Examination of Witnesses (Questions 120-139)
MINISTRY OF DEFENCE, SHAREHOLDER EXECUTIVE & QUINTEQ
3 DECEMBER 2007
Q120 Angela Browning: Why was that? If in this Report it is telling us that would have been a reasonable way to conduct the negotiation, albeit a small amount but still £16 million of taxpayer's money, why was that not negotiated at the time?
Mr Jeffrey: I suspect the answer to that lies in the fact that it would have had to be found somewhere in the sense that if our bid costs had to fall to the company then the receipt we would have received at the time would have been that much less.
Q121 Angela Browning: In the future, just coming back to where I started with the very clear recommendations that the NAO Report gives to your Department, not just with your ongoing relationship with QinetiQ but any future privatisations of this nature, or government for that matter, would you agree that one would have expected that negotiation to take place?
Mr Jeffrey: I would certainly agree that if we were in the same position again, and I would be very surprised if we were in exactly the same position because, as Mr Schofield said, this was a very complex negotiation, we should be aiming to recoup our own costs from the privatised entity as well.
Q122 Angela Browning: I appreciate the complexity of it but I assume a due diligence exercise was carried out.
Mr Jeffrey: Yes.
Q123 Angela Browning: At what point?
Mr Jeffrey: A due diligence exercise was carried out certainly by the company.
Q124 Angela Browning: As a result of their due diligence exercise were any specific issues raised that the Committee should know about in terms of how these negotiations proceeded?
Mr Jeffrey: I am not quite sure which due diligence exercise you are addressing. It was certainly the case that once Carlyle had been identified as the preferred bidder they undertook due diligence.
Q125 Angela Browning: Of course.
Mr Jeffrey: And it was out of that that came these issues that were referred to in earlier questions to do with the Long Term Partnering Agreement and the pension fund.
Q126 Angela Browning: I thought that might have been the case. Can I ask you then was it the case that when they raised these issues, such as the reimbursement of costs, were these part of the negotiations that took place as a part of issues that were raised more latterly after due diligence?
Mr Jeffrey: The expectation that Carlyle's costs would be recovered from QinetiQ was embedded in the original bid.
Q127 Angela Browning: I would just raise with you, although obviously we are not party to the detail of that negotiation, it just looks like a rather weak negotiating hand, frankly, from where I am sitting. I hope that the lessons will be learned from it.
Mr Jeffrey: There are lessons to be learned from this, I do not deny that, and we will certainly be seeking to learn them.
Q128 Angela Browning: Thank you. My time is just about up but I think, Chairman, I have time for just one for Sir John. The ten senior managers—what was the process followed to identify them? Was it by job title or by individual person?
Sir John Chisholm: When I was asked to go and see Carlyle the main topic of conversation was for Carlyle to get my view of who was most important for the company.
Q129 Angela Browning: By job title or person?
Sir John Chisholm: Obviously, they were interviewing me as well because it was not at all clear that I would be chief executive either, so they wanted to choose their management team and it would be natural to come to me and ask what my views were, and so we went through much more than ten of the top management team and the ten who were most important were identified then.
Q130 Angela Browning: Could you just answer my question? Was it because of their individual experience and skill or was it based on the job title they held within the organisation?
Sir John Chisholm: The two were highly linked together.
Q131 Angela Browning: Yes, of course. Did the 11th one know he was the 11th?
Sir John Chisholm: Not all the people who were offered to be in the scheme agreed to do so because they were concerned about the risk of putting their own money into the company.
Q132 Mr Mitchell: The Financial Times has said the department was out of its depth, my colleague Don Touhig has said it has a tinge of corruption and the National Audit Office has been concerned about the excessive enrichment of the executives in the deal. I just wonder, as a question to all of you, the department and the company, whether any of you feel any shame or sense of regret about the deal now.
Mr Jeffrey: I would certainly refute very strongly any suggestion of the tinge of corruption. I have found nothing—
Q133 Mr Mitchell: Okay. That said, do you feel any sense of shame or regret?
Mr Jeffrey: In preparing myself for this hearing I have found nothing that supports that remotely. It is worth saying that just to start with. As for a sense of shame, I would say that the problem I have had with this is first of all that the eventual outcome was, as I have kept saying (and I make no apology for that), I think a satisfactory one and if you view the process as a whole it produced a successful outcome. If you then look at the detailed negotiations around the sale of the minority stake it is, as Mr Schofield said, a very complicated sequence of negotiation with potential bidders.
Q134 Mr Mitchell: I will stop you there because I guess that is a no and you are giving me an E Piaf on that.
Mr Jeffrey: What I am saying, Mr Mitchell, is that these were judgments made at the time in the thick of a commercial negotiation.
Q135 Mr Mitchell: Which in retrospect you might have a sense of regret about.
Mr Jeffrey: I cannot say that because I think the eventual—
Q136 Mr Mitchell: Okay. Sir John, do you have any sense of shame about the enormous amount of money you have made out of this deal?
Sir John Chisholm: Absolutely not. What I have a sense of is that the company was extraordinarily successful and as a consequence those of us who invested in it made an extraordinary gain.
Q137 Mr Mitchell: Okay; I will stop you there again because in the course of the discussions about privatisation your position seems to have varied enormously. You told the NAO that you had raised concerns about the potential risk of management making large returns from the involvement of a private equity investor. Did you say that very quietly? Who did you say it to? Did you whisper it?
Sir John Chisholm: Mr Mitchell, I was simply concerned about the perverse situation whereby, as a chief executive who was employed to create a successful company, I was kind of blamed for doing so.
Q138 Mr Mitchell: In other words you were not being critical of large returns if they came to you; you were critical about large returns that went to other people?
Sir John Chisholm: No, Mr Mitchell. As I said, I was just concerned about exactly the kind of perverse situation that we now have.
Q139 Mr Mitchell: About the potential of them going to other people. Okay; that is paragraph 2.2 Further on, in paragraph 2.15, we find that having expressed that concern you then started arguing that the view that the 10% equity offered by Carlyle was low and wanted the arrangement to offer higher returns based on exceptional performance. You discussed this with Carlyle before the final bids were submitted and Carlyle put up its proposal from 10% to 20% for the enrichment of the executives. You wanted that?
Sir John Chisholm: I touched on that early on, that the principal issue surrounding the 10% was to enfranchise a larger number of people in QinetiQ—
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