Q81 Geraldine Smith: Carlyle was also given the opportunity to bid for additional shares which they got for £3 million which later went on to be worth £27 million. Why was that?
Mr Jeffrey: This was a judgment made at the end of the process for reasons that the Report explains in relation to the value of the bid having reduced to take account of the deficit in the pension fund and reduction in the value of the Long Term Partnering Agreement. Both of these tended to reduce Carlyle's stake in the business. The view that was taken was that an additional 2.5% of the business should be included in order to maintain the level of their stake. There is no magic in a particular percentage, but the sense at the time was that Carlyle needed to have a reasonable stake in the business to be incentivised to achieve the growth that was achieved.
Q82 Geraldine Smith: Do you appreciate how this looks to any man or woman in the street? It looks like there is a cosy little relationship between Carlyle and the senior managers who were agreeing and working with the bidder before they became the preferred bidder and working on their own incentive scheme which turned them into multimillionaires? It stinks. It looks terrible to anyone and I do not think you can justify it. I do not think you can justify an investment of £100,000 where you end up with £20 million, a civil servant. £20 million would do a lot in my constituency. For that sort of money to go to one individual goes way beyond an incentive scheme. The point was made earlier that there should have been a cap put on it. I would say that you have been completely irresponsible in not putting that cap on it.
Mr Jeffrey: I do see how this looks to members of the public, I understand that very well. Against that I would only put the points that I made earlier about the extent to which in combination this was a strategy that yielded very significant benefits to the taxpayer.
Q83 Geraldine Smith: Yes, but the point is could it have yielded more benefits to the taxpayer? Did your actions disadvantage the taxpayer? Yes, they did make money on it but could they have made a lot more?
Mr Jeffrey: I do not think it is possible to establish that we could.
Q84 Geraldine Smith: I think you could have a pretty good guess.
Mr Jeffrey: With great respect, I would disagree with that. The judgment is about how much this business would have grown if we kept it within the Department and with all the things that entailed and without the invigorating effect that a strategic private sector partner brought into the picture. It may well be that the yield could have been greater but I do not think one can say that with great confidence. I would argue that the overall strategy, starting with the sale of a minority stake and allowing that to build in value and then floated in a way that the NAO praises in a way that I cannot recall seeing in their reports recently was in the end successful.
Q85 Geraldine Smith: You spent £28 million on consultants getting ready for the privatisation. Can you tell me what the taxpayer got for that £28 million?
Mr Jeffrey: It was a range of advice, including the advice of financial advisers who were familiar with business of this kind, legal advice, and I have no reason to suppose that it was not properly incurred and properly audited at the time.
Q86 Geraldine Smith: But you did not bother getting any advice on the incentive scheme. You spent all that money on consultants but you could not spend a little bit more just getting a bit of advice on the incentive scheme for the senior managers and what would be fair and reasonable?
Mr Jeffrey: There was not separate specific advice taken. Our financial advisers helped us to model what the implications of the incentive scheme would be, but in the end, as I said earlier, it was a judgment taken for better or worse that the incentive scheme was something that Carlyle were best placed to assess.
Q87 Geraldine Smith: If your financial advisers helped you model what the incentive scheme should be, should you not be asking for your money back?
Mr Jeffrey: I do not think so. One can always argue about quality of advice but I have no reason to think that this was other than good, professional advice at every stage.
Q88 Geraldine Smith: I guess you can say that because it is other people's money you are spending. It seems there is a blasé approach to taxpayer's money in this Department. It is thrown around at consultants, £28 million. Carlyle must have thought all of their Christmases had come at once, along with the senior management.
Mr Jeffrey: I certainly would contest the proposition that the Department was other than mindful of the fact that it was dealing with public money here. I apologise for keeping coming back to this but one has to look at the proof of the pudding and the proof of the pudding was a very substantial and successful flotation of this company which gained the taxpayer approaching £600 million and we still hold a stake in the company which is worth the best part of a quarter of a billion. That is nowhere near the situation in which Carlyle approached this business and the prospects then were as I have described them: a bit of the MoD that was struggling to find its feet, if Sir John Chisholm would allow me to say so, and it was hard at that stage to say confidently that it was going to have a bright future.
Mr Woolley: I think it is right to say that this was a very complex deal, both at the private partnership stage and subsequently.
Q89 Geraldine Smith: It looks very simple to me, some of the outcomes.
Mr Woolley: There was a very complex need to separate the assets of the company from the assets of the Department. There were some complex contractual arrangements that had to be taken into account and the flotation itself was a complex process. Spending £28 million on consultants in order to generate a return of £850 million does not seem to me to indicate a cavalier way of dealing with the taxpayer's money.
Mr Jeffrey: If you will allow me to add one point. If you care to look at paragraph 1.16 of the Report, the NAO say that their review of the invoices and the correspondence shows that the Department monitored expenditure closely. There is no criticism of our handling of the consultancy side of this in the NAO Report.
Q90 Mr Davidson: I wonder if I could just start by asking you, Sir John, whether or not you are a Labour donor by any chance?
Sir John Chisholm: I am not a donor either in my own name or anyone else's!