Qinetiq deal cost taxpayers £100 million

The Committee of Public Accounts (PAC) today issued a damning report on its review of the privatisation of Ministry of Defence (MOD) technology spin-off Qinetiq.

Overall, the PAC said the 2003 deal to privatise Qinetiq had been successful in protecting the viability of this business of strategic importance to UK defence interests.

But Edward Leigh MP, chairman of the Committee of Public Accounts added: "The MOD conducted the deal like an innocent at a table of cardsharps, with the taxpayer the fall guy losing out on nearly 100 million."

Created out of the Defence Evaluation and Research Agency (DERA) in 2001 as a means of addressing the declining defence research budget, Qinetiq was spun off in two stages: the sale of a minority stake in the business to the private equity firm, the Carlyle Group in 2003 and a flotation on the London Stock Exchange in 2006.

The PAC report found weaknesses in the 2003 sale process, and the National Audit Office have estimated that the taxpayer could have received 90 million more from the privatisation. The MOD continues to hold a 19 per cent shareholding in the company.

Leigh added: "The MOD pushed ahead with the sale at the worst possible time and then weakened the competition among bidders by eliminating them at too early a stage. Carlyle was appointed preferred bidder with major price sensitive issues still unresolved, leaving that firm with an unbeatable hand in subsequent negotiations about the value of Qinetiq. And then the MOD even refunded Carlyle's bid costs."

In a damning indictment of the senior public servants managing Qinetiq and its impartiality in sensitive UK defence affairs in future, he added that they had "behaved dishonourably," particularly pointing to the negotiation of their own incentive scheme with Carlyle before the firm was appointed preferred bidder.

"The design of the scheme contributed towards the top ten managers receiving a return on their own investment of 200 times. This is nothing less than profiteering at the expense of the taxpayer. Never again should public servants be permitted to pursue such a self-interested stratagem," he added.

Qinetiq issued a statement in response that "strongly refuted" the PAC's "accusations". "Once the government had made its decision [on the public private partnership], the management team focused on the successful delivery of the selected option andan incentive scheme for employees was put in place to ensure its success," it stated.

"The final structure of the incentive scheme was negotiated between Carlyle, as purchaser, and Government, as vendor, once Carlyle was appointed as preferred bidder." It added that the taxpayer had received approximately 1 billion worth of value from that organisation, "which was previously considered a substantial financial liability".

Qinetiq also said it would be publishing a more detailed response to the PAC report on its website in due course.