Whitehall agency 'naive' in pounds 6.5m deal

An ill-fated multi-million pound deal to sell notebooks, calenders, pencils and india rubbers to Uzbekistan contributed to HMSO yesterday recording a pounds 40m operating loss, undermining the Government's plans to privatise its stationery office.

HMSO reported its first-ever trading loss just weeks before bids to buy the business are to be invited.

Mike Lynn, HMSO's chief executive, said the stationery office had been caught by "a sucker punch" over the deal with the former Soviet republic as the National Audit Office (NAO) reported that the loss to the taxpayer on the pounds 6.5m deal "could be substantial".

Despite the operating loss - and the likelihood that Parliament will decide to make all parliamentary papers available at no charge on the Internet - Mr Lynn said he was confident the organisation would "prosper" in the private sector. Parliamentary papers currently account for pounds 30m of HMSO's business.

Yesterday's annual report showed provision of more than pounds 26m for 540 redundancies ahead of privatisation, plus pounds 3m for losses on the Uzbekistan deal, and an pounds 11.6m trading deficit on top.

Roger Freeman, Chancellor of the Duchy of Lancaster, said the redundancies were needed because HMSO's business had shrunk. Derek Foster, his Labour opposite number, said they were "a blatant attempt to load the costs of privatisation on the public sector" making HMSO "ripe for cherry-picking".

The City will look equally closely, however, at results which show that a projected pounds 11.6m operating surplus turned into a pounds 11.6m deficit, as investments in new business and systems came late on stream. With these functioning, Mr Lynn said profits in the first quarter were ahead of target.

The Uzbekistan deal was struck in June last year when the former Soviet republic invited a delegation from HMSO Scotland to Tashkent. "Rather to our surprise", Mr Lynn said, "the team came back with a pounds 6.5m order" and promised payment in US dollars. "Our mistake," Mr Lynn said yesterday, "was we believed it".

It transpired that Uztoshkitob - the sales and retail arm of the state publishing committee placing the order - did not have authorisation to convert som, the Uzbekistan currency, into dollars and by the time HMSO realised this, it had ordered and received goods tailored to the Uzbekistan market - thin notebooks and tiny india rubbers, short pencils, plus 1996 Cyrillic calendars that had little resale value elsewhere.

Despite the absence of letters of credit, Geoff Bedford, HMSO Scotland's director decided to ship the first consignments "on trust". To date, three consignments have been delivered, three are being negotiated with a private-sector middleman, three are held in customs in Uzbekistan and a final pounds 1.5m of goods are in a warehouse in Felixstowe. As yet, HMSO has received "no substantial payment" for the goods.

The NAO fiercely criticised HMSO's performance in not checking the contract properly when international trade presented "unfamiliar risks".

Mr Lynn admitted his organisation had been "naive" and had behaved like "innocents abroad" but said that Uztoshkitob, trading with the West for the first time, had not realised themselves that they lacked authority to make good their promises. After Foreign Office intervention, HMSO was told a payment of pounds 2.6m for the first consignments is on its way and Mr Lynn said there were "prospects for recovering most if not all" of the contract value.

t HMSO Trading Fund Accounts 1995; HMSO, pounds 8.95