Examination of Witnesses (Questions 120-139)
DR LEWIS
MOONIE MP, MR
COLIN BALMER
AND MR
MARTIN EARWICKER
TUESDAY 21 JANUARY 2003
120. No, Minister, let me finish and then you
may respond.
(Dr Moonie) I certainly shall.
121.—In which the Minute could be protested
against, if you like, and that included the days of the Christmas
recess. I think it is unfortunate that we were not given more
time.
(Dr Moonie) I am sorry, that is not the case. You
are allowed 14 sitting days in which to lodge an objection. By
lodging it on 17 December rather than on 8 January when we came
back I actually gave you nearly three weeks extra time in which
to decide whether to do something. I could have lodged that on
the day we returned and the closing date for objections would
have been exactly the same as it was.
122. That is not what the Table Office told
me.
(Dr Moonie) I am sorry, the Table Office is wrong.
123. The Table Office runs the House of Commons
but I accept what an official of the House of Commons—
(Dr Moonie) It is 14 sitting days. That is what the
regulation says, so you had two to three weeks extra in which
to lodge any objections, so did Llew Smith.
124. In the meantime Mr Balmer has very helpfully
come up with the figures I need.
(Dr Moonie) I had them as well but, as you say—
(Mr Balmer) If we look at all the cost elements over
the whole period of the process which began, as you will recall,
after the Strategic Defence Review of 1998, it will be of the
order of £80 million.
Chairman
125. £80 million; is that for DERA as well?
(Mr Balmer) That is a mixture of the MoD's own costs
which is about £19 million, primarily for advisers, financial,
legal, and others. In the DERA annual report for 2001 there is
a total of about £39 million, primarily for the separation
as between QinetiQ and the DSTL for the separation of IT systems
geographically and the separation of facilities and the records
audit separation process. QinetiQ have since incurred in their
annual report of 2002 about another £14 million with another
£4 million or so still to come. DSTL have incurred about
£3.3 million, again as part of the separation process, the
total of which comes to over £80 million.
126. Can we accept that as a definitive figure
or would you like to drop us a note?
(Mr Balmer) No, those ought to be the final figures,
there ought not be any further figures because we are so close
to completion.
Chairman: Thank you. Rachel?
Rachel Squire
127. Can I ask the Minister and indeed Mr Balmer,
given what you have just said, and given that I am an MP with
a constituency interest as I cover the area of Rosyth which includes
QinetiQ, whether you think the money that has been spent on this
further reorganisation of facilities, which to my knowledge over
the last ten years have had successive reorganisations, could
have been better spent directly on research and technology rather
than on this constant reorganisation which is very complex and
is still going on?
(Dr Moonie) What I can say is that we decided to embark
on this route. I am well aware that many members of the Committee
disagreed with the MoD—
Chairman
128. Not just many members, Minister, every
member.
(Dr Moonie) Alright, I was looking for some port in
a storm—every member. I do not share that view. I think
that this was something that had to be done. I think the way in
which the pattern of research is changing meant that this company
had to go out and try to make its fortune, therefore, these costs
were inevitable. It does point to the fact there are at least
some parts of the industry doing rather well just now, those who
advise on privatisation.
Rachel Squire
129. Indeed. Can I also just clarify, coming
back to the issue of pensions and so on, if people have decided
not to transfer their pension, presumably they just started as
new members of whatever is the new scheme or are they continuing
to pay into the previous MoD pension scheme?
(Mr Balmer) People were not allowed to stay in the
Civil Service scheme, they had to leave that scheme. The choice
they had was whether they transferred their service into the new
scheme or whether they froze the Civil Service pension and started
a new one in the company scheme.
130. Can I follow that up by asking if the MoD
take decisions which affect the QinetiQ site and its testing facilities
and which then lead to, frankly, jobs being surplus, to put it
politely, will the MoD cover the cost of any early retirement
or redundancy or will that be covered by QinetiQ?
(Mr Balmer) In the first instance, it obviously falls
to QinetiQ because all rationalisation costs are for them, whether
it is rebuilding, sale costs or redundancy costs. Where the costs
eventually fall will depend upon the fine detail of the contract
that is still being negotiated to put in place this long-term
partnering arrangement.
131. So there is still the possibility that
where effects on this site are the direct result of MoD decisions
it is still being negotiated as to who will bear the costs in
respect to personnel?
(Mr Balmer) What we are looking to put in place is
a normal commercial arrangement and as with a normal commercial
arrangement with any company if the MoD changes an order, or decides
not to place an order the impact on the company will vary and
the company will expect to pick up its own costs. Quite often
in relation to defence expenditure some of those costs will inevitably
find their way back to the MoD because we sustain quite a lot
of the overheads of the relevant companies so some costs will
automatically find their way back into our budget.
132. Moving on then from all of these costs,
when do you expect Qinetiq's financial performance to step up
a gear as a result of Carlyle's input?
(Dr Moonie) You are asking us to predict the future,
which is not an easy thing to do.
Mr Roy
133. Go on!
(Dr Moonie) We expect to see the effects fairly quickly
and I certainly hope to see a growth in value substantially over
the next few years.
Rachel Squire
134. Can I then follow it up by saying that
QinetiQ already has site rationalisation plans in train along
with a new 25-year test and evaluation partnering arrangement
to bring £300 million of savings in that area. As Carlyle
will soon own a third of QinetiQ, will they be able to reap a
similar share in the benefit of those measures which have been
introduced, frankly without Carlyle's help?
(Mr Balmer) Carlyle owns a third of the equity so
to the extent that the value of the company grows then Carlyle
will receive a third of it.
135. Okay. Can I finally then ask that as Carlyle's
experience has been mainly in non-defence areas, is there not
a risk for the MoD that technologies of particular relevance in
the defence field will not be pursued as fully as they might and
will not be seen as financially attractive, particularly in the
short term, as other areas?
(Dr Moonie) I think that QinetiQ are quite able to
stand on their own two feet where the evaluation of technology
and its exploitation is concerned. What we were seeking with a
partner through Carlyle is somebody who would be complementary
to QinetiQ's undoubted skills in technological development and
research, and I think that that is what we have got. If the company
is going to be successful in the market place you need marketing
skills, commercial skills and financial skills, and these are
things that Carlyle will bring to the table.
Syd Rapson
136. Carlyle's time horizon is likely to be
shorter than the MoD's, they are venture capitalists after all,
and you have indicated that QinetiQ will be floated in two or
three years' time. How will you ensure that the strategic direction
of QinetiQ fosters the long-term as well as the short-term well-being?
(Dr Moonie) There are two things there. I think it
is actually six years.
(Mr Balmer) We have said three to five years.
(Dr Moonie) It will depend on how quickly the company
grows in value, what people think of it. Carlyle's record tends
to show that as good venture capitalists they are interested in
capital growth and I think that is very important. Had QinetiQ
gone for a disastrous total share placement and had the company
been sold on the open market then they would have been at the
prey of funds, most of whose views do not look beyond the next
quarter's balance in terms of profits being distributed. Carlyle
is not like that and I think they do have a stake in seeing the
company grow. They are prepared to wait and take their money out
as an increase in the notional value and we will gain by that
as well.
137. You have got no concerns at all that the
remuneration packages for the senior managers at QinetiQ will
encourage them to strive to maximise the company's returns over
the next three or four years at the expense of its longer-term
viability to make the company look that much better?
(Dr Moonie) I spent a great deal of time with my financial
and other people on working out this package. I wanted to ensure
that every employee got at least some small chance to benefit
from it and at the same time, shall we say, that there were not
the chances to make totally unwarranted major gains without producing
major growth. If you look at the package as we have constructed
it there is a potential for substantial earnings from the top.
The company has to treble or quadruple in value in order to do
that. If that happens then, of course, our stake in the company
will grow commensurately and I think we will deserve that reward.
It may still seem very high to some people but I think it is very
reasonable and a good challenge to them to grow the company.
(Mr Balmer) I think it is worth making the point in
relation to senior management remuneration that, yes, we are looking
for the company to grow several times if that can be achieved.
That growth will be measured at the point that we sell it. The
market place will not buy a company at that value unless it has
got a long-term future. We are not looking for either Carlyle
or the MoD to be extracting value in the short-term. We are looking
for the value of the company to grow and that value will be assessed
by people who would be buying the shares from us who would expect
them to continue to be of value in the future.
138. Can I just go back a little bit. I was
asking about the remuneration package of the senior managers at
QinetiQ and you said that you were involved heavily in the construction
of those packages. From earlier evidence we were told that the
MoD sat in the room and listened and never said anything when
the packages were being discussed. I assume that your version
is right?
(Dr Moonie) I do not care what the rest of the MoD
did, what counted was my view of it and since that was one of
the things I had been specifically asked to look at I can assure
that I was extremely voluble when we discussed it and when I finally
gave my approval to it. I can give you that cast iron guarantee.
(Mr Balmer) As one of the people who have been sitting
in various rooms can I just describe what the process has been.
Salaries and bonuses have been very much for the company's remuneration
committee to determine based on the pressures that apply to senior
managers in the private marketplace. The MoD observers on the
board, of which I have been one, have been content to allow the
board to make those judgments very much themselves. When it came
to the incentive proposals for share options the company was the
first to draw up the proposals but they then gave those proposals
to us, we took them away and we sat in rooms ourselves with our
own advisers and we advised ministers on what the scheme should
be.
139. Can I ask about the flotation. What sort
of factors will help you judge in due course when the time is
right for the floatation of QinetiQ on the stock market?
(Dr Moonie) Basically there are two things and one
is contingent on the other: the degree of success that QinetiQ
have in their growing of business, which will largely be done
through the commercial side, and the amount of money we are likely
to get back from it. We are just human. When we do come and sell
our stake in it we do want to make a good return, it is only natural.
It is a combination of these two. We want the company to be a
success and we want them to feel it is the right time for them
to make the break. We are not just going to do it for the sake
of doing it.
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