Q1 Chairman: Good afternoon. Today we are looking at the Comptroller and Auditor General's Report into The Privatisation of QinetiQ. We welcome back to our Committee Mr Bill Jeffrey, who is the Permanent Under Secretary of the Ministry of Defence, and Peter Schofield, who is the Director from the Shareholder Executive, and also Sir John Chisholm from QinetiQ. Perhaps you might introduce your other colleague.
Mr Jeffrey: My other colleague is Trevor Woolley who is the Finance Director at the Ministry of Defence.
Q2 Chairman: Thank you very much. Perhaps we could start, Mr Jeffrey, by looking at paragraph 2.2 of Sir John's Report, which tells us that Sir John Egan, QinetiQ's chairman at the time: "told us that the poor markets presented an opportunity to get the business in shape ahead of privatisation and could not see what value could be added by private equity houses or the trader partners who were likely to bid." That leads me, Mr Jeffrey, to ask why did you not take up Sir John's advice at the time. Why did you not get this business into shape in the public sector first rather than selling a stake in QinetiQ in 2003? If you had got it into shape in the public sector first and then privatised it you might have avoided Carlyle profiteering at the expense of the taxpayer.
Mr Jeffrey: I think it is matter of judgment, Chairman. The judgment the Department reached at the time, which the NAO endorses, was that it was not right to go straight to flotation.
Q3 Chairman: Why not?
Mr Jeffrey: Because at the time the market and the market's knowledge of DERA, as it then was,-
Q4 Chairman: I was not suggesting it should have gone straight to flotation, what I said was why did you not take up Sir John's advice to get the business in shape in the public sector.
Mr Jeffrey: The judgment at the time was that it was unlikely to achieve that within the public sector and the best way to grow the value of the business was to introduce a strategic partner from the private sector. The result in terms of the benefits to the taxpayer a few years later, I would argue, tend to vindicate that judgment.
Q5 Chairman: We can certainly accept for the sake of this hearing that the taxpayer did make a profit. I think the purpose of this hearing is to establish whether the taxpayer could have made much more of a profit. We will go on pursuing this, we have got all afternoon. Let us now look at paragraph 1.7 which tells us that: "The inclusion of a £250 million receipt in the 1999-2002 Comprehensive Spending Review had the potential to create pressure for the PPP to be completed by the end of the financial year in March 2002." How did this Treasury earmarked £250 million affect the timetable? I suspect that this may have pressurised you into rushing the sale.
Mr Jeffrey: I do not believe it did. I have looked at the papers on this to a certain extent and I have found no evidence within the Department that people felt they were being rushed in any way about this. It is also the case that there was a specific understanding, as the Report brings out, with the Treasury that if the introduction of the public-private partnership did slip into the year 2002-03 then it would still be credited to the Department's budget in 2001-02. I do not think there is evidence there that the Department was operating under that sort of pressure.
Q6 Chairman: Let us look at the heart of this which is summarised in paragraphs five and six. It tells us in paragraph six that: "After Carlyle were appointed preferred bidder they negotiated a reduction in the value of the business of £55 million". So why would did you not settle the terms of this Long Term Partnering Agreement between QinetiQ and the MoD before starting these sales? Would that not have been wise? The fact that you had not settled it meant that you were really in a very weak bargaining position with Carlyle and, indeed, this was precisely what happened.
Mr Jeffrey: The initial Carlyle offer, certainly in terms of the financial advice the Department received at the time, was not such that as we came to settle the Long Term Partnering Agreement it was unreasonable for the company to expect some recognition of the impact of that agreement. I think the position the Department was in at the time was that there was a risk in concluding the agreement more quickly than was sensible. There was a risk also, and that was certainly the view of our financial advisers, in delaying the sale of the minority stake in the business. Those responsible at the time did their best to balance these risks.
Q7 Chairman: You are not surely suggesting to this Committee are you, Mr Jeffrey, that if you had not got into bed so quickly with Carlyle you would not have got a higher price? The fact is you got into bed with them too quickly, your arm was forced and, frankly, you could have got a lot more. You are not denying this, are you? Are you seriously suggesting to this Committee that you got the best price you possibly could have got?
Mr Jeffrey: What I am saying is that there was a properly conducted process. It involved eliciting bids which were properly considered. They were reduced and the ones that were discarded, the NAO accept, were weaker. We then reached a point where there were two and they were invited to bid and the result was the one that was reported in the Report.
Q8 Chairman: I have got to move on, others will come back to that. Let us look at this incentive scheme. Let us look at paragraph 2.15, shall we. Halfway down it says here: "Carlyle should revise their offer to include a three-tier structure to encompass middle managers. The Chief Executive", that is Sir John, "also expressed the view that the 10% of equity offered by Carlyle was low…" You allowed Carlyle and QinetiQ to sort out the incentive scheme between them, did you not?
Mr Jeffrey: Chairman, one has to recall the basic strategy that was being pursued. As we have said, it was not to float the whole enterprise immediately, to introduce a strategic partner from the private sector that had the expertise to develop the business and to give that partner only a minority stake so that the taxpayer could share in any growth of the business. Given that we were doing that, the view that was taken was that it was reasonable to leave the design of the share incentive scheme to the strategic partner. That is what firms like Carlyle are expert in.
Q9 Chairman: What was the result of this? "Bidders initially intended making just 10% of shares available to management". Carlyle, because you had such a light touch on this, doubled their proposal from 10% to 20%. Why did you agree to this?
Mr Jeffrey: In the end it was Carlyle's judgment. They are the experts in incentivising-
Q10 Chairman: That is precisely my point.
Mr Jeffrey: They had no incentive to make the scheme more generous than this.