Eurostar sale shows government still "undervaluing assets", warns public accounts commitee

Report by MPs says Eurostar sale was managed well but that government used "over cautious assumptions" and should do more to build in-house corporate finance knowledge

By matt.foster

20 Jan 2016

The sale of the taxpayer's stake in Eurostar shows that government is continuing "to undervalue public assets it is selling", according to MPs on the public accounts committee (PAC), in a new report that warns departments could be too reliant on external financial advice.

In March last year, the Treasury sold the UK government's 40% stake in the company – which runs Channel Tunnel passenger services between London and continental Europe – for £585.1m. MPs point out that the sale price was "almost double" the estimates carried out by the government and its advisers, UBS, and warns that the under-valuation appears to be part of pattern.

PAC's report says: "The government's over cautious assumptions that a competitor to Eurostar would emerge to run trains on the same track and that a discount of 20% should be applied to reflect the fact that a minority holding in the company was being sold depressed its valuation of the asset.

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"We are concerned that there has been a pattern of undervaluing publicly owned assets prior to sale. For example, the valuations of Royal Mail prepared in advance of the sale were significantly below the market price achieved."

While the committee praises the Treasury-managed Eurostar sale process itself as having been "well handled" and securing "a good return for the taxpayer" by ensuring proper competitive tension between bidders, PAC's report says the government may still be too reliant on "a small pool of financial and legal advisers" to help it carry out sales.

The committee points out that the government's financial adviser on the sale, UBS, as well as its legal adviser, Freshfields, were both involved in the controversial sale of Royal Mail, adding: "Although we are not questioning the integrity of the appointment process and have no reason to doubt the professionalism and expertise of these advisers, we are concerned that a small number of advisers are engaged so frequently."

A 2014 report on the Royal Mail privatisation by the separate Business, Innovation and Skills committee said that while the government had met its "primary objective" of disposing of the service, the taxpayer may have "missed out on significant value" after shares, which were sold at 330p, climbed in value by more than a third on the first day of trading.

In its report on Eurostar, PAC said departments continue to rely "heavily" on external advisers to provide corporate finance skills and expertise, with Mark Russell, the head of the civil service's head of corporate finance profession unable to say "how much the government was spending on its own in-house corporate finance specialist staff".

The report calls on UK Government Investments – recently formed through the merger of UK Financial Investments and the Shareholder Executive – to make more use of its internal staff and "consider the business case for reducing its reliance on expensive external advice" by building in-house capability. 

A spokesperson for the Treasury said it welcomed the committee's finding "that the sale of our stake in Eurostar was well-handled and secured a good return for the taxpayer". 

They added: "Releasing public assets we no longer need is at the heart of our long-term plan to tackle Britain's debts and boost economic growth, and that's why we've recently identified up to £4.6 billion of further asset sales, to help build on the huge progress we've already made."

High Speed 1

Elsewhere in its report, PAC criticises the Department for Transport (DfT) for a delay in publishing its evaluation of the High Speed 1 line between London and the Channel Tunnel on the Kent coast.

The committee says the fact that the report was not published until October last year may have hindered efforts to properly scrutinise the High Speed 2 project.

“We now also know, following publication of the government’s much delayed report, that the costs of HS1 far outweigh its economic benefits,” committee chair Meg Hillier said. “In particular it is deeply concerning that work towards HS2 should have progressed without full and detailed consideration of HS1.”

The DfT told the committee that it did not accept the HS1 project represented poor value for money – although the MPs point out that the department's evaluation gave a benefit-cost ratio of 0.64 to 1 for the scheme.

PAC says: "The evaluation included a value for wider economic benefits, but the department asserted that there were other 'wider, wider benefits' which had not been included because its methodology, which the department considers is 'world class', does not factor how investments will transform places through regeneration and development.

"We are concerned that the evidence provided by the department implies that its own methodology, which it uses to justify new investments such as High Speed 2, is inadequate."

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