MoD slammed over QinetiQ sale

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The Ministry of Defence behaved like "an innocent at a table of card-sharps" when it arranged the sale of QinetiQ to a private equity group, a committee of MPs has said.

The National Audit Office have calculated that the taxpayer lost out to the tune of £90m from the part-privatisation of QinetiQ, which carries out research for the MoD and advises on the procurement of equipment.

The 2003 sale of a minority stake in the company was conducted when the market for technology stock was weak and the Carlyle Group was offered an "unbeatable hand" when other bidders were eliminated by the MoD, said today's report by the House of Commons public accounts committee.

The MoD began the sale process before QinetiQ's most important contract had been finalised, making it difficult to judge the company's true value, noted the report.

This allowed Carlyle to negotiate a £55m reduction in its £374m offer after being appointed preferred bidder. But the MoD nevertheless agreed to sell the group 2.5 per cent more of QinetiQ than they had specified in their bid.

'Profiteering'

Tuesday's report also accused QinetiQ's directors of "profiteering at the expense of the taxpayer" after they were allowed to negotiate their own incentive packages with Carlyle before it was named as preferred bidder.

At the date of the flotation of the company in 2006, the top 10 managers held shares worth £107m for an investment of just £540,000 - making £200 for every £1 invested, compared to £9 for the taxpayer.

The public accounts committee found that privatisation was successful in protecting the viability of the business, and the eventual flotation of the government's remaining stake on the London Stock Exchange was well handled.

QinetiQ's revenue grew by 48 per cent and its operating profit by 197 per cent between 2003 and 2007, as it expanded into the US defence market to offset a 10 per cent fall in the UK defence research budget. The privatisation has to date generated £576m in proceeds for the taxpayer.

But the report said that the MoD should have obtained £90m more from the initial sale to Carlyle and criticised the Treasury for giving the MoD an incentive to rush through the sale by promising to credit the department's budget with £250m if it was completed by March 2003.

Naivety

Committee chairman Edward Leigh said privatisation made strategic sense for Britain but lambasted senior QinetiQ officials, who had profited from the naivety of MoD civil servants at the expense of taxpayers.

"The MoD pushed ahead with the sale at the worst possible time and then weakened the competition among bidders by eliminating them at too early a stage,” he said

"Carlyle was appointed preferred bidder with major price-sensitive issues still unresolved, leaving that firm with an unbeatable hand in subsequent negotiations about the value of QinetiQ. And then the MoD even refunded Carlyle's bid costs.

"The senior public servants managing QinetiQ behaved dishonourably. They sold the idea to the MoD of privatising the business without explaining they stood to benefit, a serious conflict of interest, and later negotiated their own incentive scheme with Carlyle before that firm was appointed preferred bidder.

"The design of the scheme contributed towards the top 10 managers receiving a return on their own investment of 200 times. This is nothing less than profiteering at the expense of the taxpayer. Never again should public servants be permitted to pursue such a self-interested stratagem.

Leigh said the episode had called into question the ability of QinetiQ to advise the MoD on defence procurement matters in the future.

There was a swift response from the government, with defence procurement minister Baroness Taylor rejecting the suggestion of a lost £90m as “speculation”.

“This is pure speculation, and fails to take into account the realities of what could be achieved in negotiation,” Taylor said.

“The MoD was backed by a range of experienced specialist advisors during the sale process, including a leading merchant bank. The charge of commercial naivety makes a good soundbite but is not supported by the facts.”

Rejecting charges that executives had profited unduly from the sale, the minister said any gains made had been linked to the success of the business.