Annex A
Departmental Minute dated 4 December 2001
concerning the Ministry of Defence's Agreement with QinetiQ on
the allocation of pre-vesting liabilities
It is normal practice when a government department
proposes to undertake a contingent liability in excess of £100,000,
for which there is no specific statutory authority, for the department
concerned to present to Parliament a Minute giving particulars
of the liability created and explaining the circumstances; and
to refrain from incurring the liability until 14 days (exclusive
of Saturdays and Sundays) after the issue of the Minute, except
in cases of special urgency.
As outlined in Statutory Instrument 1246/2001
(made on 28 March 2001), the Defence Evaluation and Research Agency
(DERA) was renamed the Defence Scientific and Technology Laboratory
(Dstl) and concurrently net assets with an estimated value of
£384.5 million were removed from the Trading Fund. These
net assets were passed to a newly created company, QinetiQ, in
return for a consideration to the Ministry of Defence (MoD) of
shares and debt in the company. The company is currently 100%
owned by the Government. Current planning is for QinetiQ to be
sold as soon as its potential is judged to be suitably developed,
probably in 2002. A decision will be taken in the New Year on
the timing of, and route to, a transaction.
The former DERA, as a Trading Fund Agency of
the MoD, generally did not have commercial insurance. When the
majority of the Agency was vested as QinetiQ on 1 July 2001, there
arose a requirement to determine which organisation should take
responsibility in respect of individual pre-vesting liabilities,
which were incurred on behalf of the MoD but transferred to QinetiQ
on vesting. As a business is complex, the MoD, acting as a prudent
vendor, and QinetiQ undertook a detailed analysis, in conjunction
with insurance advisers, to determine the most cost-effective
way to allocate and manage these historic liabilities. This was
conducted according to a process and criteria set out in the original
Business Transfer Agreement signed on 1 July 2001.
The analysis took into account the extent to
which such liabilities could be transferred to the private sector
as part of any subsequent PPP transaction, the ability of each
party to effectively manage risks in the future, and overall value
for money to the taxpayer. In order to provide sufficient time
to complete a full and rigorous analysis MoD issued QinetiQ with
a six month limited temporary indemnity under which the Crown
accepted responsibility for certain liabilities arising after
the inception of the Trading Fund in 1993. This temporary indemnity
was laid before Parliament in a Departmental Minute dated 25 June
2001.
The analysis has now been completed and its
results have helped determine how liabilities are to be apportioned
between MoD and QinetiQ and informed agreement on insurance cover.
The Department's independent insurance advisers concluded that
the loss of capacity within the commercial insurance market following
the attacks on the 11 September effectively ruled out insurance
as a risk management option for the various categories of liabilities
as the market was unable to offer terms that represented acceptable
value for money.
It is proposed that QinetiQ will retain responsibility
for the following categories of pre-vesting liabilities: aviation,
employee accidents (except for personnel previously employed within
DERA but who did not transfer to QinetiQ for whom MoD retains
liability), intellectual property infringement, product liability
and environmental contamination on sites where the freehold transferred
to QinetiQ.
For third party claims from commercial work,
liability remains with QinetiQ except that relating to transferred
contracts which were signed before vesting on 1 July 2001 and
which have been completed, or which are currently due for completion
on or before 30 June 2002 where MoD will indemnify QinetiQ (subject
to £250K annual excess). In the case of employee disease,
MoD will indemnify QinetiQ except where exposure to harm spans
vesting, in which case MoD and QinetiQ will share in proportion.
For personnel not transferred to QinetiQ, MoD will retain liability.
For public liability, MoD will indemnify QinetiQ unless liability
arose solely from work on a commercial contract or where exposure
to harm spans vesting, in which case MoD and QinetiQ will share
in proportion.
The Department retains any liabilities prior
to 1993. If the liability is called, provision for any payment
will be sought through the normal Supply procedure.
At the time this Minute was laid, 10 days remain
before the Ministry of Defence wishes to enter into these arrangements.
Regrettably the Department has been unable to submit the Minute
in sufficient time to fulfil the normal requirement of 14 days.
This is because the analysis required to determine the apportionment
of liabilities and assess the availability of insurance cover
has taken longer than expected due to the complex nature of the
liabilities involved, compounded by the impact on the insurance
market of the events of 11 September. The need to formalise the
new arrangements is a case of urgency. Because of the Christmas
recess, the full 14 days would take us to 11 January 2002. To
wait until then would risk a period of uncertainty for both MoD
and QinetiQ, particularly in respect of claims handling. The alternative
would be to seek to extend the temporary indemnity, which would
result in an extension of the liability upon MoD.
The Treasury has approved the proposal in principle.
If, during the period of the 10 days (exclusive of Saturdays and
Sundays) beginning on the date of which this Minute was laid before
Parliament, a member signifies an objection by giving notice of
a Parliamentary Question or by otherwise raising the matter in
Parliament, final approval to proceed with incurring the liability
will be withheld pending an examination of the objection.
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