Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 60-79)


24 JANUARY 2006

  Q60  Robert Key: Thank you. Finally, could I ask about QinetiQ's role in the new Defence Industrial Strategy because clearly it is going to have a very important role in that, and when the Secretary of State launched the strategy, after his statement, during the questioning of the Secretary of State, I raised the interesting point that there is a difficulty with intellectual property here, on the one hand looking towards America and on the other hand, through the DIS, looking more towards Europe. QinetiQ is expanding into the United States and they have taken over Westar and Foster-Miller, and that is very good, but if they are also going to be expanding into Europe what about the intellectual property implication of this? Is it not going to be impossible for companies like QinetiQ to, on the one hand, be expanding into Europe and on the other hand have so much intellectual property bound up in North America?

  Mr Woolley: Is your concern in terms of the risk of exporting our intellectual property because in that regard clearly QinetiQ, like any other company, is subject to export and security controls?

  Q61  Robert Key: I am talking about the government to government relations and our special relations with the United States here and whether they will be at risk if the United States' government feels that we are moving too close to other companies in Europe, with which they are not in such accord as they are with us?

  Mr Woolley: It is obviously something that the government is very conscious of. I do not think in this respect QinetiQ is different from any other defence department; I think the same principles apply. Clearly there have been and will continue to be very strong arrangements in place to ensure that any information provided in confidence and for a specific purpose from the American government to the UK government or one of its suppliers is protected if that is what is required.

  Q62  Robert Key: Forgive me, Chairman, QinetiQ is different precisely because of the golden share and the fact that the government can actually stop QinetiQ from doing something it might wish to do, and therefore there is a government veto on QinetiQ's activities, is there not?

  Mr Woolley: What there is is a compliance regime that is in place and that is designed to ensure that QinetiQ does not get into a situation in which there is a conflict of interests between its role as an adviser to the Ministry of Defence in the procurement process and a potential role as a supplier to the Ministry of Defence. Clearly one of the roles of the former Defence Evaluation and Research Agency, as well as providing research to the Ministry of Defence, was to do analysis, test and evaluation indeed of products of other companies' ideas, and while much of that role is continued in Dstl it is also, to some extent, performed now by QinetiQ. Obviously there is potential for conflict of interest here, and what has been in operation ever since QinetiQ was vested as a private company is a regime which requires QinetiQ to seek Ministry of Defence clearance before it embarks on contracts that might give rise to a conflict of interest, such that the Ministry of Defence can be assured that arrangements are put in place to ensure that no such conflict of interest will arise, and we in the Ministry of Defence regard that as very important and QinetiQ are entirely comfortable that that regime will continue to operate in the future.

  Mr Jeffrey: I do not think it is our view that although it puts it in a different position from other companies it inhibits them from doing defence business in the way that we all hope they will do.

  Robert Key: Thank you. I wish QinetiQ well and we watch this space.

  Q63  John Smith: Mr Chairman, on QinetiQ, just moving on to a related subject. QinetiQ, as I understand it, are currently bidding for some very large defence contracts and there is this change taking place vis-a"-vis the ownership and the nature of the government stake in the company. How does the Department guarantee transparency when evaluating bids that companies like QinetiQ are involved in to prevent other bidders for work, given that the preparation costs of submitting for large-scale projects are quite large now? How does the MoD insure itself against claims from unsuccessful bidders that they were treated fairly and on a level playing field, given these links with some of the companies involved in the bids? Do you follow that? Transparency in evaluation of bid proposals without giving away commercial confidentiality, to prevent future legal action.

  Mr Woolley: Are you asking in the sense that because QinetiQ is partly owned by the Ministry of Defence the Ministry of Defence might be biased?

  Q64  John Smith: How do you ensure that that claim cannot be made? What processes and procedures exist within the evaluation of bids to ensure that those sorts of claims have no substance?

  Mr Woolley: First of all, within the Department we have a clear understanding that in relation to QinetiQ there is a separate shareholder interest from a customer interest. I represent the shareholder interest; I am not myself engaged in the process of the awarding of contracts, which is what the customers, such as the Research Acquisition Organisation, the Defence Procurement Agency and other customers within the Department, that is their role, and they are quite clear that they must assess competitive bids purely on the basis of bids that are put forward by the companies and not take into account what the impact of awarding or not awarding the contract might be for the shareholder interest in QinetiQ. So my shareholder team is not involved in any way in discussions about the award of contracts to QinetiQ or not QinetiQ, so to the outcome of competitions in which QinetiQ might be involved. Their duty is to award the contracts on the basis of a best value for money bid and the customers have their budgets, and naturally as customers they will want the best value for money as it affects their budget, even though there might be a different impact indirectly in terms of the shareholding value that the Ministry of Defence has.

  Q65  John Smith: But do you recognise that there is an increasing risk as you enter into more and larger longer-term PFIs or partnering agreements that companies may use the courts to challenge awards that have been made, or is that not something you are worried about?

  Mr Woolley: We are always concerned about any legal challenge to the basis for which a contract was placed and we have very clear rules; we have very clear evaluation processes that are well-documented; we have a very clear approvals process; and, as far as possible, only a very small number of people evaluating bids actually know which bid is from which company or which consortium so we will give, if you like, code names to the various consortia so that those doing the evaluation are judging between the code names without knowing which is which where it is particularly sensitive. So I think we have robust arrangements in place.

  Q66  Chairman: Mr Woolley, a quick question about QinetiQ. You are the shareholder, will you get the proceeds of sale or will the Treasury snaffle them?

  Mr Woolley: I personally, sadly, will not get the proceeds! The proceeds will be split between the Ministry of Defence and the Treasury in a proportion that we cannot yet finalise until we know what the size of the proceeds are.

  Q67  Robert Key: Chairman, how could that possibly work? How can you not decide in advance what the proportions will be? I find that an extraordinary proposition.

  Mr Woolley: As I say, until the flotation takes place we will not know precisely how much the proceeds will be.

  Q68  Chairman: You will not know how much the proceeds will be but are you being then promised a set figure by the Treasury as opposed to a proportion of the proceeds?

  Mr Woolley: We have been given an indication by the Treasury of the sort of figure that we might be allowed to retain, but it has not been finalised.

  Q69  Robert Key: Chairman, may I pursue that for a moment, please? In the Annual Report and Accounts on page 166 it gives some figures here about the amount of money which has been apportioned from QinetiQ in various ways, and it says: "Loans repaid by QinetiQ and subsidiary undertakings, representing the partial original asset value of the business since its formation amounted to £104 million. The cash received on the part disposal of the shares," etc. Where did that money go? How was that apportioned?

  Mr Woolley: That has all gone to the Ministry of Defence. Since 2002 the Ministry of Defence has received, I believe, £250 million in various ways from the QinetiQ process.

  Q70  Robert Key: Did any of it go to the Treasury?

  Mr Woolley: None of that went to the Treasury.

  Q71  Robert Key: Can we therefore suppose that 100% will come to the Ministry of Defence once again?[11]

  Mr Woolley: We have not concluded an agreement with the Treasury on this.

  Q72  Robert Key: How can we help!

  Mr Jeffrey: I think you are doing so, actually!

  Q73  Chairman: A question about some of the other shareholdings that the Ministry of Defence has. International Military Services Limited, the value of the investment has been written down to nil. When was that written down to nil, do you remember?

  Mr Jeffrey: This is a long and complicated story. International Military Services Limited goes back to the early 1960s. It was originally set up as a private limited company by the Crown Agents; it was then transferred to the MoD in 1979. Its purpose was to allow the Department to sell equipment and munitions overseas, but it ceased trading in 1991 following a change of government policy on involvement in overseas military sales. So we would have wound it up years ago but there is an outstanding appeal, a legal claim in respect of the equipment due to be supplied to Iran prior to 1979, which is still before the Arbitration Tribunal in the Hague, and we are not yet in a position finally to wind up this company.

  Q74  Chairman: I have one other question about golden shares. My expectation was that it might be the Ministry of Defence that owned the golden share in Rolls-Royce, but is that actually the DTI because I cannot find Rolls Royce and the other investments on page 167.

  Mr Jeffrey: I have a feeling that it is the DTI but I think we ought to check and confirm.

  Chairman: If you could, please[12]. Brian Jenkins.

  Q75 Mr Jenkins: Thank you, Chairman. Good morning, Mr Jeffrey. It has been a long time sitting here before I get the chance to have a question. The reason I am going to take you to the book is because many of the questions have been asked this late on, but there are one or two items I want to flesh out a little bit. On page in the Service Agreement we say that in the RAF that 3.9%, that is 2000 people in the RAF go over their time, and further on I find the type of personnel that go over their time; but it does not mention aircrew, it does not mention pilots and it does not mention maintenance staff, especially fast jet maintenance staff. If you do not have the details to date could you give me a full list of the personnel that do go over or breach the Harmony Guidelines because the term "pinch point" occurs on that type of staff?

  Mr Jeffrey: I do not think I have a detailed answer to the question about the RAF. As we were saying earlier in the session, both the RAF and the Army, for reasons that are much as anything to do with existing commitments—

  Q76  Mr Jenkins: Let me know the answer, please.

  Mr Jeffrey: We will give you that[13].

  Q77 Mr Jenkins: On page 14 on the "Not met" on "Objective: Build for the future" we notice that the slippage is getting better now on our new projects. But the first question I ask is, are we actually better at targeting and developing with the producer the time needed to produce the product or are we better now at lengthening the time to take the slippage into consideration?

  Mr Jeffrey: The key to this and to avoiding slippage is clearly to have a good realistic plan in the first place and the most significant stage, in my view, in these big procurements is the earlier stage where one does what one can to reduce this.

  Q78  Mr Jenkins: We are perfectly au fait with the gateway system and the reasons for it. If we are now saying that we are better at targeting and we not just lengthening the time taken, I will accept that we are not going to see slippage in the future or the slippage will be reduced. One of the things I am surprised Mr Jones let go was the projects where we are now £5 billion estimated overrun on the actual target. What effect is this going to have for you on your future ability to manage your programme?

  Mr Jeffrey: It has a very significant effect; it is something that we clearly need to take into account.

  Q79  Mr Jenkins: Could you do so, please, and could you give me a note on what you see as the effects being on your procurement programme, therefore the slippage and time for each part of it in the next few years.

  Mr Jeffrey: We can certainly try to produce that[14].

11   Note: See Ev 31 Back

12   Note: See Ev 25 Back

13   Note: See Ev 25 Back

14   Note: See Ev 26 Back

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