MPs on Monday berated officials involved in the privatisation of Qinetiq, the defence research group, for acting like “naive babies in a sea of sharks” by signing off a deal “that stank to high heaven”.
In a bruising two-hour hearing before the public accounts committee, Sir John Chisholm, then chief executive of Qinetiq, was repeatedly forced to justify how he and nine other civil servants made a return of £107m ($220.8m) from a deal they helped to negotiate in 2003.
Sir John, now chairman of the group, said he would have been “gobsmacked” if he had known senior managers would make a 19,900 per cent return on an initial investment of £537,000.
“At the time there was no sense of wealth and riches. There was a considerable sense of risk,” he said.
Asked it he was ashamed of making the returns, Sir John said: “Absolutely not.”
“What I have a sense of is a company that was extraordinarily successful and as a consequence the people who invested in it made an extraordinary gain.”
The grilling follows a highly critical report by the National Audit Office, the independent spending watchdog, that said the government sold the defence group too cheaply.
Carlyle, the US private equity group, bought a 33.8 per cent stake in Qinetiq for £42m in February 2003. Qinetiq’s employees secured a further 3.7 per cent. The deal valued the company at £125m.
Three years later, it listed on the London Stock Exchange, which valued it at £1.3bn. The deal raised about £800m for the public purse but the NAO said the government could have got more. The MoD disagreed.
Ian Davidson, Labour MP, said Carlyle “took advantage of these poor unfortunates who really should not have been let out alone”.
The NAO recommended that in future the government should not allow management to negotiate the terms of their own incentive scheme even before a preferred bidder was chosen.
The employees’ stake rose to 20 per cent of the equity when it floated, double what Carlyle originally offered. The 10 top managers secured 9.2 per cent. Sir Edward Leigh, Tory chair of the committee, said the incentives went against “any concept of ethical capitalism”.
Sir Bill Jeffrey, Ministry of Defence permanent secretary, defended the Qinetiq management talking to Carlyle about performance-based incentives but conceded: “There may have been a question about the timing.”
Designing the incentive scheme was left to “hard-headed business people” at Carlyle who had no reason to over-compensate the management, he said.
Sir Bill refuted “very strongly” any suggestion of “a tinge of corruption”. “I have found nothing that shows that,” he said.
He defended the decision to refund £16m of bidding costs to Carlyle but said that in future the government should “be aiming to recoup [costs] from the private entity as well”.
John Pugh, Liberal Democrat, said: “It’s difficult to think what you could have done worse apart from putting it on Ebay.”