May, and property advisers Healey & Baker and King & Co. During the sale the Department and their advisers maintained a close working contact with the Company and were well placed to advise the Secretary of State. 12. The Company’s strategy, agreed with the Department, was to start the sale process for each subsidiary when it became ready for sale. Progress was dependent on a number of factors, including the readiness of local management to mount a bid, the need to restructure some subsidiaries and create new management teams, the availability of detailed information on each subsidiary for third parties and the ability of the Company to respond to enquiries. The Department accepted that the Company had to decide in each case when negotiations should begin. 13. An advertising campaign was undertaken in the national, regional and trade press. An initial advertisement in March 1986, listed the subsidiaries and invited general expressions of interest. This was followed by a second campaign in September 1986 under the theme “70 great names for sale”. In October 1986 further advertisements were placed in the specialist trade press. Copies of these advertisements, which did not target individual subsidiaries, are at Appendix 1. In addition to these advertisements, the Company made a number of direct approaches to parties mostly in the transport industry, who it thought might be interested in bus operations. 14. As part of the marketing strategy, an information memorandum was prepared for each subsidiary and these were sold for E50 each to all those with an interest in purchasing a company. These memoranda were prepared by the Company after consultation with local management and their legal advisers. Price Waterhouse reviewed and criticised the approach to and content of the early memoranda and these were revised before issue. The Company also employed six independent consultants as negotiators to manage the sale process by liaising between subsidiaries and potential purchasers. 15. The marketing approach of the Company was reviewed by the Department and its advisers and discussed with the Company in the period leading up to the first sales. After the sale of the first two operating subsidiaries the Department asked Price Waterhouse specifically to review the marketing. Price Waterhouse recognised the value of the Company’s 3 DBPART?,ENT OF TRANSPORT: SALE OF THE NATIONAL BUS COMPANY early advertisements but suggested, amongst other things, that the Company should consider employing marketing consultants to advise on potential interested parties in the United Kingdom and abroad.