Summary

Summary

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QinetiQ was created out of the Defence Evaluation and Research Agency (DERA) in 2001 as a means of addressing the declining defence research budget, which threatened DERA's ability to maintain its capability. As well as carrying out research for the Ministry of Defence (the Department), QinetiQ advises the Department on the procurement of equipment and manages the testing and evaluation of this equipment.

QinetiQ was privatised in two stages: the sale of a minority stake in the business to the private equity firm the Carlyle Group (Carlyle) in 2003; and a flotation on the London Stock Exchange in 2006. The Department conducted the flotation well in a strong market and used the experience and expertise of the Shareholder Executive to good effect. There were however weaknesses in the 2003 sale process, and the National Audit Office have estimated that the taxpayer could have received £90 million more from the privatisation.

The Department began the competition for a strategic partner when market conditions were poor and before the terms of QinetiQ's most significant contract had been agreed. It also eliminated the only trade bidder at a very early stage. These decisions weakened the competitive process for selecting a strategic partner, and Carlyle negotiated a £55 million reduction in the value of the business after they had been appointed preferred bidder. The Department nevertheless agreed to sell Carlyle 2.5% more of QinetiQ than they had specified in their bid.

The Department failed to manage specific risks relating to the management incentive scheme established as part of the privatisation. The Department relied on Carlyle to design the incentive scheme but did not put safeguards in place to protect its interests, nor did it take specific professional advice. QinetiQ's management were consequently able to influence the design of their incentives before Carlyle were appointed preferred bidder. At the date of the flotation the top 10 managers held shares worth £107 million for an investment of just £540,000.

The privatisation of QinetiQ was successful in protecting the viability of a business of strategic importance to UK defence interests. QinetiQ has balanced the decline in the research budget with revenue from other sources and has successfully expanded into the US defence market. There are, however, risks to the long-term value for money of the privatisation arising from the Department's ongoing relationship with QinetiQ. The Department envisaged that the privatisation would deliver reduced prices and improved services and will need to develop robust benchmarks to ensure it realises this aspiration. The firewalls intended to protect the independence of QinetiQ's advice require active monitoring to ensure they are operating effectively.

On the basis of a report by the Comptroller and Auditor General,1 the Committee examined the Ministry of Defence, Shareholder Executive and the Chairman of QinetiQ on the process by which QinetiQ had been privatised and the lessons that can be learned for future privatisations.