Supplementary memorandum submitted by the Ministry of Defence
Question 44 (Dr John Pugh): Have you evidence to show services are being delivered more cheaply and more effectively given that the Report says there has been no benchmarking of service delivery
The Department's objectives, as set out in Appendix 2 of the NAO's Report into the privatisation of QinetiQ, included the introduction of commercial disciplines, to achieve reduced contract prices for the Department and other customers as a result of increased competition, economies and productivity. The NAO have concluded that, even six years after QinetiQ was created, it is challenging to measure the success of some of the Department's wider objectives. Given the very wide range of services (including research, project support, and test and evaluation) which QinetiQ provides to a diverse set of MOD customers, we do not believe there is any single metric which can be used to measure overall value for money. However, there are a number of pieces of evidence which support the view that the privatisation process has delivered good value to the Department as customer, as well as owner, of QinetiQ. These are set out below.
OVERALL HEALTH OF THE RESEARCH PROGRAMME
The extensive audit of the Research Programme by the Department's Chief Scientific Advisor during 2006, and Reported in "Maximising Benefit from Defence Research", placed projects under the scrutiny of independent subject matter experts from the Defence Scientific Advisory Council (an NDPB). Of the more than 130 QinetiQ projects assessed, the average quality was found to be comparable with that found in top-tier research journals and in some cases providing MOD with internationally competitive research.
INCREMENTAL INTRODUCTION OF COMPETITION
The privatisation was not just about ensuring the best prices from QinetiQ, but also reflected an intention to provide customers with access to a wider range of suppliers than would have been possible when the Department had to sustain the Defence Evaluation and Research Agency (DERA) as its in-house provider of science and technology capability. It is generally accepted that the introduction of competition creates incentives for suppliers to increase value for money. In this instance, it also provided an opportunity for new suppliers to enter the market, in a way which was not possible when almost all of the Department's research funding was spent through its in-house provider. In 2002-03 around 90% of the Department's applied and corporate research was carried out within DSTL or by the newly created QinetiQ. By 2009/10, the Department estimates that 60% of the research programme will be competed with industry and academia with the bulk of the remainder going to DSTL. In cash terms, the total annual value of contracts awarded without competition to QinetiQ has declined from approximately £208m in FY04/05 to approximately £80m FY07/08.
ASSESSMENT OF KEY SUPPLIERS
In 2003, the MOD's Supplier Relations Group introduced benchmarking for its key suppliers, including QinetiQ. This assessment covers a range of criteria including but not limited to: approach to project management, responsiveness, management of risk, quality of output, commercial management and innovation. QinetiQ's performance has been measured over the last three years and the results indicate that the company has consistently exceeded the average benchmark level, and has shown an overall performance improvement over the past 12 months.
DOCUMENTED CONTRACTUAL SAVINGS
The Department's largest current contract with QinetiQ is the Long Term Partnering Agreement for test and evaluation. Over the first 5 years of this contract, customers have identified that that the contract will deliver savings of around £22m. These savings exceed the target which was originally set when the contract was first awarded.
Question 80 (Geraldine Smith): Have you a breakdown of the £16million bid costs
Carlyle's bid, which was submitted in August 2002, identified that, if they were appointed as Strategic Partner, then their bid costs would be reimbursed by QinetiQ Holdings Ltd (the new company that was created as part of the sale process). This is not unusual in transactions of this sort, and in accepting the Carlyle bid, the Department agreed that this should occur. This was further documented in the Shareholder's Agreement signed by the Department and Carlyle, which stated that QinetiQ would be responsible for: "the payment of reasonable professional costs and expenses properly incurred... in connection with the transaction". Under the agreement, costs were capped at a maximum of £22m and the actual figure reimbursed was £16m. Before the costs were submitted to the company for reimbursement the invoices were seen by MOD officials to ensure that they were consistent with the shareholder's agreement. However, because the costs were for QinetiQ to reimburse, it was the responsibility of the company, as with any other bill payment, to ensure they were properly incurred. As a limited company any such payments by QinetiQ would have been open to examination by external auditors.
Questions 95-97 (Mr Ian Davidson): The Carlyle Group
We do not currently have any substantial engagement with The Carlyle Group. Aerospace & defence is one of the sectors in which Carlyle does invest and, accordingly, the Department does from time to time have discussions with them. Such discussions are carried out on the same basis as those with other companies that invest in the defence industry. We were aware at the time of the sale that many of the potential bidders employed individuals who had been active in the political or military arena. However, this was not a factor which in any way influenced the selection process.
We have no comprehensive information on those employed by Carlyle or their advisors, either at the time or subsequently. This is a matter for the company.
| 
