Examination of Witnesses (Questions 260-279)
MINISTRY OF DEFENCE, SHAREHOLDER EXECUTIVE & QUINTEQ
3 DECEMBER 2007
Q260 Mr Williams: I do not want to go over ground that has been covered before so I am going to leave you alone for a moment now and switch to Warburg, because Warburg, I think, cost the Government a lot more than you and your colleagues did. First of all, when they came back asking for the £13 million reduction it turned out they had not taken into account the tasking cash flow. That was not taken into account at all, which was rather remiss of them, and the NAO comments that it could have made a significant difference in value, and similarly they seemed to do the same in relation to capital expenditure where they assumed that the capital expenditure was going to be met out of contractual cash flows; they did not take into account the option of the much cheaper and more widely spread option of debt which was available. These two cost a great deal of money, more than, as I say, the executives cost the department. Why were Warburg so remiss in two areas, both of which the National Audit Office said were errors that could have made a significant difference?
Mr Jeffrey: I do not think the NAO's conclusion is that these were errors. What happened was that the Carlyle bid assumed that the long term partnering agreement would generate £30 million profit a year by a predictable income stream. They argued that because that assumption was not, as the LTPA was coming out, going to be well founded. It reduced the contract value by between £43 million and £76 million. UBS/Warburg agreed that there was a material reduction which could be expected to result in a reduction of proceeds to the MoD and there was then a negotiation in which we reduced that reduction to £30 million, of which £11 million impacted on the proceeds of the sale of the minority stake. It was a rational part of the process and it is not so very unusual for these final stages to involve negotiations of that sort.
Mr Williams: But there were two oversights, and I am not asking a further question, and the National Audit Office observed in both cases that it made a considerable difference to the sum and that that comes to vastly more than the £30 million which is already admitted from the one cause alone. I will leave it at that now.
Chairman: That concludes our hearing, but obviously the National Audit Office will have to work on this further in preparing our draft Report for us. For a key part of this hearing, of course, Sir John is going to rely on just how much more the Government could have got for this business in light of the fact that an extra 2.5% was sold for £3 million and this was worth £27 million to the flotation. I do not normally ask the National Audit Office to do further work again, period, but there is no time now to ask questions and I think this could be reflected in our draft report. Thank you very much, gentlemen.
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