Taxpayers have been left short-changed by the privatisation of a defence research firm while managers hit the jackpot, it has been claimed.

Commons public accounts committee chairman Edward Leigh made the comments after a National Audit Office report said the Ministry of Defence could have made tens of millions of pounds more from the 2003 sale of QinetiQ.

The government decided to sell the former Defence Evaluation and Research Agency when cuts in MoD research budgets put the organisation's future in doubt.

While the NAO report said the privatisation had saved the business, it criticised the MoD for hindering competition by appointing a preferred bidder while price-sensitive issues were unresolved.

Private equity firm Carlyle spent £319m on a 37.5 per cent stake in the business, £55m less than its original bid, the NAO said. The report also found that the MoD had underestimated the value of a partnership deal worth up to £5.6bn over the next 25 years.

When Carlyle floated the company three years later, its 10 most senior managers found that their £540,000 investment in shares had shot up by 19,990 per cent to be worth £107.5m.

That return was described as "excessive" by the NAO.

Leigh said: "The MoD backed themselves into a corner before they had even started... and the department went on to sell a larger share of the business for less money than they initially agreed.

"Compare this to the rewards for QinetiQ's top managers, who won the jackpot."

Auditors were also unimpressed that the MoD had allowed bosses at the defence research firm to negotiate an incentive scheme with Carlyle as the private equity company was bidding for the business.

That should not have happened, the NAO said. Chief auditor Sir John Bourn added: "It is of concern that the MoD did not seek specialist advice on the incentive scheme."

Mark Serwotka, general secretary of the Public and Commercial Services union, said the managers who benefited from the "obscene" deal were the people who sold the idea of privatisation in the first place.

"It is scandalous that a small number of senior managers and private companies should be making so much money out of an organisation that was built by public servants with public money," he added. "It is unacceptable that returns of 20,000 per cent can be made at the expense of the taxpayer."

The NAO has also warned the MoD, which still owns a 19 per cent stake in QinetiQ, that it could find itself over a barrel if Carlyle decides it is not satisfied with the return and ends the agreement in 2013 as it is entitled to.

Leigh said: "Should QinetiQ threaten to pull the plug and ask for a whole new agreement at heavily inflated prices, it would leave the MoD over a barrel. And probably result in the taxpayer having to hand over a blank cheque."

Response

Responding to the report, the government defended the deal and insisted that the taxpayer, which has so far gained a net £576m from the agreement, had done well.

Defence minister Baroness Taylor said: "The original intention behind the sale was to protect defence interests and the NAO have acknowledged that this has been achieved.

"As the largest shareholder, it is the taxpayer who has gained the most from the increase in QinetiQ's value.

"The value that MoD received for the sale of a minority stake in QinetiQ to the Carlyle group was determined by the market in a competitive process."

But Richard Bacon, a Conservative member of the committee, said it was "not the job of government to allow senior civil servants to become multimillionaires by selling off assets at knock-down prices which taxpayers have paid for".

He also questioned how the Treasury, which this week has faced criticism over Northern Rock and the loss of personal data at HM Revenue and Customs, had allowed the situation to arise.

Bacon added: "I am all for rewarding success, but for the Treasury to force through the sale while civil servants made a 20,000 per cent return on their investment is disgusting."

Vince Cable, acting leader of the Liberal Democrats, also spoke out against what he described as "yet another government botch".

He also asked why the MoD squandered the competitive element of negotiations by selecting a preferred bidder too early.

"It is completely unacceptable that the government has sold off a valuable national asset for a pittance, providing huge profits for the Carlyle group and the senior civil servants involved," he said.

"This deal didn't sell the family silver; it gave it away."