3.4 The Shareholder Executive30, formed in 2003, seconded an individual to the Department to manage the Government shareholding in QinetiQ jointly with the Department. This strengthened the team responsible for the eventual flotation of QinetiQ. The Department recognised that whilst the interests of Carlyle were broadly aligned with its own in terms of growing QinetiQ's business, it was important to protect the Department's specific interests in any flotation. The Department staffed the team with people who had been directly involved in the creation of QinetiQ so that this experience was not lost.
3.5 The Department successfully protected its interests by planning for an early flotation. For QinetiQ to be marketed as a successful growth story its financial results had to support this. Following good growth in 2004-05 the Shareholder Executive and the Department examined three broad options for a flotation:
■ as soon as practicably possible, by November 2005 at the earliest but up to February 2006, to capitalise on the favourable markets;
■ June or July 2006, following the publication of another year's financial results; and
■ after February 2007: following this date a decision on the timing would fall to Carlyle alone under the PPP contract.
3.6 Although it was recognised that waiting until after March 2006 would better demonstrate the growth potential of the business following the publication of the 2005-06 annual report and accounts, the Department chose to float the business as soon as possible. This decision was made to take advantage of the favourable market, to preserve the Department's control over the timing of the flotation, and with the knowledge that an early flotation would enable QinetiQ to develop its business strategy more rapidly. The Department agreed with Carlyle that both parties would sell down their shareholdings pro rata, thereby ensuring the continuing involvement of Carlyle in the business and adding credibility to future expectations of QinetiQ.31
3.7 The Department conducted a thorough analysis of the risks associated with reducing its shareholding in QinetiQ, recognising that this would significantly reduce its influence. Although the Department felt that the future provision of critical test and evaluation services was well protected under the Long Term Partnering Agreement contract, it took steps to ensure that it would not be overly reliant on QinetiQ in other areas. The programme to award a higher proportion of the defence research budget through competition is aimed at improving value for money and will eventually reduce the Department's reliance on QinetiQ. In recognition of this, the Department put in place measures to lift the restrictions on QinetiQ engaging in defence manufacturing work from April 2008. The Department created a Customer Group to monitor and advise on dependency issues and develop mitigation strategies if necessary. The Department has also retained the right to appoint a non-executive director on the Board of QinetiQ32 although it will lose this right if its stake in the business falls below ten per cent.
3.8 The special share established when QinetiQ was formed in 2001 (see paragraph 1.23) was reviewed and amended in light of the planned flotation. There were changes to the powers of veto granted under the share so that so that they also covered the ownership of QinetiQ shares. Broadly these extensions give the Department the right to:
■ require the disposal of some or all of shareholdings of three per cent or more of QinetiQ where the shareholding would be contrary to the defence interests of the UK; and
■ require any shareholder that has a material conflict of interest, such as through its involvement in defence manufacturing, and owns ten per cent or more of QinetiQ to dispose of shares so that it holds less than ten per cent of QinetiQ.
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30 The Shareholder Executive was created to fundamentally improve the Government's performance as shareholder in wholly and partly Government owned business.
31 Carlyle subsequently announced the sale of their remaining shares in QinetiQ on 8 February 2007.
32 This role is currently fulfilled by Mr Colin Balmer.