Annex C
Departmental Minute dated 8 July 2002 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 a share of QinetiQ
to be sold to a Strategic Investor, with the aim of completing
the transaction before the end of this year (2002).
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 the 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.
Following further analysis and detailed work
with specialist advisers, the proposed final allocation of liabilities
was laid before Parliament in a Departmental Minute dated 4 December
2001. The Minute stated that QinetiQ would retain responsibility
for pre-vesting liabilities associated with environmental contamination
on sites where the freehold transferred to the company. This was
based on the assumption that QinetiQ would be able to obtain commercial
insurance in relation to these liabilities. However, following
extensive discussions with insurers, it became apparent that cover
was not available on reasonable terms for certain environmental
liabilities which sit outside the category of normal business
and arise from the unique nature of the work DERA undertook for
MoD. All risks relating to these historic activities had previously
been borne by MoD.
Rigorous analysis was subsequently undertaken
with specialist advisers to determine whether it would be better
value for these liabilities to be retained by MoD or for them
to be transferred to QinetiQ. This concluded that it would be
prudent for MoD to indemnify QinetiQ for some of the policy exclusions
relating to environmental contamination at former DERA sites where
it is reasonable to assume that contamination could arise from
past activities undertaken for MoD. Mod, therefore, proposes to
provide QinetiQ with a 20 year indemnity for environmental losses
incurred by the company in respect of the presence of certain
defined materials in or under any of the properties before the
company was vested on 1 July 2001. Due to the nature of the liabilities
and the period of the indemnity granted it is impracticable to
quantify them. The relevant legal documents detail the specific
environmental liabilities to which the indemnity applies and also
list the properties covered. The remaining exclusions are considered
typical business risks which would be best managed by the company,
and therefore not subject to a MoD indemnity. The Treasury has
approved this proposal in principle.
If the liability is called, provision for any
payment will be sought through the normal Supply procedure.
At the time this Minute was laid, 12 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 has taken longer than expected
due to the complex nature of the liabilities involved, coupled
with the difficulties in obtaining insurance cover on reasonable
terms. The need to formalise the new arrangements is a case of
urgency to end a period of uncertainty for both MoD and QinetiQ
and to provide a sound basis for the next stage of the transaction
process.
If, during the period of the 12 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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