Q61 Mr Curry: Mr Jeffrey, I suppose that if anybody in the press was going to be sympathetic to your case it would probably be the Financial Times, would it not?
Mr Jeffrey: I would not care to speculate.
Q62 Mr Curry: I am just looking at the leader of Friday 23 November-I used to work for them a long time ago-which begins: "If this is how the Government manages privatisation perhaps we should be grateful that it has carried out so few. The Report from Parliament's public spending watchdog into how the Ministry of Defence privatised QinetiQ, the defence technology business, shows a department out of its depth". Do you think the FT have got that wrong?
Mr Jeffrey: I do. I go back to the point I have been making rather repetitively, I feel, in this hearing, which is that in my view it is important to step back from this and look at the whole strategy and the whole sequence of events. The whole sequence of events is one that has led to the growth in the value of equity in the company from £125 million at the time of the sale to £1.3 billion at the time of the flotation, the Government's share going from £80 million to over £600 million and proceeds to the taxpayer already close to £600 million with a retained stake of over £200 million. I do not think that is as bad a story as the FT is making out.
Q63 Mr Curry: One could add to that, could one not, annual internal rate of return for the Carlyle Group 112%, annual rate of return for the British taxpayer 14%?
Mr Jeffrey: One thing I would have liked to have said earlier on, Chairman, was that I very much regret that this is not an agreed Report, and I think the Comptroller and Auditor General does as well, but we do not accept that 14% figure is a valid comparison.
Q64 Mr Curry: If you look at the share price, people might have done quite well out of the dividends but the share price itself has absolutely plateaued, has it not?
Mr Jeffrey: You mean the share price since flotation?
Q65 Mr Curry: Yes.
Mr Jeffrey: I think it has been fairly steady since the flotation.
Q66 Mr Curry: By that you mean it has not gone up, do you not?
Mr Jeffrey: Sir John is probably more familiar with the detail of that.
Mr Woolley: We would certainly have been open to criticism if the share price had rocketed up after we sold our stake in it.
Q67 Mr Curry: You said, Mr Jeffrey, and I accept that you were not there at the time, that you had to go back in the process. My concern is not at the end of the day who made what out of it, it is the point at which those decisions were taken. There are two key things which give me particular concern. The first is that the preferred bidder was identified before the very, very price sensitive issue of the Long Term Partnering Agreement was settled, and the second is that the incentives were discussed before Carlyle became the preferred bidder and, indeed, the incentives led to what turned out to be a remarkably generous ratchet scheme, perhaps even more generous than Carlyle anticipated it might turn out with the over times four figure and no professional advice was taken on those incentives. Do you think even with the benefit of hindsight that I am wrong to be feeling slightly queasy that the preferred bidder was identified with, if you like, the relationship between the Government as procurer and the company to be settled and the incentives were discussed before Carlyle became the preferred bidder leading to the inevitable suggestion that the people who would benefit from the incentive scheme and would be giving the advice on the acceptability of the bid might, whether they intended to or not, be capable of being perceived as having a conflict of interest?
Mr Jeffrey: There are three points on that, if I may, Mr Curry. First of all, when the preferred bidder was identified another bidder was kept in play as reserve, so it is not true to say there was only one. Secondly, it is not unusual as one gets to that stage in a competitive process of this sort for there to be some unresolved issues which have a bearing on the eventual price, and it is not unusual for the preferred bidder to expect to have a chance to negotiate these issues with the seller. As far as the timing of the Carlyle discussions with QinetiQ senior management, I do not think it was an unreasonable or improper thing for Carlyle to be doing given that senior management knew the business and knew who was critical in growing it. There may be a point about timing, and that is one which the NAO has made a recommendation on, and it is a recommendation that we and the Treasury will be looking at because it may have implications for wider government. The final decision on the scheme, as I have said, was for Carlyle. I am sure they took account of what QinetiQ management were saying, but in the end they are hard-headed business people who made a judgment on what incentivisation scheme was likely to work for them and for us.
Q68 Mr Curry: If we look at that incentivisation scheme, we have the business of the ratchets so that if the business was grown by three times then the incentive went from 3.9% to 6.67% of the business and if it was grown by four times it went to 9.18%, so each time it more or less doubles. Did any alarm bells ring in the Ministry of Defence when that was being negotiated in saying, "Does somebody think this business is actually going to do a great deal better than perhaps we think and, therefore, should we be looking at the price? Should we get some external advice on that?" In fact, the times four was triggered which is why 20% of the company is now owned by people who work for the company.
Mr Jeffrey: As I acknowledged earlier, the eventual growth in the company was significantly greater than at this stage I judge anybody was expecting. I acknowledge that without hesitation.
Q69 Mr Curry: If you do a classic PFI then of course there is a preferred bidder and, you are quite right, some details are not finally worked out before the preferred bidder, but this is rather different, is it not? This is a preferred bidder for a business which has got apparently huge potential and clearly there was a huge amount of unrealised capability in that business which the privatisation was intended to realise, but the management must have known that because the incentive scheme appeared to be very optimistic about what could be delivered.
Mr Jeffrey: Sir John can speak for himself, but my sense is at the time no-one expected that the growth of the value of the business would be quite as great as it turned out to be.
Q70 Mr Curry: Even Carlyle, I think, because they lost holdings.
Mr Jeffrey: You might say that should have led us to place a cap on the extent to which executives should-