Business secretary Sharma issues ministerial direction after perm sec flags up ‘significant downside risks’ of acquisition of bankrupt firm

Credit: Wiktor Szymanowicz/NurPhoto/PA

The business secretary, Alok Sharma, overrode concerns raised by his department’s permanent secretary about “significant” risks of a deal to invest £400m in acquiring a bankrupt satellite firm, it has emerged.

Sam Beckett, who was interim perm sec at the time, wrote to Sharma (pictured above) last month flagging “significant downside risks” of investing in London-based company OneWeb, including the potential to lose the entire investment.

The deal is part of the government’s efforts to ensure the UK has access to a post-Brexit satellite navigation and positioning network, as it has been shut out of the secure parts of the EU’s Galileo satnav network that are to be used by the emergency services and the military.

Earlier this month, science minister Amanda Solloway was forced to defend the department’s actions after questions were raised about the wisdom of investing in a company that had gone bust.

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Solloway said the deal was “likely to make an economic return” from the investment, for which the Department for Business, Energy and Industrial Strategy joined forces with Indian telecoms firm Bharti. She said the department’s due diligence showed a “strong commercial basis for investment”, despite OneWeb having filed for bankruptcy three months earlier.

But it has now emerged that Beckett advised Sharma that there were a “very broad range of uncertainties and possible outcomes” around the investment, making it “hard at this time to be confident in the underlying assumptions or the likely returns”.

She said she would be unable to press ahead with the deal without a written ministerial direction – which perm secs must request when they believe a policy or project would not meet Treasury guidance on value for money, propriety, regularity or feasibility – to do so.

In her letter to Sharma on 26 June, Beckett said that while Bharti’s investment in the company indicated a “rational commercial case for investing”, its involvement must be viewed through the lens of its broader business strategy.

“It should be noted that the lead co-investor is a telecoms company who will also be considering synergies with the wider businesses, in addition to the pure commercials of the case, which are not relevant to a government decision on this investment,” she said.

The risk of the investment to government is “more stark” than to other investors, as it is a stand-alone purchase rather than part of a broader portfolio, she added.

“While in one scenario we could get a 20% return, the central case is marginal and there are significant downside risks, including that venture capital investments of this sort can fail, with the consequence that all the value of the equity can be lost.”

Beckett said she had been able to conclude the investment met value-for-money requirements set out in the Treasury’s Managing Public Money guidance.

In his response the same day, Sharma said he was prepared to back the deal.

Having taken advice from Treasury, BEIS, UK Space Agency and Cabinet Office officials, he said, “I have been informed that even with substantial haircuts to OneWeb’s base case financial projections the investment would have a positive return”.

“We also agree that OneWeb, a UK-based company, represents an opportunity for UK interests globally. As you say, it would be the first mega-constellation operator, if it succeeds, and would have the potential to connect millions of people, in particular those in remote, rural locations without broadband access,” he said.

If the company is successful, it would also give the UK a share in a global space platform, with opportunities for R&D and manufacturing, and “wider, less quantifiable benefits of signalling UK ambition and influence on the global stage”, he said.

He added: “The chancellor and his officials have given me approval to proceed and I am prepared to provide support for the proposed purchase of OneWeb. I am therefore formally directing you as accounting officer to take this forward with immediate effect.”

Before entering bankruptcy, OneWeb had received funding totalling $3.3bn during its eight years in business, with backers including Virgin, Airbus and Japanese conglomerate SoftBank, which is understood to have invested as much as $2bn.

When it announced, on 27 March, the commencement of bankruptcy proceedings and a sale process, the satellite company said it had been “close to obtaining” further financing, but that “the process did not progress because of the financial impact and market turbulence related to the spread of Covid-19”.

OneWeb’s accounts for the 2017 and 2018 calendar years show operating costs of £81.3m and £216.5m, respectively. This level of costs will continue, if not significantly increase, as the company builds and launches more satellites; it currently has a constellation of 74 in orbit, and has filed a request with US authorities to ultimately increase this to 48,000.

The company is yet to generate any revenue, let alone profit.