THE Ministry of Defence behaved like "an innocent at a table of card-sharps" when it arranged the sell-off of the former Defence Evaluation and Research Agency to a private equity group, an MPs' committee said yesterday.
The National Audit Office has calculated that the taxpayer lost out to the tune of £90 million 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 firm 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 yesterday's report by the Commons public accounts committee (PAC).
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 £55 million reduction in its £374 million offer after being appointed preferred bidder. But the MoD nevertheless agreed to sell the group 2.5 per cent more of QinetiQ than was specified in the bid.
The 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.
Edward Leigh, the committee chairman, said: "The privatisation of QinetiQ has been successful in protecting the viability of this business of strategic importance to UK defence interests. But the MoD conducted the deal like an innocent at a table of cardsharps, with the taxpayer the fall guy losing out on nearly £100 million.
"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.
"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 ten 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.
"Their behaviour does not fill me with confidence that QinetiQ can be relied upon to advise the MoD on what military equipment to buy, if QinetiQ is increasingly in the game of supplying that equipment.
"The department must be vigilant to guarantee the impartiality of QinetiQ's advice."
Baroness Taylor, the minister for defence equipment and support, said:
"I do not accept the PAC's conclusion that a further £90 million could have been achieved from the sale. This is pure speculation, and fails to take into account the realities of what could be achieved in negotiation.
"The Ministry of Defence 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," she added.
BACKGROUNDAT THE date of the flotation of QinetiQ in 2006, the top ten managers held shares worth £107 million for an investment of just £540,000 – making £200 for every £1 invested, compared with £9 for the taxpayer.
The Public Accounts Committee yesterday 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 generated £576 million in proceeds for the taxpayer, but the report said that the MoD should have obtained £90 million more from the sale to Carlyle.
