The government has bowed to mounting political pressure and announced a review of how it handles privatisations following the controversial sale of Royal Mail, which the National Audit Office (NAO) said cost taxpayers £750m in a single day.
The business secretary, Vince Cable, who has faced calls to resign over his handling of the £3.3bn privatisation last October, on Wednesday appointed city grandee Paul Myners to review lessons from it. The move came as MPs prepare to publish a report into the process on Friday, which is said to be highly critical of Cable.
Cable, whom the NAO criticised for refusing to increase the flotation price of Royal Mail shares despite widespread fears the 500-year-old company was being sold off on the cheap, has repeatedly refused to apologise and still describes the privatisation as a "success".
The NAO said the business department's keen desire to achieve a successful sale of Royal Mail within this parliament "resulted in the shares being priced at a level substantially below that at which they started trading". After floating at 330p, shares in Royal Mail closed up 38% on their first day of trading at 455p. On Wednesday the shares closed at 469.7p, 42% above their flotation price.
Cable announced the "informal review" of the way the government handles flotations just days before the business select committee is expected to release another highly critical report into the privatisation.
Adrian Bailey, chair of the committee, has accused ministers of living in "Alice-in-Wonderland" reality if they really believe the government got the best price for taxpayers for Royal Mail. "They seem to think if you repeat certain assertions long enough, they will become true," Bailey said when he questioned Cable in Parliament in April.
Chuka Umunna, shadow business secretary, said that by announcing the review the government was "admitting what everyone else has known for months – that its privatisation was a first-class short-changing of the taxpayer".
"Ministers have continued to defend their botched Royal Mail fire sale and maintained that the process was managed correctly, but the fact they have set up this inquiry shows the opposite is true," he said.
"Taxpayers have been short changed to the tune of hundreds of millions of pounds while large City investors, who were placed at the front of the queue by ministers, have been laughing all the way to the bank at the public's expense. There are a huge number of questions which ministers need to answer on the mistakes which have been made."
Lord Myners' review will concentrate on Cable's reliance on the advice of investment bank Lazard, the Guardian understands. In April, it emerged that Lazard, which advised the government not to increase the flotation price above 330p a share, made an immediate £8m profit buying and almost instantly selling Royal Mail shares after the stock spiked by 38% on the first day.
Lazard's corporate advisory arm, Lazard & Co, collected £1.5m for its advice that increasing the price would put off City investors from buying shares. Cable gave Lazard's investment division, Lazard Asset Management (LAM), "golden ticket" priority investor status allowing it to buy 6m shares at 330p. LAM sold all of its shares within 48 hours at 470p to reap a profit of £8.4m.
Margaret Hodge, chair of the powerful parliamentary public accounts committee (PAC), which is finalising its own report into the Royal Mail float, said Lazard "made a killing at the expense of the ordinary taxpayer that lost £750m on day one" of Royal Mail's London Stock Exchange debut.
During the sale process Lazard & Co advised the government to sell the shares as cheaply as 212p. Other banks valued the shares as high as 510p, with none reckoning they were worth less than 300p.
Lazard insists that there was nothing improper in the company acting as both adviser and investor, and said there were Chinese walls preventing one half of the business from knowing what the other half was doing.
On Wednesday Vince Cable said: "I have asked Lord Myners to conduct this review, following the recommendations of the National Audit Office, to help me assess whether changes are needed to the current system government operates for the sale of its assets.
"Lord Myners is uniquely qualified to carry out this work – with a background in Government and the City. I look forward to reviewing his findings and recommendations in due course."
Myners, who was installed as a Labour minister at the height of the credit crisis and was appointed to review governance at the Co-operative Group during its recent crisis, has taken a keen interest in Royal Mail.
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