Examination of Witnesses (Questions 80-99)
MINISTRY OF DEFENCE, SHAREHOLDER EXECUTIVE & QUINTEQ
3 DECEMBER 2007
Q80 Geraldine Smith: £16 million seems an awful lot of money to prepare a bid. I think most people would think it really is a lot of money. What checks were made to make sure that those costs were validated, that they were incurred? Have you got a breakdown of them and can we see that?
Mr Jeffrey: I imagine that we can provide the Committee with a note on that. I am sure that these costs were properly audited and checked, but in detail I am not familiar with the process that was gone through.[3]
Mr Schofield: I have three points to make. One is that the audit committee of QinetiQ Holdings Limited would have audited all of the costs. The second point to make is that it is a fairly standard process, as paragraph 2.34 says, in a private equity deal for the new company that takes the business forward to pick up the costs of the successful bidder. The third point to make is, as you say, all of the bidders incurred significant costs but those costs increase as the process goes through and at the very end the short-listed bidders are incurring very significant costs in full due diligence of the business, and that is legal due diligence and financial due diligence.
Q81 Geraldine Smith: Carlyle was also given the opportunity to bid for additional shares which they got for £3 million which later went on to be worth £27 million. Why was that?
Mr Jeffrey: This was a judgment made at the end of the process for reasons that the Report explains in relation to the value of the bid having reduced to take account of the deficit in the pension fund and reduction in the value of the Long Term Partnering Agreement. Both of these tended to reduce Carlyle's stake in the business. The view that was taken was that an additional 2.5% of the business should be included in order to maintain the level of their stake. There is no magic in a particular percentage, but the sense at the time was that Carlyle needed to have a reasonable stake in the business to be incentivised to achieve the growth that was achieved.
Q82 Geraldine Smith: Do you appreciate how this looks to any man or woman in the street? It looks like there is a cosy little relationship between Carlyle and the senior managers who were agreeing and working with the bidder before they became the preferred bidder and working on their own incentive scheme which turned them into multimillionaires? It stinks. It looks terrible to anyone and I do not think you can justify it. I do not think you can justify an investment of £100,000 where you end up with £20 million, a civil servant. £20 million would do a lot in my constituency. For that sort of money to go to one individual goes way beyond an incentive scheme. The point was made earlier that there should have been a cap put on it. I would say that you have been completely irresponsible in not putting that cap on it.
Mr Jeffrey: I do see how this looks to members of the public, I understand that very well. Against that I would only put the points that I made earlier about the extent to which in combination this was a strategy that yielded very significant benefits to the taxpayer.
Q83 Geraldine Smith: Yes, but the point is could it have yielded more benefits to the taxpayer? Did your actions disadvantage the taxpayer? Yes, they did make money on it but could they have made a lot more?
Mr Jeffrey: I do not think it is possible to establish that we could.
Q84 Geraldine Smith: I think you could have a pretty good guess.
Mr Jeffrey: With great respect, I would disagree with that. The judgment is about how much this business would have grown if we kept it within the Department and with all the things that entailed and without the invigorating effect that a strategic private sector partner brought into the picture. It may well be that the yield could have been greater but I do not think one can say that with great confidence. I would argue that the overall strategy, starting with the sale of a minority stake and allowing that to build in value and then floated in a way that the NAO praises in a way that I cannot recall seeing in their reports recently was in the end successful.
Q85 Geraldine Smith: You spent £28 million on consultants getting ready for the privatisation. Can you tell me what the taxpayer got for that £28 million?
Mr Jeffrey: It was a range of advice, including the advice of financial advisers who were familiar with business of this kind, legal advice, and I have no reason to suppose that it was not properly incurred and properly audited at the time.
Q86 Geraldine Smith: But you did not bother getting any advice on the incentive scheme. You spent all that money on consultants but you could not spend a little bit more just getting a bit of advice on the incentive scheme for the senior managers and what would be fair and reasonable?
Mr Jeffrey: There was not separate specific advice taken. Our financial advisers helped us to model what the implications of the incentive scheme would be, but in the end, as I said earlier, it was a judgment taken for better or worse that the incentive scheme was something that Carlyle were best placed to assess.
Q87 Geraldine Smith: If your financial advisers helped you model what the incentive scheme should be, should you not be asking for your money back?
Mr Jeffrey: I do not think so. One can always argue about quality of advice but I have no reason to think that this was other than good, professional advice at every stage.
Q88 Geraldine Smith: I guess you can say that because it is other people's money you are spending. It seems there is a blase approach to taxpayer's money in this Department. It is thrown around at consultants, £28 million. Carlyle must have thought all of their Christmases had come at once, along with the senior management.
Mr Jeffrey: I certainly would contest the proposition that the Department was other than mindful of the fact that it was dealing with public money here. I apologise for keeping coming back to this but one has to look at the proof of the pudding and the proof of the pudding was a very substantial and successful flotation of this company which gained the taxpayer approaching £600 million and we still hold a stake in the company which is worth the best part of a quarter of a billion. That is nowhere near the situation in which Carlyle approached this business and the prospects then were as I have described them: a bit of the MoD that was struggling to find its feet, if Sir John Chisholm would allow me to say so, and it was hard at that stage to say confidently that it was going to have a bright future.
Mr Woolley: I think it is right to say that this was a very complex deal, both at the private partnership stage and subsequently.
Q89 Geraldine Smith: It looks very simple to me, some of the outcomes.
Mr Woolley: There was a very complex need to separate the assets of the company from the assets of the Department. There were some complex contractual arrangements that had to be taken into account and the flotation itself was a complex process. Spending £28 million on consultants in order to generate a return of £850 million does not seem to me to indicate a cavalier way of dealing with the taxpayer's money.
Mr Jeffrey: If you will allow me to add one point. If you care to look at paragraph 1.16 of the Report, the NAO say that their review of the invoices and the correspondence shows that the Department monitored expenditure closely. There is no criticism of our handling of the consultancy side of this in the NAO Report.
Q90 Mr Davidson: I wonder if I could just start by asking you, Sir John, whether or not you are a Labour donor by any chance?
Sir John Chisholm: I am not a donor either in my own name or anyone else's!
Q91 Mr Davidson: Thank you. Excellent. I do not think I have ever been so glad to hear that in my life. While I am quite happy with the strategy that has been adopted here, the two-tiers and so on, like some of my colleagues I have some grave difficulties with the implementation thereof. I have the overwhelming feeling that Carlyle and the others just saw the MoD coming and they have taken advantage of your innocence in these matters and exacted a much better deal than we would have agreed to now when we have much more experience. Can I just ask Mr Schofield if that seems fair, that Carlyle, well experienced in taking sweets off children, found the MoD an inexperienced seller and took full advantage of them in a way that they would not let them do now?
Mr Schofield: I think that is an unfair criticism of the MoD. They were absolutely masterful in only selling a minority stake.
Q92 Mr Davidson: The strategy I accept.
Mr Schofield: In terms of the process, they ran a competitive process against a very difficult backdrop and that is a point that comes out throughout this Report, that the markets were difficult, the business was not as well developed by 2006, its strategy needed developing and at the same time the stock market comparators were falling. I think this was a very difficult backdrop against which to take forward an ambitious privatisation process and the fact that they only sold a minority stake was a masterful element.
Q93 Mr Davidson: I accept that. So we should be happy with this, should we?
Mr Schofield: I think we should be happy with the overall result. We should be happy with the way that the company was prepared for flotation and we should be happy with the way in which the flotation delivered value for the taxpayer.
Q94 Mr Davidson: You do not think that we could have got a better deal?
Mr Schofield: That is impossible for me to know. The Shareholder Executive first got involved in about 2004, a year after the deal with Carlyle, so I have just been looking back on the papers the way everyone else has. As I say, I was struck in reading the NAO Report as to the difficulty of carrying out a process throughout 2002.
Q95 Mr Davidson: I appreciate the difficulty and I am also supportive of the general structure that was adopted, but when something like that is difficult I was taking the view that was where the experience of Carlyle and the innocence of the MoD were at their most meaningful and it was in the detail where Carlyle then took advantage of these poor unfortunates who perhaps should not have been let out on their own. That is my reservation about that. Can I ask about Carlyle. Does the MoD have a lot of other dealings with Carlyle?
Mr Jeffrey: I do not think we have had other substantial dealings with Carlyle.[4]
Q96 Mr Davidson: Not knowing, perhaps you may give us a note. I am interested in the connections that Carlyle have. Can I just clarify whether or not Carlyle had at that time, or have had subsequently, employed people who had been in defence, military or political worlds in the UK and the same applying to their public relations advisers? Can you tell us that or, if not, give us a note on that?[5]
Mr Jeffrey: I am not aware that they did so but as ever, Mr Davidson, I ought to check and give you a note on the subject.
Mr Woolley: They have a military adviser who they have employed for some years who is an ex-serviceman.
Q97 Mr Davidson: I think it would be helpful if we just see who they have at the moment who was perhaps active at that time, and similarly for the public relations advisers, and who they had at that time who would have been involved actively in either the military, political or defence worlds. You do not know of anybody at all. The name John Major does not spring to your mind, for example?
Mr Jeffrey: Not to my mind, but perhaps I could reflect on that.
Q98 Mr Davidson: Google was able to give me that within two minutes when I was coming down here. Maybe you could check about the others. Mr Schofield, is this normal? One of the things that causes me anxiety is the way in which as soon as Carlyle were given preferred bidder status they managed to negotiate a reduction in the value of some £55 million. That does look as if they took advantage of the position that by then they had been given. Is that normal in these circumstances?
Mr Schofield: Every situation is different and every company is different, every transaction is different. That is an obvious point, I guess. In terms of this case, clearly it would be ideal if you could preserve in aspic a business from the point of going to preferred bidder to the point where you actually get the money in.
Q99 Mr Davidson: £55 million is not loose change though, is it? To be able to get preferred bidder status and then once you have got that foot in the door then to discover that there needs to be more work done on the roof and therefore the price will have to change and so on is standard negotiating practice, is it not, and Carlyle seems to have got away with it?
Mr Schofield: One of the points that comes out of paragraph 2.25 of the Report is the fact that the MoD held Permira as a reserve bidder throughout this process. The other point to make is that around this process, as I understand it, the MoD was receiving its continuing advice from UBS and the assessment was that those two elements that made up the £55 million to which you refer were justified in terms of the pension fund deficit and the changes to the Long Term Partnering Agreement.
3 Ev 29 Back
4 Ev 29 Back
5 Ev 29 Back
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