BBC BLOGS - Peston's Picks
« Previous | Main | Next »

Treasury mugged itself

Robert Peston | 08:30 UK time, Friday, 23 November 2007

qinetiq.jpgA battalion of former military bigwigs last night accused Gordon Brown of being tight-fisted on Britain’s defence. Which adds resonance to today’s judgement by the National Audit Office that taxpayers were short-changed in the sale by the Ministry of Defence of a stake in Qinetiq, the technology and defence business.

The charge which sticks against the MoD and the Treasury (which always oversees these deals) is that they made a schoolboy error in the sale-process. They ran an auction and identified the US private equity house, Carlyle, as the preferred bidder before nailing down all the financial variables.

Carlyle then succeeded in significantly negotiating down the price it would eventually pay, exploiting the absence of any rival acquirer. At the crucial moment, there was no competitive tension, which undermined the MoD’s bargaining position.

The deal was also done in the least favourable market conditions, when share prices were on their knees. So credit to Lord Moonie, who at the time was a defence minister, because he argued for the deal to be delayed. As he told me in an interview for the Ten O’Clock News last night, it was the Treasury which was as keen as mustard on a transaction and – no surprise here – the Treasury got its way.

That said, the uplift in the value of Qinetiq since Carlyle acquired its third stake has been a benefit to the taxpayer, because the MoD kept a majority holding. Realised and unrealised proceeds total about £800m for the public purse – which ain’t bad going for a research operation that may well have been a liability rather than an asset only ten years ago.

But let’s not overstate the gain for the Exchequer. For the Department, according to the NAO, the internal rate of return on this deal (the yardstick for success used by the private equity houses) was 14 per cent a year – which is respectable for the public sector, reason enough to open a good bottle of cider.

Carlyle’s internal rate of return was a staggering 112 per cent per annum. This wasn’t just a vintage deal for Carlyle, it was vintage Krug.

For those who ran Qinetiq, it was Krug in diamond-encrusted, solid gold goblets. The top ten executives in the business made £200 for every £1 of their own cash they invested in the business. Sir John Chisholm, Qinetiq’s chairman, turned £130,000 into £26m; Graham Love, the chief executive, scooped £21m from £110,000.

As it happens, they deserved to do pretty well, because they transformed a research cost-centre into an international hi-tech business with great prospects – and the UK has too few of those.

Did they “deserve” to do quite as well they did? Unanswerable question.

They benefited from the gullibility of the Treasury and the MoD, who sold off Carlyle’s equity at the least propitious moment in the stock-market cycle.

It’s spilt milk, lapped up by Sir John, Mr Love and a few other former civil servants at Qinetiq. And if there’s an unattractive sound from the NAO, it’s the mewling of public officials that there’s no cream for them.

Comments   Post your comment

  • 1.
  • At 09:46 AM on 23 Nov 2007,
  • adam wrote:

Another foul up. How many more ?

  • 2.
  • At 09:54 AM on 23 Nov 2007,
  • david kinloch wrote:

This is another example of the Treasury's incompetence during Gordon Brown's reign. We should not forget its inept handling of the sale of the UK's gold reserves which has cost the country countless billions.
It confirms my view that Gordon Brown's record as Chancellor has been vastly over-rated.

  • 3.
  • At 09:55 AM on 23 Nov 2007,
  • w Haddon wrote:

It is the government's decision. It would be interesting to know however who advised them on the process. They are of course unable to comment.

  • 4.
  • At 09:56 AM on 23 Nov 2007,
  • Simon Stephenson wrote:

"That said, the uplift in the value of Qinetiq since Carlyle acquired its third stake has been a benefit to the taxpayer, because the MOD kept a majority holding. Realised and unrealised proceeds total about £800m for the public purse - which ain't bad going for a research operation that may well have been a liability rather than an asset onlt ten years ago"

This seems even to my untutored eye to be a false argument, implying as it does that:-

(a) the £800m is in effect buck-shee for the taxpayer, having been created solely as a result of Carlyle's involvement. In other words we should be in no doubt that this wealth would have remained dormant and uncreated if the 33% sell-off had not occurred. The income-stream that has created the wealth could not have been generated under arrangements where the resulting wealth remained overwhelmingly the property of the general public.

(b) we should be grateful to have received £800m from the deal - after all Carlyle could have held out for even better terms that would have led the taxpayer to receive only, say, £300m. So we should really be applauding the MOD's perspicacity in securing for us what we must assume was the best deal possible at the time.

To me, the paragraph reads more like a government press release than the usually measured writngs of Mr Peston.

  • 5.
  • At 09:56 AM on 23 Nov 2007,
  • Andrew wrote:

This is the second time Graham Love has made an outrageous profit from the privatisation of an MOD organisation. The first time around he led the privatisation of DSSD to form Comax which was eventually bought by Amey. The second time around it was QinetiQ. I think I'll buy shares in his next company.

  • 6.
  • At 09:56 AM on 23 Nov 2007,
  • Thomas Worthington wrote:

Everyone involved in technology knew that the valuation was at least an order of magnitude out at the time. This was no error, schoolboy or otherwise. Someone somewhere set out to make a lot of money from selling public assets at utterly unrealistic prices.

  • 7.
  • At 10:03 AM on 23 Nov 2007,
  • Dennis wrote:

At a time of falling economic growth,rising inflation on the horizon the government sells off state assets for a song while the Treasury and it's pup the inland revenue ever more greedily pursue offshore Bank accounts and impose stealth taxes on the general public.Labour government.Labour managment.Enough said.

  • 8.
  • At 10:27 AM on 23 Nov 2007,
  • David Simmons wrote:

What a good job we have analysts like yourself about, Robert, to give us the facts in these matters. I have no doubt that, without this information, the Treasury would have trumpeted this as a hugely successful piece of negotiation.
Now - about the sale of our gold reserves at the bottom of the market...

  • 9.
  • At 10:44 AM on 23 Nov 2007,
  • Samantha wrote:

It's QinetiQ, not Qinetiq!! It may be a very silly name, but you are the BBC and should therefore write it properly!!

  • 10.
  • At 10:46 AM on 23 Nov 2007,
  • Scamp wrote:

This was indeed a scandalous affair which in the absence of a UK bid also tells you a lot about how pathetic the UK financial institutions are.

Equally though we should not have sold this to a US PE company.. The Americans would not have sold it to a UK company.

John Chisholm - good luck to him...I've met him a couple of times and he's a thoroughly nice bloke.

However - turning this particular research cost-centre into an international hi-tech business with great prospects was never going to be difficult so I wouldn't overstate what they've achieved.

But then Brown has done this again since... Selling Westinghouse to the Japanese just as the nuclear generation business looks like it is taking off again wasn't exactly intelligent.

  • 11.
  • At 11:11 AM on 23 Nov 2007,
  • Quinton Nimoy wrote:

Peddling the tired old line about Treasury incompetence is pure fantasy. The columnist should really be experienced enough to spot blatant corporate welfare when he sees it.

As previous commenters have variously stated the reasoning behind this piece is specious at best, and the inclusion of a swipe at civil servants a childish sideshow. The individuals 'mewing' are probably labouring under the illusion that they are acting in the public interest.

And no, I think you'll find they didn't 'deserve' it. What could you possibly do to deserve that money? Save the planet? Cure all disease? Of course not, those aren't well paid positions after all.

  • 12.
  • At 11:16 AM on 23 Nov 2007,
  • Gilbert wrote:

I agree with much of what you say. But there is no "stock market cycle". It's easy after the event to point out that a given time was a particularly good or bad one to float a company. But if you could do that sort of thing at the time, you'd be a billionaire fund manager and not a BBC journalist.

  • 13.
  • At 11:21 AM on 23 Nov 2007,
  • Ted wrote:

To make £21 million from an investment of £110,000 on the sale of a public asset stinks of corruption to me, regardless of whether the company has been relatively successful since the deal. How radically has this business been changed since this partial privatisation? Enough to turn 110 grand into 21 million? Surely not! If I were one of the engineers or scientists working for this company, one of the people actually producing the world class R&D that has driven its success, I'd be pretty bitter about the scale of the rewards the managament have taken.

  • 14.
  • At 11:29 AM on 23 Nov 2007,
  • adam wrote:

incompetence after incompetence after incompetence...the list goes on.

  • 15.
  • At 11:40 AM on 23 Nov 2007,
  • Dennis wrote:

At a time of falling economic growth,rising inflation on the horizon the government sells off state assets for a song while the Treasury and it's pup the inland revenue ever more greedily pursue offshore Bank accounts and impose stealth taxes on the general public.Labour government.Labour managment.Enough said.

  • 16.
  • At 11:50 AM on 23 Nov 2007,
  • vaughn wrote:

Treason. Theft. There are no other words to describe the sale of such an asset. Once again UKPLC sells itself short of ever being anything more than a puppet on the technology stage. All in the name of money - we have all been robbed! Did they get it all tax free as well?What was Mr Blairs cut??

  • 17.
  • At 11:56 AM on 23 Nov 2007,
  • Roy wrote:

Let us not forgot that this is the second time that the defence research establishments were split, half sold off and half kept in government hands.

In the mid-1980s, half of the MOD (Procurement Executives) R & D establishments were transferred to the Royal Ordnance Factories, which were in turn sold at a knock-down price to BAe. Two sites to the north of London, the Royal Small Arms Factory and the former Explosives R & D Establishment at Waltham Abbey, both inside the M25 belt, both of which were duly closed and sold off, were reputedly worth more that the £400m paid for the entire company.

  • 18.
  • At 12:06 PM on 23 Nov 2007,
  • Dave wrote:

This would be the Carlyle group of George H W Bush and John Major fame? Politics really does pay.

  • 19.
  • At 12:36 PM on 23 Nov 2007,
  • Neil wrote:

Remember Amersham anyone?

  • 20.
  • At 12:50 PM on 23 Nov 2007,
  • batson d belfry wrote:

So the accusation is that they held an auction and then went exclusive and suffered a price chip. If there is not more to this story than that then this is a lot of hot air generated out of sheer ignorance. That is how practically all these deals go. You do the auction, go for the preferred bidder and then they will need to do their due diligence, which usually requires exclusivity. Issues then come up through the due diligence, and many buyers use these to price chip. The call then for the seller is when to pull that deal, write off costs to date and then go back to the other auctioners - all of whom by then will sense an opportunity as they will know the first bid failed, so their offers will probably go down. Most buyers won't operate any other way. You can try to do and pay for your own due diligence, but it is unlikely any buyer will settle purely for this. And try and "nail down financial variables" before they have done their due diligence and buyers will just rightly walk away. You don't spend that amount of money sight unseen.

The only major potential mistake with any substance in these allegations is that they sold when the market was low - as a buoyant market when everyone wants in is the best protection against the price chip process. Possibly also they did not reference enough the past transactions of Carlyle and their house style. But calling the auction and then due diligence process a schoolboy error shows a profound ignorance of how these deals work in practice.

It's a shame that the BBC perpetuates these types of shallow understanding, and that you have to get well into the piece to read the rather significant comment, "As it happens, they deserved to do pretty well, because they transformed a research cost-centre into an international hi-tech business with great prospects – and the UK has too few of those." We are still as a country so jealous of success.

  • 21.
  • At 01:13 PM on 23 Nov 2007,
  • gus wrote:

Although I'd be the first person to jump on this Government's continued incompetency, in fact I suspect a more sinister truth behind this.

For those that have researched the Carlyle Group (and I strongly suggest you all do) I think the implication of who is benefitting from this and how it was 'allowed' to happen becomes clearer.

  • 22.
  • At 01:45 PM on 23 Nov 2007,
  • Stew Davies wrote:

I worked alongside DERA which became Quinetiq after it was sold.

In my opinion it was a very talented organisation with great people but for it to become what it was capable of it needed to be set free from the shackles of government who simply did not use this business to make money, just to solve problems they had.

I think the Mod has dropped quite a few things which they owned but were not prepared to develop into profit centers, which are now in the hands of successful individuals, I certainly know of one.

  • 23.
  • At 01:46 PM on 23 Nov 2007,
  • Dave wrote:

Funny how a lot of these deals often wind up benefiting a small number of private individuals, even when it was the taxpayer who bore most of the financial pain involved in the initial creation, running or acquisition of the assets in question. Remember how a sizeable chunk of our gold reserves was sold at rock-bottom prices under GB? Read about any of the seemingly endless undervalued public land sales later turning a massive profit for private developers mere months later? Wonder why this happens? Chances are the ministers and public officials who agree such bargain basement sales will use those profits to feather their own nests some way down the line.

  • 24.
  • At 04:46 PM on 23 Nov 2007,
  • Neil Kiley wrote:

Does anyone in their right mind believe that getting a good deal was the most important thing involved in this sale? The Carlyle Group is probably the most influential player in the military-industrial complex, with numerous government and ex-government ministers from a variety of countries on their books. They wield a huge influence over governments - an influence that I am sure they used to full advantage in this deal.

  • 25.
  • At 05:11 PM on 23 Nov 2007,
  • John from Hendon wrote:

The problem with privatizing any government agency is that the government is generally committing itself to a never ending relationship with the organization. No such bad thing you may think - but I suggest that you may be wrong. Consider for example getting rid of the Road Fund License and just putting up fuel prices - HMG cannot do this as it has privatized the DVLA (though not yet as far as the MOD armament development agencies.)

One of the major problems of merging the Customs and the Inland revenue was that their two computer systems had been separetely privatized. Also consider closing a Private Public Partnership Hospital or School - basically it is either impossible or extraordinarily expensive.

All of these financial stratagems may look good in very short term Treasury accounting but in the end cost far more than paying for what we need out of Tax and borrowing - This is a fundamental flaw in Treasury "think".

The only argument for bringing in the private sector is that structural inefficiencies can be overcome (read labour/union restrictive practices) - even this is only partly true. In any case one needs to balance this against the huge extra cost of bringing in and paying for private sector capital (guaranteed returns of 20% as I have seen somewhere) - our children and our children's children will be paying these.

Qinetiq is just a case in point - but recall the many billions of pounds (5 I think) wasted on MOD computer systems etc. etc. To concentrate on Qinetiq misses the point.

  • 26.
  • At 05:33 PM on 23 Nov 2007,
  • Simon Densley wrote:

Posting #9
As far as I am aware, correct English requires only that the first letter of a proper name be capitalised. I have not read anywhere that the entity referred to by that name can demand that users capitalise any other letters when using it. I commend the BBC for correcting their idiocy and actually writing it properly.

  • 27.
  • At 06:12 PM on 23 Nov 2007,
  • Will W wrote:

QinetiQ should not have been hived-off to Carlyle in the first place. Yes they have "added value" and maximised profits for certain individuals within the company but I can tell you there was almost mutiny in the camp when senior management tried to impose a pathetic pay offer on hard working staff last year.

It should have been turned into a GovCo; thereby commercialising the business yet keeping its public sector ethos and status.

  • 28.
  • At 08:28 PM on 23 Nov 2007,
  • John Braddock wrote:

Is it me or is it amazing that nearly everything the erstwhile chancellor - now PM - has done has been to the detriment of the British people . PFI's keep the true cost off the books - agency agreements ( and agency set ups)mislead everyone as to who pays and who is responsible . Favoured companies ( PwC ; EDS plus the rest ) make billions on the backs of poor performance or supine support for the government. Accountability is the biggest victim of this sorry administration .

  • 29.
  • At 10:13 PM on 23 Nov 2007,
  • Martin wrote:

You claim that the Civil Service organisation was a liability. In the eyes of MoD is was. 9000 scientists and engineers which the MoD could not see to employing long term. Putting them in the commercial arena seemed a good idea. However, it is only recently that QinetiQ has had to show how good it is in turning government research into products. Judging by it's share price since being launched onto the stock market it does not present a very exciting prospect. Hardly a success transferring many of Britain's highly renowned engineers and scientists into a lac-lustre commercial enterprise which much of industry has yet to understand.

AND do not forget the privatisation and sweetener costs that MoD may have paid out over the 10 years that QinetiQ took to privatise.

Sad that a few priviledged individuals get so much for so little.

  • 30.
  • At 10:20 PM on 23 Nov 2007,
  • Quietzapple wrote:

Such nonsense!

HMG were supposed to pretend they had Trotter Enterprises in the wings?

Or whom?

(as much of a larf trying to post here as on Mr Robinson's blag)

  • 31.
  • At 11:22 PM on 23 Nov 2007,
  • ernest kelly wrote:

did we not have similar profits made
at the time of the privatising spree
by mrs thatcher or dont we count that

  • 32.
  • At 12:54 AM on 24 Nov 2007,
  • Austin wrote:

I see no one is mentioning that it was John Major PM, who initiated the sale of the DERA (now Qinetiq) to the Carlyle Group for a knock-down price, and then resigned as PM, and became its UK Chairman.


  • 33.
  • At 03:50 AM on 24 Nov 2007,
  • Jay wrote:

"In my opinion it was a very talented organisation with great people but for it to become what it was capable of it needed to be set free from the shackles of government who simply did not use this business to make money, just to solve problems they had."

Are you joking? Seriously, are you saying that this resource should have been used to make a profit for the government rather than deliver solutions in its field?

Do you work for Carlyle, much?

  • 34.
  • At 08:07 AM on 24 Nov 2007,
  • Alan McDonald wrote:

> What a disgusting thing to say. The NAO exists to protect the public interest. Only the greedy ascribe greed to everyone else they encounter. A decent journalist would have spoken to the NAO and allowed them to speak for themselves.

  • 35.
  • At 10:11 AM on 24 Nov 2007,
  • Simon Stephenson wrote:

Comment 19 : batson d belfry : 12.50PM

I respect your argument, but I wonder how much of the wealth creation at QuinetiQ has come through efficiency and development of new areas of activity, and how much through withdrawal from areas of activity that have social/political value but are financially loss-making. Are you actually comparing like with like?

It's not really rocket science to take an organisation with financially costly social/political commitments, strip them out and improve the return and cash flow. Any competent manager with a profit-centred conscience can do that. But is the processing of such a programme something that has a value, in itself, of hundreds of millions of pounds?

  • 36.
  • At 11:59 AM on 24 Nov 2007,
  • Quietzapple wrote:

Amusing as ever that so many Tories are at or near the top of the thread, blagging for the Conservative Party.

Desperation breeds this kind of keenness.

  • 37.
  • At 02:08 PM on 24 Nov 2007,
  • Sam wrote:

Not one comment here has stated the obvious. QinetiQ, regardless of its profitability, is an arms company which is now being run for maximum profit, which means vast amounts of arms being sold to governments across the world.

That is, if New Labour's "ethical foreign policy" had ever been a remote possibility, then it would have been wound up and its expertise turned to peaceful pursuits which benefit mankind, rather than finding new ways to kill us.

Oh yes. And let's not be fooled here. The "value added" is all about expanding the "war on terror," and when that great white elephant collapses, Carlyle's vaunted management will seem a lot less prescient.

  • 38.
  • At 02:48 PM on 24 Nov 2007,
  • Frank J. wrote:

Glancing through the commentaries made so far, I see that only #'s 18, 21 and 24 have any idea of what is really going on. You must do some research on the who's who of Carlyle to understand the significance of this purchase. A good start is to locate the Dutch-made 4 minute video on Carlyle and then do a daily Google search. You will be amazed at what you find.

  • 39.
  • At 08:55 PM on 24 Nov 2007,
  • Eric McCay wrote:

I wonder how long it will be before Brown and Blair get Quinitec directorships.

This was a bent deal with money disappearing into the hands of a very politically oriented private equity company.

Here are some names.

John Major, former British Prime Minister; Fidel Ramos, former Philippines President; Park Tae Joon, former South Korean Prime Minister; Saudi Prince Al-Walid; Colin Powell, former Secretary of State; James Baker III, former Secretary of State; Caspar Weinberger, former Defense Secretary; Richard Darman, former White House Budget Director; the George Soros,Alice Albright, daughter of Madeleine Albright, former Secretary of State; Arthur Lewitt, former SEC head; William Kennard, former head of the FCC, to this list. Finally, add in the Europeans: Karl Otto Poehl, former Bundesbank president; the now-deceased Henri Martre, who was president of Aerospatiale; and Etienne Davignon, former president of the Belgian Generale Holding Company.

.. and even some bin Laden family members.

  • 40.
  • At 08:58 PM on 24 Nov 2007,
  • John Smith wrote:

It is becoming more and more obvious that the BBC is nothing more than a collection of Winston Smiths rewriting history for the British government. Orwell literally got his ideas for 1984 working at the BBC.

  • 41.
  • At 12:18 PM on 26 Nov 2007,
  • ecforster wrote:

It is claimed that Carlyle paid £42.2m for equity in Qinetiq. A certain Mr.Peston at the Sunday Telegraph pointed out in 2005 that Carlyle actually paid £4.2m for one third of the company's equity and effectively gave it a loan of £38m by buying redeemable preference shares. Why would that matter? If Carlyle's equity was finally sold for, say, £304.2m, Carlyle would gain £300m, since it gets back its £38m loan.
If its equity had been bought for £42.2m it would have gained £38m less or £262m. Pretty sharp operators these private equity boys. Even the NAO seems not to have picked this up. But devaluing the equity in this manner also allowed the initial value of employees' modest share purchases to gain undue ownership of the company to the detriment of the taxpayer. Perhaps MoD really did believe that redeemable preference shares are equity.

Furthermore, on studying the NAO report, it appears that the NAO auditors misunderstand the true equity value. It is not £125m as stated in their report (Fig.10) but £12.4m as quite clearly stated in Qinetiq Holdings' 2003 Annual Report. Quite a serious difference for the actual purchase price of the business. The rest is made up of loans from the various parties - see above. So multiply all gain factors in the report by 10 to get the real picture.

  • 42.
  • At 01:14 PM on 26 Nov 2007,
  • ecforster wrote:

Correction. £12.4m above should read £12.9 being equity share capital of £1.5m plus share premium account of £11.4m.

  • 43.
  • At 08:53 PM on 02 Dec 2007,
  • John Tibbetts wrote:

You have to understand that the amount of revenue to the exchequer is irrelevant. The government was risk averse to sacking so many civil servants and just wanted to get their pension commitments and salaries off its back! Carlyle offered a way to acquire US businesses so as to ensure that the float was successful. The amount of money generated for the exchequer is not relevant. Their main political concern was that the float would be a flop and that they would be lumbered with the embarrassing business of shutting down the place and laying off 12000 public scientific civil servants (the best scientists in the world). The real unfair thing was the money made by the 245 who invested 3000 and got 500,000 most of these people are spread sheet operatives who did nothing other than put some order in the accounts. The top guys can have their money but the reward for these 245 was a real scandal.

  • 44.
  • At 09:07 PM on 02 Dec 2007,
  • Johnny Smart wrote:

Comment # 5 is correct but consider this. Buying a profitable defence company in the USA is not easy. Possibly by allowing Carlyle to make a killing this produced a special relationship that might have helped the group to buy profitable US defence companies (keeping the company in good profit today). A challenge now for this company might be to capitalize on the talent of the workforce - the best in the world - to lift the share value via exploitation of scientific inventions and the technologies of the future. This will in the long run benefit the exchequer much more than any money gained from the original flotation. Everyone must be optimistic as this is one of the only large high technology companies that the UK has got. The military R&D is to us what the precision engineering industry is to the Germans and to the Japanese. We must help it to flourish and wish it a lot of luck.

  • 45.
  • At 09:29 PM on 02 Dec 2007,
  • Pete Prosser wrote:

Whatever happened it is a good thing for there is now a large high technology company in Britain capable of delivering complex solutions in the market. This is a rare thing but it is possible it will be a very real and big success. We should wish it much success and buy its shares because the staff and its history is replete with talent.

This post is closed to new comments.

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.