Q11 Chairman: You have obviously read figure 19 on page 38. The top ten managers get a 19,000% increase on their investment and the ordinary workers get £9 back for every £1 they have put in, which I think is a perfectly adequate incentivising scheme. Let me put it this way: you are not suggesting you need a 19,000% return on your investment to incentivise you, are you? You are not going to come to this Committee and defend this. It would be much better just to apologise now and admit that you got it wrong.
Mr Jeffrey: What I am saying to the Committee is, first of all, I think everyone has agreed that the growth in the value of the company exceeded what was expected at the time and that did lead to these very high rewards for the executives in the company, but in the end --- If we had second-guessed Carlyle, who had been brought in order to grow the company, in order to improve its management, first of all, as the Report observes, there might well have been an impact on the price that Carlyle were willing to pay because these incentivisation schemes are a key element of what companies like Carlyle bring to the party. Of course rewards of quite that order were not foreseen. It might have been an option to place some sort of cap on it, but we need to recognise that if a cap had been placed on it, it might not have incentivised-
Q12 Chairman: It did not occur to you that this was the best deal of all time? It did not occur to you that this was a fantastic deal for whoever was buying it?
Mr Jeffrey: What I would say is if one looks at the whole course of events, one looks at the effect of the strategy of selling part of the company to start with and then hoping that the private sector partner would succeed with management in growing it, that strategy has been successful because it has brought very substantial gains to the taxpayer.
Q13 Chairman: But we believe that you should have got much more. Mr Schofield, here we have a conflict of interest within the MoD, both as shareholder and as customer, do you think you could have made a difference? Would you have made a difference?
Mr Schofield: As the Committee knows, we were set up in order to grow shareholder value. If we had been involved I think we would have added the same value that I hope we added in the flotation, which we were involved with. That is setting out very clearly an approach that is based on getting our objectives right, being very clear about what the Government's objectives are and being very clear where objectives compete against each other. We would have brought skills and experience in terms of managing transactions of this kind and we would have brought experience in terms of managing advisers.
Q14 Chairman: Do you not think it was a bit odd that defence manufacturers were barred from bidding, although at the time of flotation QinetiQ, hey presto, was allowed to carry out defence manufacturing work? Do you not think this was rather odd? If you had been involved, would you have done it this way?
Mr Schofield: We would have started by trying to be clear about what the MoD's objectives were in taking the transaction forward. I think it is very clear that the MoD were looking to maintain a source of impartial advice, which is the reason for the-
Q15 Chairman: Mr Jeffrey, I think you were just naïve babies in a sea of sharks.
Mr Jeffrey: I do not accept that, Chairman. I have looked at this myself, and it clearly predates my time at the Department, and I know that is not a relevant consideration for the Committee, but-
Q16 Chairman: Listen to what Lord Gilbert said, former Defence Procurement Minister. I am going to put this to Sir John, he is here to defend himself and his profit margin. One of the things Lord Gilbert said that irritated me, and that is a soft word, was: "Never once in my presence did Sir John Chisholm indicate that he might have a conflict of interest or was going privately to be enriched by what was going on". What do you say to that, Sir John?
Sir John Chisholm: I would say that never once in my presence did Lord Gilbert suggest he was against the policy of the then government.
Q17 Chairman: That is not an answer to the question I put to you. Is Lord Gilbert right in saying that: "Never once in my presence did Sir John Chisholm indicate that he might have a conflict of interest or was going privately to be enriched by what was going on"? Is Lord Gilbert right in saying that or is he making it up?
Sir John Chisholm: At the time that Lord Gilbert was in office there was not in prospect a private equity investor. Indeed, the plan was not private equity at that stage, it was institutional investment, so the whole issue of any management or staff shareholding was simply not discussed by anyone. It was not in the frame at that time.
Q18 Chairman: Yes, because you told the Defence Committee on 28 February 2001: "In regard to people who were already in the organisation, certainly when they have proved themselves successful they can expect to earn a reward but they cannot expect to earn it just because we have been privatised". What the public think is that it is frankly appalling. It goes totally against any concept of ethical capitalism, Sir John, that you can put £100,000 into a business and emerge with £25 million of taxpayer's money. Nobody from outside can understand it. Do you have any sense of shame here before us?
Sir John Chisholm: I have a considerable sense of having led a team to create £1 billion worth of value for the taxpayer. I think that is a great achievement by the team.
Q19 Chairman: Why should your poor staff get £9 for every pound they put in but you get £200 for every pound that you put in? Do you think that is fair?
Sir John Chisholm: I believe in any deal like this there was a contractual agreement put by the investor to the management team that had considerable risk for the management team at the time and they signed up to it.
Q20 Chairman: Why should your poor staff get £9 for every pound they put in but you get £200 for every pound that you put in? Do you think that is fair?
Sir John Chisholm: Can I answer that question?