11 The Department considers that privatisation has delivered excellent value for money on the basis that it has generated approximately £800 million for the taxpayer, net of costs (£576 million in cash proceeds to date and a 19 per cent stake in QinetiQ worth £235 million as at 31October 2007). The equity value of QinetiQ increased from £125 million to £1.3 billion as a result of the introduction of a strategic partner in 2003, despite difficult market conditions and the complexity of QinetiQ's business. The Department also considers that the process has established QinetiQ as a successful new British company and that it has provided a sustainable future for key defence capabilities and the employment of 13,500 staff.
12 Our assessment of the outcome in terms of value for money is mixed. The privatisation achieved a key objective of improving the viability of a business of national strategic importance by allowing QinetiQ to expand its business into the US and other civil markets. The measures put in place to protect defence interests at present appear to be working as intended. It is, however, too early to tell if all the Department's objectives in privatising DERA will be met.
13 We consider that more money might have been raised from the 2003 sale to Carlyle, which generated total proceeds of £155 million. The resulting business strategy, however, was instrumental in increasing the value of QinetiQ and the 2006 flotation maximised proceeds. In the long term, the value for money of the privatisation to the taxpayer will depend on a range of factors, such as the value for money of the Long Term Partnering Agreement and the continued availability of independent advice, as well as the proceeds received.
14 We have calculated that as at 31 October 2007 the Department made a notional internal rate of return4 of 14 per cent from the privatisation. This calculation uses the book value of QinetiQ on incorporation as an estimate of the Department's past investment in the business and takes account of the costs the Department has incurred throughout the privatisation and the value of the Department's remaining stake in QinetiQ; it does not attempt to quantify non financial benefits. The Department does not accept that the book value of QinetiQ at incorporation is a robust measure of the value of the business at that time and considers that it is not possible to derive an accurate estimate of the return it has achieved over the whole privatisation.
15 Carlyle made an internal rate of return of 112 per cent5 on their investment in QinetiQ. The internal rate of return achieved by the Department over the same period was 99 per cent.6 The Department's internal rate of return was similar to Carlyle's because both parties invested on the same terms at that stage. The Department, however, incurred significant costs during the 2003 sale.
_______________________________________________________________________________________
4 The internal rate of return (IRR) is the discount rate at which the present value of all cash flows will be zero; it is used to rank investment opportunities, the higher the IRR the more profitable the investment. For our analysis we have included the value of the retained shares of the Department as at 31 October 2007.
5 This is based on the price paid by Carlyle for their stake in 2003 and the subsequent proceeds received from the sale of this stake.
6 This ignores the receipts from the sale to Carlyle, assumes that the Department's initial investment in QinetiQ was equal to £78 million, the value of its shares in QinetiQ at that time, and includes the value of the retained shares of the Department as at 9 February 2007, the date Carlyle sold their remaining stake in the business; the Department's eventual return will depend on the value of these shares when sold.