Q21 Chairman: Yes, please, that is only fair.
Sir John Chisholm: The NAO Report itself says that if the company had not achieved a 20% return at least then the management team would have lost their whole investment.
Q22 Chairman: But was there any doubt that you would achieve this? Surely, not for a second did you doubt that with this secure contract from the MoD you would not achieve this. Are you seriously suggesting that you ever thought your £100,000 was at risk?
Sir John Chisholm: The major document which was produced to support this element of the privatisation was a long form report produced by the reporting accountants and in that Report the top four issues, it says, were: "MoD revenues will go down. QinetiQ trying to penetrate markets in which it has no experience. Revenues will be unpredictable. Risks will increase". There was a considerable sense of risk at the time.
Chairman: That is your point of view, fair enough.
Q23 Mr Touhig: I was a minister for part of the time, although I had no direct responsibility for the Ministry of Defence, and as you point out, Mr Jeffrey, you were not there for most of the time either, you came in almost at the tail end, however you are here to answer for the Department. It is clear from the Report that the MoD did not want defence manufacturers involved in this bidding and the only trade bidder was SERCO but they were ruled out after opposition by QinetiQ. Do you think you should have allowed that?
Mr Jeffrey: They were ruled out, Mr Touhig, and this was again consistent with the financial advice the Department was receiving, on the basis that their bid was weaker than those of others.
Q24 Mr Touhig: But QinetiQ opposed them, did they not?
Mr Jeffrey: I think they may well have done but that was not the reason they were ruled out. The view that was taken within the Department was that the SERCO bid did not adequately address how potential conflicts would be dealt with.
Q25 Mr Touhig: Here is a company, Mr Jeffrey, about to be privatised and you are allowing it to have the lion's share in the say of who should be the successful bidder. Do you think that is healthy?
Mr Jeffrey: I would question if I may the premise of your question. It is not my impression looking back into this that that was the story of SERCO not having their bid advanced.
Q26 Mr Touhig: Little was done to give them a chance to mount an effective bid because it was opposed by QinetiQ.
Mr Jeffrey: There was a discussion with SERCO at the time about the extent to which the bid might advance but the reason was not that QinetiQ was opposing it, the reason was the one I have given.
Q27 Mr Touhig: It came down to two bids in the end, Permira and Carlyle. Permira would have wanted to appoint a new chairman. Carlyle became the preferred bidder and QinetiQ certainly did not support Permira, did they?
Mr Jeffrey: I cannot recall whether they supported them or not, but, again, the reason for favouring Carlyle over Permira was that it was a more attractive bid, including financially, and when the two companies were given an opportunity to improve their bids Carlyle did and Permira essentially did not.
Q28 Mr Touhig: Out of those two bids, Permira and Carlyle, QinetiQ opposed Permira, yes, and Carlyle became the preferred bidder aided and abetted by QinetiQ's management who then went on to make a substantial fortune as a result.
Mr Jeffrey: First of all, I think it is worth bearing in mind that at an earlier stage what became QinetiQ management were opposed at one point to the involvement of Carlyle in the competition. I think underlying your question, Mr Touhig, is a sense that what became the QinetiQ management were unduly influential within the Department and that is not my sense, I have to say, because there was clearly a good deal of care taken to establish teams that supported-
Q29 Mr Touhig: The Report tells us, Mr Jeffrey, that the QinetiQ board had an active role in evaluating the bids and they played a substantial part in the Department's decision not to involve Permira but to involve Carlyle. The result was that Carlyle were then the successful bidder and they were aided and abetted throughout by QinetiQ.
Mr Jeffrey: They played an active role in the sense that their views were taken and I think it is quite reasonable that as those who would have been working with the private sector partner their views should have been taken. Their contribution was by no means decisive and a good deal of care was taken within the Department to ensure that advice that went to ministers came from a completely separate team reporting to the then finance director.
Q30 Mr Touhig: You see our concern, because one of the first things that Carlyle did when it became the preferred bidder was to change the planned management incentive scheme following representations from the QinetiQ Board. The outcome of this, as the Chairman has pointed out, was that top management got almost a 20,000% increase on the return on their investment. Sir John, that is not so much the unacceptable face of capitalism as the unacceptable face of greed, is it not?
Sir John Chisholm: I do not accept that, no.