Q241 Nigel Griffiths: When Lord Moonie reminded the public that the Government had indeed shared in the rising value of the company was he referring to number 15, page 8, that 112% on the investment was the internal rate of return to QinetiQ and that 99% (not far short of 112%) was achieved by the department?
Mr Jeffrey: He may have been. The only reason for the difference between the 112% and the 99% goes back to the slightly contentious point about departmental costs that we were discussing earlier. He may also have been referring to the fact that, as this stands at the moment, as I said earlier, the proceeds from the various sales have already amounted to £578 million and we retain a share which is currently estimated as being worth around £235 million, so there is potentially a very substantial benefit for the taxpayer in this whole episode.
Q242 Nigel Griffiths: When the Report says in Part Three, "The Department executed the flotation well and achieved a good price", do you believe that a better price might have been achieved if this were to be, with hindsight, done in 2007?
Mr Jeffrey: I do not believe so. I, as it happens, was around at the time, although only just, and I think those who made the judgment to go to market early in 2006 got the market about right and got a very good price for the shares, which has since then been sustained. It has neither, as Mr Williams remarked earlier, shot up, which suggested we sold cheap, nor is it depressed.
Q243 Nigel Griffiths: When it says in Part Four, "It is too early to be able to assess authoritatively if some of the objectives have been met", what have you got in place with the company to measure objectives? When do you think we will be able to see a report that shows whether objectives have been met or not?
Mr Jeffrey: I think what has been happening in recent times is the gradual, if you like, normalisation of the relationship so that our relationship with QinetiQ is closer to the kind of relationship that we have with all suppliers in this sector. We have certainly been discussing with them the nature of the safeguards that need to be there to protect against any question of conflict of interest where they are giving us independent advice as well, and we have recently been auditing internally exactly how these arrangements work, so it is a developing relationship and the way I would characterise it is that from a starting point where this was just any old part of the department we are going into a mature relationship with a company that is playing a significant part in the British defence sector.
Q244 Nigel Griffiths: In paragraph 3.9 it says: "The process for appointing advisors for the flotation was robust". You must take some pride in that.
Mr Jeffrey: I think it is a fair reflection of what happened.
Q245 Nigel Griffiths: And, more importantly to all of us, when the department put in place measures to safeguard the UK defence interests, again, do we have to await the verdict of history on that or do you have evidence that UK defence interests have been effectively safeguarded?
Mr Jeffrey: I think the relationship at the moment is working in such a way as to safeguard defence interests, although, for the kind of reason that Mrs Browning was hinting at earlier, we need to keep an eye on this very carefully.
Q246 Nigel Griffiths: Sir John, I mentioned earlier paragraph 2.1 which was the cut in the budget for research which fell by over 40%. What is the present figure? Do you have one?8
Sir John Chisholm: I do not have a figure for the Ministry of Defence research budget today because I am no longer involved at that level.
Mr Jeffrey: We can provide one. It is one of the issues that I have been looking at in the context of our overall judgments about financial plans over the next few years. I certainly think that maintaining the level of MoD investment in science and technology generally and research in particular is very important. As a matter of fact, over the years when this was happening it was declining. My recollection is that in real terms it flattened out after that period of decline.9
Mr Woolley: I think the challenge for QinetiQ has not simply been the decline in the overall value of the research budget but also the fact that it has been progressively open to competition where previously it was virtually assigned to the old DERA.
Q247 Nigel Griffiths: Do you think it is a fair summary of this Report that greater proceeds might have been achievable from the sale to a strategic partner, page 35?
Mr Jeffrey: I think it is very hard to judge. That is why I have been a little non-compliant in this session. I think four or five years after the event there is an argument, and the NAO Report expounds it, to the effect that we could have got more from this. It was a complicated sequence of negotiations in which properly equipped financial advice was taken at each stage, and I am very reluctant myself to conclude that it produced a sub-optimal result, but clearly it is a matter of opinion.
Q248 Mr Williams: Sir John, may I make it clear I am not in any way suggesting that you are a dishonourable man. What I do think is that you may be someone who is out of his depth in the rather cynical world of private equity. Can you tell me, when was the issue of equity for executives first raised? Was it raised early on? Was it raised by your side or was it raised by the bidders?
Sir John Chisholm: All the bids had a section of their bid which talked about equity for staff and managers.
Q249 Mr Williams: So that was envisaged as being something that was to come?
Sir John Chisholm: Yes.
Q250 Mr Williams: Following on what Richard and Austin have referred to, paragraph 2.2, you told the NAO that you were concerned about the potential risk of management making large returns from the involvement of private equity investors. What at that stage did you envisage to be large returns? What did you have in mind? What led you to issue that warning?
Sir John Chisholm: That warning was in the context of the debate over whether the route to market should be through private equity or through a direct flotation. That was the context of that debate and I would not have had a number at all in my mind. I would merely be relating to the perverse issue I discussed early on, that the management team would be employed to create as much value as they possibly could and eventually, if they were successful, that would raise exactly the debate we have been having today.
The Committee suspended from 6.54 pm to 7.00 pm for a division in the House
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8 Note by witness: The Department's spending on research for 2007-08 is approximately £630m. This figure includes the Science, Innovation and Technology (SIT) budget as well as some of the other research activities carried out in the MOD as defined by the OECD Frascati guidelines (the Frascati guidelines provide a point of reference for the definition of research and development and its outputs).
9 Note by witness: The Department's spending on research for 2007-08 is approximately £630m. This figure includes the Science, Innovation and Technology (SIT) budget as well as some of the other research activities carried out in the MOD as defined by the OECD Frascati guidelines (the Frascati guidelines provide a point of reference for the definition of research and development and its outputs).