The Right Honourable George Osborne
11 Down in the Street
I hope you are well. You must be looking forward to putting your feet up and sipping a nice single malt over the weekend after a the excitement of the budget. It’s been a pretty damn good week. Those nice people at OBR found you £27bn which came in pretty handy when you needed to ‘fine tune’ the austerity timetable. Then that amusing John McConnell gave you a gift of his signed copy of The Little Red Book (was it signed by Mao or John?) which gave you and the PM a jolly good laugh. Mr Watson didn’t seem quite as amused as you but that probably added to your pleasure. Anyway, I am drifting off topic and I know you are a busy man.
You probably haven’t had time to read the whole of the Spending Review, it runs to 110 pages and there are loads of statistics and appendices as well. On page 55 (Section 10.5) one of those Bright Young Things (BYTs) who works for you at the Treasury or BIS has come up with this nifty one liner
“develop options to bring private capital into the Ordnance Survey before 2020”
This is in the context of trying to raise £5bn from the sale of corporate and financial assets by 2020. When I read this I was initially dismayed (I will explain later) but then I noted the different language that your BYTs used regarding the sale of the Land Registry
“consult on options to move operations of the Land Registry to the private sector from 2017”
It seems that the BYTs are a bit more cautious about moving Ordnance Survey into the private sector. By the way, what does moving an organisation into the private sector mean? Is it a euphemism for selling it, or is their a subtlety that I am missing?
A while ago people who new a little about digital map data were talking themselves into a frenzy over the value of Ordnance Survey if it was only freed from the constraints of public task and trading fund status. Wild numbers have been bandied about £500m, £1bn, gosh it must be attractive when you are looking to reduce the national debt. Those values may have been influenced by the remarkable values placed on TeleAtlas by TomTom and Navteq by Nokia in the buying frenzy of 2007 but we know how both of those investments plummeted in value (Navteq bought by Nokia for £8bn and sold 8 years later for $3bn) so the financiers and investors may be a bit more cautious today. So here is a word of advice Chancellor, please be sceptical about the ideas coming from those BYTs, the vested interests within the OS and outside (and I have to be honest with you I am not impartial on this topic) and most of all those smart guys in suits from the banks who will be ramping up expectations of sale proceeds when there is a fee at stake, not that you would be influenced by bankers after the last few years.
You might have guessed by now that I am not completely enamoured with the idea of selling off all or even part of Ordnance Survey, I’ll explain my reasons later on. When you start “developing options” I would imagine the potential value of OS will be one of your considerations, as a taxpayer who indirectly owns a part of the OS I hope that value for taxpayers will be a top consideration. Valuing a business is a bit of a black art (is that PC to say?) it usually combines turnover, profitability, assets, growth, market share or positioning with a bit of spice (or multiplication) for future prospects. I am sure that what with being the Chancellor and a very smart financial head, you have a good understanding of how the market values businesses, let’s agree to differ over whether you got it right over Royal Mail, particularly the inclusion of the PAF in that deal. No one really knows what the value of a business is until a willing buyer and seller find a meeting point but ‘caveat emptor’ applies to both parties. I know you are a busy man Chancellor so I have grabbed the last few years accounts from the OS and summarised them for you in this table:
|Operating costs exc depreciation||97.5||99.7||2.3%||103.9||4.2%|
|Depreciation, amortisation etc||15.1||16.5||9.3%||16.3||1.2%|
|Operating profit before exceptionals||16.7||24.1||44.3%||31.9||32.4%||32.3||1.3%||28||13.3%||26.5||5.4%|
|Operating profit/(loss) after exceptionals||-1.8||10.8||31.9||195.4%||32.3||1.3%|
|Profit attributable to PDC holders||31.5||32.1||1.9%||30.9||3.7%|
|Net assets at 31 March||85.7||112||30.7%||127.9||14.2%||145.1||13.4%||158.4||9.2%||169||6.7%|
|Dividend Yield on Net Assets||6.8%||5.6%||13.4%||14.1%||12.2%||12.4%|
I have had to do a little reorganising of the figures quoted in the accounts as the format has changed a couple of times over the last 6 years. A couple of observations from me on these figures with apologies for the simplifications and any misinterpretation of the numbers (You can view my calculations here)
- OS is a ca. £150m turnover business that seems to have flatlined over the last three years
- Management have done a great job of controlling costs, only 3.4% higher over the 6 year period
- Profit before exceptionals almost doubled in the years up to 2013 but fell in 2014 and fell again in 2015
- Dividends back to the Treasury have grown almost every year and in 2015 were 262% higher than in 2009. You are getting a very decent £20m a year from OS
On most methods of valuation I think you are looking at somewhere between £200m and a very top end of £350/400m for the whole shebang (you could have a look here for some basics on valuation). To us ordinary folk that sounds like quite a lot of money but in the ‘big picture’ that you are looking at it is little more than a rounding error on the £27bn that the OBR found this week or the £8bn additional costs anticipated for Trident let alone the whole bill. Still, I guess if the return is up at the high end the lost dividends will be offset by the lower interest payments on a tiny chunk of the national debt and it may be worth selling. I am afraid there might be a couple of teensy weensy issues that might just cause investors a tad of concern and push valuations down to the lower end.
Firstly about 55% of OS’s revenue comes from one customer – you! The UK government spend with OS is £80m (including payments for OpenData) according to the most recent accounts. Lots of people don’t think it is a great idea to have over half of your revenue dependent on a single customer and they might reduce their valuation of the business because of the risk attached. Of course you could solve that problem by granting the OS a long term contract to continue supplying government on similar terms to current agreements but I would encourage you to be a bit more ambitious in driving down the costs to the taxpayer and perhaps opening the market up to those entrepreneurs and innovative new businesses that feature in election manifestos (both yours and the other lot who probably won’t be in government again in my lifetime).
Secondly there might be a little problem around who owns the core IPR of the geographic data that OS manages. You see this isn’t OS’s data, it belongs to the Crown as we are regularly reminded if we want to use it in ways that don’t quite match OS licensing conditions. When you ‘transitioned’ (that’s a nice word isn’t it?) OS from a Trading Fund to a Gov Co you retained the IPR in the existing data and much of any future data for the Crown (well done there by the way, looks like someone may have learnt a little from the Royal Mail sale):
As part of the transition to a Government owned limited company:
1. The Crown copyright (and Crown database rights) which existed in the Ordnance Survey mapping as at 1 April 2015 remain owned by the Crown. However, under the terms of the Crown Rights Agreement with HMSO, OS is granted an exclusive right to use, license and manage this IP on behalf of the Crown.
3. Where Ordnance Survey Limited updates, or creates, new mapping data and products which fall under its Public Task, the copyright and/or database rights which arise will automatically on creation be assigned to the Crown1. As with 1 above, OS is granted an exclusive right to use, license and manage this IP on behalf of the Crown.
4. Where Ordnance Survey Limited creates new mapping products: (i) which fall outside its Public Task, and (ii) without using data in which the IPR is already owned by the Crown, the copyright or database rights which arise will vest in Ordnance Survey Limited.
Now that might put potential investors off a little bit unless you choose to change your mind on the IPR thing and toss it into the pot to sweeten the sale. Please, please don’t do that! If you do, you can be sure that there will be an embarrassing kerfuffle if the new owners start to exploit their asset by either increasing charges to government or by revaluing assets once they have bought it at a discount. It’s interesting that the book value of Geographic Data described in the 2015 accounts as “represent[ing] the core datasets from which the business provides its products and services.” (p46) is only £11.5m. That’s about the charge that OS would make to two large commercial customers for it’s national datasets! I am sure that those BYTs will have brought to your attention the NAO’s criticism of OS accounting in 2000:
“The National Topographic Database is a unique national asset, the creation of which has been funded from public money over the years.”
“On the basis of expert advice the NAO has estimated that the value of the database to the business is unlikely to be less than £50 million”
Of course the OS has since rectified matters to some extent but the ‘book value’ of the database is still quite a lot less than the NAO valuation. Beware Chancellor, there is a banana skin here!
By now Chancellor, you may be starting to have some hesitation as to whether selling off the OS is a great idea. I hope that you think twice and then think twice again. You see there is also a school of thought that says that keeping ownership of OS and making all of it’s data freely available would be a jolly good thing, these funny ideas come from a group of people who are known as the OpenData movement. Your old friend Francis Maude and that nice Mr Watson both agreed with these strange people as does that man Sir Tim Berners-Lee who invented the internet and then gave it away for nothing (I might point out that Sir TBL persuaded the previous PM to force OS to make some of their data OpenData but you might think that was not helpful). the Cabinet Office are quite keen on OpenData as is your delightful colleague Liz Truss, who is making a lot of Defra’s data open by June of next year. There is also a Professor Pollock who calculated that opening up public sector information could generate welfare gains of between £1.6bn and £6bn! Although I have to say that I am more than a bit doubtful about those calculations, you may even be muttering foul language that rhymes with the professor’s surname. It seems that your colleagues, international technology gurus, professors and many others think that open government information will form the data infrastructure for the new information economy and generate loads of public and economic benefit. My friends at the Open Data Institute (who you partly fund by the way) can tell you lots more about the benefits of OpenData if you are interested.
So here I am trying to persuade you not to sell off Ordnance Survey and even suggesting to you that you should make all of their data Open and free. You must be starting to worry that you are reading some kind of crank letter and anyway when you need to find things to flog off to reduce the national debt this advice just isn’t helping you. How about a modern day Marie Antoinette moment? I can let you have the cake and eat it, in fact we all can, because after all we are all in this together, aren’t we? Now you really do think I am some kind of nutter, you can get the benefits of OpenData and reduce the national debt by realising some dosh for part of the OS.
The team at OS is full of clever people who are very very good at surveying and maintaining the National Map which is vital for a load of government activities including emergency services, environmental protection, flood defences, transport, local government (I won’t go on because I know that you must be getting bored, ask one of those BYTs for some more on this). Why not just fund this team to carry on surveying etc? You currently pay the OS £80m for them to do this through a series of agreements with government, that should be more than enough to cover the costs of surveying, data management etc. You could probably save at least £10m or £20m or even more once they stopped doing things that weren’t really essential. You could make the raw data available to government and the private sector for free and without restriction potentially unlocking a chunk of the billions that people think will come from OpenData and at the very least underpinning the National Information Infrastructure (I am not sure I know what that is but cleverer people than me, particularly at the ODI, are very keen on the idea).
The BYTs who work at OS and those who are working for you in the Treasury all think that there are fantastic opportunities to add value and open up new markets with digital map data. They may well be right, even though I am hesitant based on recent revenue growth trends. So why not ‘transition’ (I do like that word) the part of the OS that doesn’t do raw data collection and maintenance into a new business (let’s call it Priv Co as opposed to Gov Co) which can add value to the raw data collected as part of the ‘public task’ (that’s another nice phrase) by printing paper maps, creating new map products that aren’t needed by government, promoting outdoor activities and all those other great ideas? Because you will paying the raw data part of the business to maintain the data and making it open to everyone, the Priv Co will get its raw material for nothing and can concentrate on adding value to it. That might be a more attractive opportunity for potential investors than having to take on the fiddly business of surveying etc. And here is the bit you will really like, all of those entrepreneurs and innovative businesses that you want to encourage (see manifesto, again!) will be able to get hold of the raw data for nothing as well and some of them might even be very successful adding value to it and creating new services that lots of consumers and businesses want and then they will create new jobs and pay you taxes which can help to reduce the national debt. A little bird tells me that you might already be thinking of this:
“For Ordnance Survey, the statement says only that the government will: “Develop options to bring private capital into the Ordnance Survey before 2020.”
This suggests that the national map maker is not seen as contributing to the chancellor’s central goal of eliminating the budget deficit by 2019-20. The most likely option is for the core public task of maintaining the Master Map database will remain in the public sector, but ways will be sought to spin off value added digital and paper mapping products in ventures with the private sector. Such ventures can expect rigorous scrutiny for anti-competitive behaviour”
Chancellor, thanks for staying with me so long (if you have), I’m sorry that this flogging off Ordnance Survey stuff may be more complicated than you thought. It is quite possibly more trouble than it’s worth and that’s before you think about all of the middle aged middle classes living in the shires (there are a lot of your voters there) who were brought up walking the English countryside guided by an Ordnance Survey map – you can imagine the number of letters to the Telegraph that will precede any attempt to privatise a part of their heritage.
I have taken on board the Big Society idea that the PM was so keen about a few years back, so if you want a bit of help working out the “options to bring private capital into the Ordnance Survey” I’d be happy to help out. I am not a BYT but I do know a bit about the mapping business.
Best regards and seasons greetings
PS: My apologies for misaddressing this letter but in a time of austerity I couldn’t really afford a license from Royal Mail to get your address details (you may recall that you sold off the Postcode Address File when you sold Royal Mail). I am sure you understand that times are hard for all of us who are in this together (whatever this is).