Q251 Mr Williams: I was asking what sum of money you thought a large return would be. Succinctly, what at that stage would you envisage as a large return?
Sir John Chisholm: I did not have in mind a specific number.
Q252 Mr Williams: Then how did you know to go and ask for more?
Sir John Chisholm: Sorry?
Q253 Mr Williams: How did you know then to go and ask for more?
Sir John Chisholm: As I explained earlier on, the principal thrust in terms of the discussion with Carlyle was that more people should be engaged in it, and in order to bring more people into it we needed more flexibility in the equity scheme.
Q254 Mr Williams: So did you at that stage envisage a possible doubling of it?
Sir John Chisholm: I would have to say that that was not a specific number because I was not proposing any specific scheme at that time. I was merely addressing the issue that this was a different company from many of the other companies that they had done business with.
Q255 Mr Williams: But, you see, approaches were now made as a result of the wish to enlarge the sum and they were made before the decision on the final bid was being made. You are in a pretty cynical, hard-headed world when you are dealing with private equity firms. It looked very much like a nod and a wink to them, and they would just think, "Oh, well, this is it. This is how we get it". Did that thought not occur to you? Did it not occur to you that it might be unwise for yourself as a potential beneficiary to be helping to promote this line of approach?
Sir John Chisholm: Let me make two points. The first point is that at no stage after we had been asked to talk to Carlyle and Permira did we provide any advice to the Ministry of Defence as to the selection of a final preferred bidder, so there was no opportunity in those discussions they had with me for me to influence the final choice of a preferred bidder. That is just a matter of the schedule, the way the schedule worked.
Q256 Mr Williams: Did Carlyle in any way seek advice from yourself or your colleagues, since the first offer had been turned down or indicated as being inadequate, as to what you would have in mind?
Sir John Chisholm: They certainly asked us about the willingness of our management group to invest and they certainly asked us what type of scheme would be readily accepted.
Q257 Mr Williams: Yes, but we are talking about scale here. Did you give advice on what would be the level of equity that you would expect to have available to distribute?
Sir John Chisholm: They certainly asked us for that, yes.
Q258 Mr Williams: And what was your advice to them?
Sir John Chisholm: They asked for advice as to who were the key people and I provided at least an outline list at that stage as to who they might be, because the key discussion was around my feeling about who the key people were.
Sir John Bourn: So what you are saying is that they wanted to know how many people were going to be participating before they decided how much they would offer? Is that how it happened, or were the two running together?
Sir John Chisholm: It is clear that in order to make a final bid the bidder needs to know what he is bidding for.
Q259 Mr Williams: Yes, and that is exactly where I come back to the nod and the wink again. How did they eventually arrive at the figure they offered or were they told that would be acceptable to QinetiQ?
Sir John Chisholm: No, no. It was not a question of being acceptable to QinetiQ because QinetiQ, as I have just explained, did not have a further voice in that selection. What they were doing was a professional job of designing their principal tool for the achievement of their end, and indeed the other shareholders' end, of increasing the shareholder value. Private equity companies do not manage the business themselves. They (a) select a management team and, as I have said, they were engaged in that process by talking to me, and (b) they design an equity scheme which in their experience achieves the best result in creating value for the shareholders.
Q260 Mr Williams: I do not want to go over ground that has been covered before so I am going to leave you alone for a moment now and switch to Warburg, because Warburg, I think, cost the Government a lot more than you and your colleagues did. First of all, when they came back asking for the £13 million reduction it turned out they had not taken into account the tasking cash flow. That was not taken into account at all, which was rather remiss of them, and the NAO comments that it could have made a significant difference in value, and similarly they seemed to do the same in relation to capital expenditure where they assumed that the capital expenditure was going to be met out of contractual cash flows; they did not take into account the option of the much cheaper and more widely spread option of debt which was available. These two cost a great deal of money, more than, as I say, the executives cost the department. Why were Warburg so remiss in two areas, both of which the National Audit Office said were errors that could have made a significant difference?
Mr Jeffrey: I do not think the NAO's conclusion is that these were errors. What happened was that the Carlyle bid assumed that the long term partnering agreement would generate £30 million profit a year by a predictable income stream. They argued that because that assumption was not, as the LTPA was coming out, going to be well founded. It reduced the contract value by between £43 million and £76 million. UBS/Warburg agreed that there was a material reduction which could be expected to result in a reduction of proceeds to the MoD and there was then a negotiation in which we reduced that reduction to £30 million, of which £11 million impacted on the proceeds of the sale of the minority stake. It was a rational part of the process and it is not so very unusual for these final stages to involve negotiations of that sort.
Mr Williams: But there were two oversights, and I am not asking a further question, and the National Audit Office observed in both cases that it made a considerable difference to the sum and that that comes to vastly more than the £30 million which is already admitted from the one cause alone. I will leave it at that now.
Chairman: That concludes our hearing, but obviously the National Audit Office will have to work on this further in preparing our draft Report for us. For a key part of this hearing, of course, Sir John is going to rely on just how much more the Government could have got for this business in light of the fact that an extra 2.5% was sold for £3 million and this was worth £27 million to the flotation. I do not normally ask the National Audit Office to do further work again, period, but there is no time now to ask questions and I think this could be reflected in our draft report. Thank you very much, gentlemen.