Examination of Witnesses (Questions 160-179)
MINISTRY OF DEFENCE, SHAREHOLDER EXECUTIVE & QUINTEQ
3 DECEMBER 2007
Q160 Mr Mitchell: Perhaps you can tell us what defence interests it had at the time of investment. Are you worried that this firm—private equity, no published accounts, other interests—is getting access to commercially sensitive information about British defence interests?
Mr Jeffrey: There is no reason to suppose that the company behaved other than properly during the period—and in fact, they have now divested themselves of their remaining stake—when they were involved in the company. I do not know whether Sir John wants to add to that.
Q161 Mr Mitchell: Sir John, how do you do it? Do you have Chinese walls? What do you have to stop them getting access to commercially sensitive information about British defence interests?
Sir John Chisholm: Carlyle's involvement with the company is that they put a director on our board. Our board does not routinely discuss operational matters. It discusses strategic matters.
Q162 Mr Mitchell: Surely if Carlyle are interested they can find out, can they not?
Sir John Chisholm: The kind of information that you are referring to there was no need for the Carlyle director to know.
Q163 Phil Wilson: I have one or two general questions first and then I want to move on to something more specific. It says in the Report that there was a problem with the deficit on the pension scheme. Has that been sorted out now? Has that been resolved, around pension issues?
Sir John Chisholm: Is that a question for me, sir?
Q164 Phil Wilson: Yes.
Sir John Chisholm: We, like every other company, or at least most other companies quoted on the London Stock Exchange, still Report a pension deficit and today we still have a pension deficit. At the time of the IPO, which is I guess the relevant time, it was reported as over £200 million. That is £200 million net of the return from the MoD.
Q165 Phil Wilson: And what is the situation now? Is it £200 million now?
Sir John Chisholm: No. We have been since then working on reducing that deficit by all the usual means—putting more money in, increasing rates, all those other things, and so we are improving that deficit. I do not have a figure for you. It is published and I can give it to you.
Mr Jeffrey: In relation to the deficit issue, at the point of sale it was implicit in the Carlyle bid that there would need to be an adjustment to take account of any pension deficit. The Government Actuary's Department assessed that in a range from zero to £70 million and in the final negotiations it was agreed that we would, in relation to the value of the whole business, take £25 million off the original bid in recognition of the fact that the pension deficit issue existed.
Q166 Phil Wilson: The other point is on the shares. I know the rate of return for the senior managers was a lot higher than it was for the employees. Was there a difficulty in convincing staff and managers to take up the share offers at the time?
Sir John Chisholm: Yes, sir, there was, because there was at the time an atmosphere of perceived risk in the business which even our staff found themselves influenced by.
Q167 Phil Wilson: Can I ask a question of Sir John Bourn, please? On page 18 of the Report about SERCO, paragraph 2.8, it says that a bit more effort should have been put in place to ensure that SERCO remained one of the bidding companies because there was not an element of private equity involved in it; it was not a firm that was involved in it. The Report says that more effort should have been put into ensuring that they stayed within the bid process. Could you amplify that, because it says at the end of that paragraph, "We consider that more could have been done to work with SERCO ... ". What does that mean exactly?
Ms Leahy: In various places in the Report, particularly figure 1, there is a timeline there which talks about the process of appointing a strategic partner. SERCO were not taken forward at a very early stage, so the department began the process for getting a strategic partner on 8 March and before the information memorandum was issued on 23 April after pre-qualification SERCO was out of the competition, and we thought that SERCO, being a different type of bidder than the private equity bidders, if taken forward would have given more insight into the value of the business. We thought that it would have been worth taking them forward.
Q168 Phil Wilson: Could I ask Mr Jeffrey what his view on all that is?
Mr Jeffrey: Other things being equal, it would have been good to have a trade bidder in the field, but the view that was taken at the time was that the SERCO bid was weaker than others and that, as I said earlier, there were some potential conflicts and it did not address how these potential conflicts would be dealt with. The NAO say that we should have worked harder to keep them in the hunt, as it were. I certainly know that there was a meeting with SERCO at one stage to talk through some of these issues but in the end the judgment was made that they were among the weaker bids.
Q169 Phil Wilson: So basically, in the thick of sorting out the bid, and it was a very complicated bid, that was your judgment at the time?
Mr Jeffrey: At the time, as I understand it, that was the judgment.
Q170 Phil Wilson: Going through the Report, some of the statements that are made are that the status quo was not sustainable, that the business was well prepared and was able to demonstrate growth, the department executed the flotation well and received a good price, and £800 million I think is the figure that has been quoted in there, the business is performing satisfactorily, defence interests are being protected and the rate of return for Carlyle is more or less the same as it is for the MoD, so in essence it is a pretty good news story for the MoD. One thing I would ask is, hindsight being what it is, if there was one thing that you would have done that you did not do, what would it be? What do you think you should have done that you did not do, in hindsight?
Mr Jeffrey: First of all, I am grateful to you, Mr Wilson, for saying what you have said because I hope the Committee knows me well enough to know that I am not gratuitously defensive, but I do feel that this is a story that overall has some very good aspects and the NAO in particular has praised the way we separated the two parts of the old DERA into QinetiQ and the DSTL. It has praised the way we undertook the flotation. My view is that when you get into the events of 2002, of which the NAO is more critical, it is very hard at this range to say in the thick of a commercial negotiation that things were necessarily got wrong. I certainly think, as I was saying in response to Mrs Browning's questions, that we need to learn lessons from this of a general kind, but I cannot point to some specific thing that, if only we had done it differently, would have produced a substantially better outcome.
Q171 Mr Bacon: Mr Pocklington, are there documents --- Mr Pocklington? Are there documents in the Treasury that show that £250 million of the MoD budget for that year was expected to come from this sale?
Mr Pocklington: I was not aware at the time—
Q172 Mr Bacon: Mr Pocklington, my question was not were you around at the time. I am not interested in whether you were around at the time or not. I hoped you had come to this meeting prepared.
Mr Pocklington: My understanding, and the NAO may be able to provide more detail than this, is that it is, of course, an NAO audited assumption that relates to the fiscal projections.
Q173 Mr Bacon: Hang on, hang on. I am not asking about the NAO. I am asking about the Treasury. You are an HM Treasury official, are you not?
Mr Pocklington: Yes.
Q174 Mr Bacon: I am not asking about the National Audit Office; I am asking about the Treasury. Are there documents around --- I will just repeat the question for clarity.
Mr Pocklington: I am not aware of any documents. Indeed, the fiscal projections which the Treasury uses are based on assumptions audited by the NAO and those assumptions include --
Q175 Mr Bacon: Hang on, hang on. Fiscal projections: I did not ask about fiscal projections. NAO: I did not ask about NAO. I am asking about whether the Treasury was assuming that £250 million of the MoD budget for the year involved would come from this sale, yes or no?
Mr Pocklington: I am not aware of any documents.
Q176 Mr Bacon: If you find any when you get back to the ranch will you send a copy of them to us?
Mr Pocklington: Of course, but I think it is important—
Q177 Mr Bacon: Thank you very much. That is great. That is all I wanted to know. Sir John, could you go to paragraph 2.17 of the Report please? This is on page 20, paragraph 2.17. Would you mind reading out the first sentence please?
Sir John Chisholm: "On the basis of the scheme agreed, following input from the chief financial officer, the then chief executive officer proposed the specific allocation of shares to management and staff."
Q178 Mr Bacon: "The then chief executive officer proposed the specific allocation of shares to management and staff". Who was "the then chief executive officer"?
Sir John Chisholm: I was.
Q179 Mr Bacon: I thought so; yes, I thought you were. A separate question: have you had any discussions with anyone about leaving QinetiQ?
Sir John Chisholm: No, sir.
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