Press Release - The privatisation of QinetiQ
23 November 2007
The Ministry of Defence’s privatisation of the defence
technology business QinetiQ safeguarded the viability of a business
of national strategic importance and generated significant proceeds
for the taxpayer. However, the NAO believes the taxpayer could have
received more money from the deal. Risks remain which the MoD must
manage carefully if long term value for money is to be
delivered.
Today’s report to Parliament concludes that the process to
establish QinetiQ was well managed against a tight time scale and
that the 2006 flotation was well executed. To date proceeds of £576
million, net of costs, have been generated for the Government, and
the MoD still holds a 19 per cent shareholding in QinetiQ currently
worth over £200 million.
The National Audit Office believes greater proceeds could have
been secured from the 2003 sale to Carlyle, although the MoD
disagrees with this. Carlyle were appointed as the preferred bidder
in September 2003 despite price sensitive issues still being
outstanding. This turned a competitive process into one of
negotiation.
Initially there were seven bids for QinetiQ valuing the business
at between £450 million and £600 million. The final bid from
Carlyle valued it at £374 million. The MoD received £155 million
from the sale of 37.5% of QinetiQ. NAO analysis shows this was £32
million less than Carlyle’s bid, which was originally for 35% of
the business. This was principally a result of changes following
negotiations on QinetiQ’s pension fund deficit and the Long Term
Partnering Agreement (LTPA). The commercial value of the LTPA was
not fully understood at the time of the sale to Carlyle.
Up to 20 per cent of the equity was made available to management
and employees subject to performance targets being met. The MoD
accepted the incentive scheme for this deal but was not involved in
designing the scheme, nor did it seek specialist professional
advice. The top ten managers at QinetiQ received shares worth £107
million at the time of flotation, from an investment of just over
£500,000. These returns were greater than MoD had expected and came
about as a result of higher growth in the value of the equity which
also benefited the taxpayer. We think that the the returns to
management exceeded what was necessary to incentivise them.
The MoD must actively manage ongoing risks to ensure it achieves
long term value for money from the deal. The price of the LTPA is
renegotiated every five years to agree a reduction in the price for
the next five year period. If there are no other suppliers who are
able to provide these services there could be a significant risk to
value for money. The MoD needs to act as an intelligent customer to
ensure that the envisaged cost savings are realised.
Sir John Bourn, head of the National Audit Office, said
today:
“The move to privatise QinetiQ was effective in
safeguarding the viability of a business of national importance and
secured half a billion pounds for the taxpayer. However, I believe
more money should have been secured for the public
purse.
“And it is of concern that the Ministry of Defence did
not seek specialist advice on the incentive scheme, which resulted
in the top ten managers owning shares worth £107m. This level of
return exceeded what was necessary to incentivise
management.
“The MoD must now be proactive in managing the remaining
risks to deliver the long term value for money from the
deal.”
Notes for Editors:
-
Press notices and reports are available from
the date of publication on the NAO website, which is at
www.nao.org.uk. Hard copies can be obtained from The Stationery
Office on 0845 702 3474.
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The Comptroller and Auditor General, Sir John
Bourn, is the head of the National Audit Office which employs some
850 staff. He and the NAO are totally independent of Government. He
certifies the accounts of all Government departments and a wide
range of other public sector bodies; and he has statutory authority
to report to Parliament on the economy, efficiency and
effectiveness with which departments and other bodies have used
their resources.
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The Long Term Partnering Agreement is a 25
year contract that funds the rationalisation and maintenance of the
equipment and facilities used in the testing and evaluation of
military equipment. QinetiQ could receive projected revenues of
£5.6bn, although these will be renegotiated every five years. The
MoD must also pay for individual tests and trials conducted on the
facilities.
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Internal Rate of Return is the interest rate
used to discount cash flows that makes the net present value of all
cash inflows and outflows equal zero. It is a common means of
ranking investments, the higher the return the more profitable the
investment.
Press Notice 53/07
All enquiries to Mark Anderson, NAO Press Office:
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