Examination of Witnesses (Questions 40-59)
MINISTRY OF DEFENCE, SHAREHOLDER EXECUTIVE & QUINTEQ
3 DECEMBER 2007
Q40 Dr Pugh: Primarily, yes, the Ministry of Defence.
Mr Jeffrey: I certainly agree that the outcome of all of this was the creation of a successful independent company and it is now flourishing in international markets and is doing so in the context in which our reliance on it is diminishing.
Q41 Dr Pugh: Would you accept that is not altogether a surprising achievement in a way because you had a rising market, you had a 25 year facilities contract involved, a lot of contracts going to QinetiQ which are single supplier contracts, you had a subsidised pension scheme, you had talented British scientists and, by Sir John's own confession, at the time there was a successful trading fund being run. It is not surprising, therefore, that out of that you get a successful independent business, is it?
Mr Jeffrey: If I may say so, it is easy to say that some years later but at the time, for example during the competition of the original 12 bidders, five declined to submit even an indicative offer because once they had seen the detailed information they were worried about the difficulty of achieving cost reductions in the company, the challenge of achieving commercial growth, the time and effort it would take to devote to it preparing the company for flotation. At that point in time this was a business that had never attempted to survive outside government, it was heavily dependent on our business which was a declining asset and I am not sure it was as self-evident as all that that this was going to succeed.
Q42 Dr Pugh: Not even with the pension fund bail-out, not even with the talented British scientists behind you, you still think there was some doubt as to whether it would be a successful independent company?
Mr Jeffrey: The fact that it was a matter of some doubt, at least on the part of markets, is reflected in the valuation of the company that is part of this Report which was very much why our predecessors decided on the two-stage approach. They decided not to float immediately but to sell a minority stake and on the basis there did turn out to be any undervaluation of the company at that point, and it is hard at this stage to say whether there was or not, then the taxpayer would nevertheless benefit in the growth in value that subsequently occurred.
Q43 Dr Pugh: Okay. Let us look at the second conclusion I mentioned where the NAO say they are not sure whether you have delivered value for money on contract prices. I can see there was a one-off capital growth because of the growth but are services that are being delivered hitherto in the usual way being delivered more cheaply and more effectively given that the Report says there has been no benchmarking of service delivery?
Mr Jeffrey: Our view as a Department is that we are getting value for money from QinetiQ.
Q44 Dr Pugh: That is your view or you have evidence of it?
Mr Jeffrey: I perhaps ought to write to the Committee. It is not something that I have detailed materials on in front of me just now.[1]
Q45 Dr Pugh: Could you give us a note on that. The way I see it is if we take the bits of the Report that you agreed to, on 28—I forget the month—2003, you sold at the bottom of the market over-incentivising management, the NAO say with a lack of agreed terms and genuine uncertainties of a Long Term Partnering Agreement with no benchmarking of services provided and you sold, and they say it, without substantive valuation of the contract. You sold without adequate time to assess intellectual property rights. You failed in the process to satisfy the wider industry about the transparency of the process and you unreasonably reimbursed unvalidated billing costs of Carlyle. It is difficult to think what you could have done worse without putting it on eBay, is it not?
Mr Jeffrey: I do not accept that occurred. On the last point, I am reminded that the bidding cost was included in Carlyle's and, indeed, Permira's bids as something that would fall to the company in the end. What we did sell at was the value the market placed on a minority stake at the time and because we followed the strategy we did it subsequently grew very significantly in value to the taxpayer's ultimate benefit.
Q46 Dr Pugh: You were advised throughout by UBS Warburg, were you not?
Mr Jeffrey: And a number of others, but UBS Warburg, yes.
Q47 Dr Pugh: You paid UBS 2.5 million, is that right, for the advice you got?
Mr Jeffrey: I think so.
Q48 Dr Pugh: Would you take that advice again? Do you think that is a model of good practice that you feel you can export elsewhere?
Mr Jeffrey: UBS Warburg is a company with high professional standards.
Q49 Dr Pugh: I am not talking about UBS Warburg, I am talking about their advice. You have implemented a contract which you are now defending, would you seek to replicate it elsewhere or recommend it to anyone else?
Mr Jeffrey: If you take each stage of this process where, for example, there was a judgment to be made about whether to carry on or abandon the competition and leave it until later, the advice we took from UBS Warburg was that there were greater risks in delay, that we would lose momentum, the company would find it harder to flourish if it did not move into an alliance with a strategic partner. In the end it is advice which the Department did not have to take but if we had failed to take their advice and subsequently it had come to fruition and QinetiQ had not flourished within the Department then in my view we really would have been open to criticism.
Q50 Dr Pugh: On the Carylye bid figures that are given in this Report, it actually says: "excess property excluded". What does that mean?
Mr Jeffrey: I do not immediately have the answer to that question. I am not sure if my colleague does.
Mr Woolley: I do not.
Mr Jeffrey: Where could one find this in the Report?
Q51 Dr Pugh: It is page 24: "All excess properly excluded from the valuation". That seemed to be a distinctive feature of the Carlyle bid. I am simply asking, what does that mean?
Ms Leahy: Perhaps I can help. This was a valuation carried out by consultants we had employed and when comparing their evaluation with other valuations they wanted to do it on a like-for-like basis and part of Carlyle's bid included £60 million for proceeds from a surplus property, so Parthenon excluded that from the valuation when they were doing their work on the valuation.
Q52 Dr Pugh: In terms of QinetiQ's property portfolio, what is the value of that?
Mr Jeffrey: What is the value of the QinetiQ property portfolio?[2]
Q53 Dr Pugh: The property portfolio owned by QinetiQ, the company.
Mr Jeffrey: I could not put a value on that immediately. We may need to write you on this one.
Q54 Dr Pugh: Can you tell me how much property since the deal has subsequently been sold?
Mr Schofield: Perhaps I can help the Committee on that. There are two points I would make. One is that the value of the key piece of surplus property, which was the Chertsey and Aquila sites, was included as a financing item in the original Carlyle deal, so that was taken into account. The second thing is that for all the other aspects of property, any property released after the PPP, there were full claw back arrangements in place to the benefit of the Department.
Q55 Dr Pugh: Are further property sales anticipated?
Mr Schofield: That is probably a question for Sir John.
Q56 Dr Pugh: Sir John, maybe you can answer that.
Sir John Chisholm: We have no currently anticipated significant property sales.
Q57 Dr Pugh: In deciding on what Sir John and other people were going to gain from the proceeds, it actually says rather amusingly that it was thought inappropriate to refer to the remuneration committee, but it clearly was not thought inappropriate to involve the remunerated. Can you clarify that, please, why it was thought inappropriate to refer to the remuneration committee, which I would have thought would have been a sensible way of dealing with things?
Mr Jeffrey: I think the answer is that it was the remuneration committee of the company within the MoD rather than the future QinetiQ Holdings and, therefore, it was not formally part of their role. As regards the second part of your question, the discussions between Carlyle and QinetiQ management, as has been discussed earlier in this hearing, were not an unusual thing to happen between—
Q58 Dr Pugh: It would seem very odd to the general public that we think it is inappropriate to involve a remuneration committee, presumably set up to decide these sorts of things, but we do not consider it inappropriate to discuss the arrangements at appreciable length with the people who subsequently were remunerated. Can you appreciate the oddity of that?
Mr Jeffrey: I appreciate the oddity of that, but in the end the judgment about the executive gains element of this, subject to the Department's overriding interest in it, as has been said earlier, was a judgment that Carlyle made.
Q59 Dr Pugh: A judgment that Carlyle made?
Mr Jeffrey: Yes.
1 Ev 28 Back
2 Note by witness: QinetiQ's annual 2007 report shows the net-book value of QinetiQ's land and buildings as being £260.7m. As indicated to the Committee, the Department has in place a `property clawback agreement' with QinetiQ, which enables it to clawback a proportion of the gain on each individual property transaction which is in excess of a 30% gain on the July 2001 professional property valuations. The proportion of the excess gains due to the Department is based on a sliding scale which reduces over time from 50% to 9% and as at 31 March 2007, it stood at 41%. Back
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