The privatisation of QinetiQ
23 November 2007
Full report: The privatisation of QinetiQ
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.
“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.”
Sir John Bourn, head of the National Audit Office, 23 November 2007
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.
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.
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.
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.