Home > QinetiQ response to NAO and PAC
QinetiQ response to NAO and PAC
QinetiQ Group plc
National Audit Office and Public Accounts Committee
QinetiQ’s comments in response to issues raised from the above reports
National Audit Office and Public Accounts Committee
QinetiQ’s comments in response to issues raised from the above reports
This document has been prepared to address issues which have arisen from the National Audit Office (NAO) and Public Accounts Committee (PAC) reports into the privatisation of QinetiQ. The following sets out the company’s formal response to the key topics arising from these reports.
Do current senior management consider the privatisation process a success? If so on what grounds?
• Yes. As highlighted by the PAC, the privatisation of QinetiQ has been successful in protecting the viability of a business which is of strategic importance to UK defence interests. This has been a significant achievement given that MOD defence research budgets have been declining over the period since QinetiQ was formed
• The taxpayer has received approximately £1 billion worth of value from an organisation which was previously considered a substantial financial liability
• Since its formation QinetiQ has balanced the decline in the UK defence research budget with revenue from other sources, and has successfully expanded into new markets, for example Australia and North America, which now account for over 40% of sales
• At the time when QinetiQ was being auctioned in 2002 its future was far from assured. Its core research business – over which it had enjoyed a near monopoly historically – was being opened up to full competition, and it lacked wider market access for its technology
• QinetiQ's successful progress as a public company was demonstrated on 28 May 2008 when it announced its preliminary results for the year to 31 March 2008. These results confirmed its successful transition from a government agency, focused on purely MOD work, to a rapidly growing commercial company operating on an international stage. QinetiQ’s value today has clearly been achieved through the entrepreneurial efforts of the management team since the Public Private Partnership transaction completed in 2003
• The current Chairman and Chief Executive have driven the outstanding performance of the company that has delivered excellent returns for all shareholders
• Sir David Lees, senior independent non executive director of QinetiQ, has made it clear that the Board has full confidence in the current QinetiQ senior management, who refute the allegations made in the PAC report
• Yes. As highlighted by the PAC, the privatisation of QinetiQ has been successful in protecting the viability of a business which is of strategic importance to UK defence interests. This has been a significant achievement given that MOD defence research budgets have been declining over the period since QinetiQ was formed
• The taxpayer has received approximately £1 billion worth of value from an organisation which was previously considered a substantial financial liability
• Since its formation QinetiQ has balanced the decline in the UK defence research budget with revenue from other sources, and has successfully expanded into new markets, for example Australia and North America, which now account for over 40% of sales
• At the time when QinetiQ was being auctioned in 2002 its future was far from assured. Its core research business – over which it had enjoyed a near monopoly historically – was being opened up to full competition, and it lacked wider market access for its technology
• QinetiQ's successful progress as a public company was demonstrated on 28 May 2008 when it announced its preliminary results for the year to 31 March 2008. These results confirmed its successful transition from a government agency, focused on purely MOD work, to a rapidly growing commercial company operating on an international stage. QinetiQ’s value today has clearly been achieved through the entrepreneurial efforts of the management team since the Public Private Partnership transaction completed in 2003
• The current Chairman and Chief Executive have driven the outstanding performance of the company that has delivered excellent returns for all shareholders
• Sir David Lees, senior independent non executive director of QinetiQ, has made it clear that the Board has full confidence in the current QinetiQ senior management, who refute the allegations made in the PAC report
Did QinetiQ management push for privatisation of the Government agency, DERA, and fail to explain the benefit they would personally receive?
• No. At the request of MOD, DERA management set out five strategic options for the future of the organisation in its 1997 corporate plan of which Public Private Partnership (“PPP”) was one
• The PPP option was based on the Labour Party Manifesto policy of a third way, neither fully public nor fully private. MOD appointed its own team to investigate options and Ministers were advised by a council including four distinguished independents advisers. Over the next five years there were several changes of the PPP model with the eventual decision, which was never advocated by the QinetiQ Board or management, being taken by the MOD
• The initial model, known as “Reliance”, was close to the original corporate plan proposal with the introduction of neutral institutional capital and no element of management equity. This was rejected by Ministers against QinetiQ management advice in favour of a “Core Competence” model which split DERA and created a vehicle for full privatisation – QinetiQ. The QinetiQ board proposed a Stock Exchange flotation but this was changed in 2002 by MOD to an auction process for a minority stake with private equity and other participants
• No. At the request of MOD, DERA management set out five strategic options for the future of the organisation in its 1997 corporate plan of which Public Private Partnership (“PPP”) was one
• The PPP option was based on the Labour Party Manifesto policy of a third way, neither fully public nor fully private. MOD appointed its own team to investigate options and Ministers were advised by a council including four distinguished independents advisers. Over the next five years there were several changes of the PPP model with the eventual decision, which was never advocated by the QinetiQ Board or management, being taken by the MOD
• The initial model, known as “Reliance”, was close to the original corporate plan proposal with the introduction of neutral institutional capital and no element of management equity. This was rejected by Ministers against QinetiQ management advice in favour of a “Core Competence” model which split DERA and created a vehicle for full privatisation – QinetiQ. The QinetiQ board proposed a Stock Exchange flotation but this was changed in 2002 by MOD to an auction process for a minority stake with private equity and other participants
What was QinetiQ’s involvement in the selection of Carlyle?
• QinetiQ's Board members were asked for their opinion from time-to-time but MOD conducted the selection process and always took the decisions
• QinetiQ's Board members were asked for their opinion from time-to-time but MOD conducted the selection process and always took the decisions
Did QinetiQ management fail to make MOD aware of conflicts of interest particularly in relation to the incentive scheme for QinetiQ management?
• The final scheme was negotiated between Carlyle, as purchaser, and government, as vendor, once Carlyle was appointed as preferred bidder
• Private equity works by incentivisation of management linked to aggressive performance criteria and therefore success can lead to highly visible management rewards
• As the NAO report confirms, share schemes to incentivise senior management are a common feature of private equity deals
• The final structure of QinetiQ's incentive scheme for employees and managers proposed by Carlyle was informed by legitimate discussion with QinetiQ management, as well as with MoD and its advisors involved in the privatisation process. The principal reason for such discussion was to give Carlyle confidence in the strength and capability of the management team; indeed, both of the final two bidders were involved in discussions with QinetiQ's management team. QinetiQ management was not involved in the structure of the final scheme that was adopted
• The PAC Report states that the top 10 managers invested over half a million pounds of their own money
• It also states that they stood to lose their investment if the equity value of QinetiQ did not increase
• The final scheme was negotiated between Carlyle, as purchaser, and government, as vendor, once Carlyle was appointed as preferred bidder
• Private equity works by incentivisation of management linked to aggressive performance criteria and therefore success can lead to highly visible management rewards
• As the NAO report confirms, share schemes to incentivise senior management are a common feature of private equity deals
• The final structure of QinetiQ's incentive scheme for employees and managers proposed by Carlyle was informed by legitimate discussion with QinetiQ management, as well as with MoD and its advisors involved in the privatisation process. The principal reason for such discussion was to give Carlyle confidence in the strength and capability of the management team; indeed, both of the final two bidders were involved in discussions with QinetiQ's management team. QinetiQ management was not involved in the structure of the final scheme that was adopted
• The PAC Report states that the top 10 managers invested over half a million pounds of their own money
• It also states that they stood to lose their investment if the equity value of QinetiQ did not increase
Did a remuneration committee oversee the allocation of shares to senior management including their own?
• The shares on offer were shares in a new company wholly owned by Carlyle and only Carlyle could decide on the allocation of equity in it. As such the remuneration committee had no official role but, as the NAO Report states, QinetiQ's Board were aware of the scheme throughout the process
• The shares on offer were shares in a new company wholly owned by Carlyle and only Carlyle could decide on the allocation of equity in it. As such the remuneration committee had no official role but, as the NAO Report states, QinetiQ's Board were aware of the scheme throughout the process
Did management benefit at the expense of taxpayers?
• The taxpayer has received approximately £1 billion worth of value from an organisation which was previously considered a substantial financial liability
• The entrepreneurial style of the management team created an asset for the Government rather than the liability which the team had inherited
• The Government retains a 19% share in the business from which they continue to generate value
• QinetiQ’s top ten managers invested over half a million pounds of their own money, taking a risk over a non guaranteed return. At the time when QinetiQ was being auctioned its future was far from assured with its core research business – over which it had enjoyed a monopoly – being opened up to full competition. During this period management adopted growth strategies to overcome these challenges
• The taxpayer has received approximately £1 billion worth of value from an organisation which was previously considered a substantial financial liability
• The entrepreneurial style of the management team created an asset for the Government rather than the liability which the team had inherited
• The Government retains a 19% share in the business from which they continue to generate value
• QinetiQ’s top ten managers invested over half a million pounds of their own money, taking a risk over a non guaranteed return. At the time when QinetiQ was being auctioned its future was far from assured with its core research business – over which it had enjoyed a monopoly – being opened up to full competition. During this period management adopted growth strategies to overcome these challenges
Can QinetiQ be trusted to advise MOD on what military equipment to buy as well as supply that equipment?
• QinetiQ's Compliance Regime is the most stringent in the industry; the PAC Report states that the MOD is confident that it is working effectively
• There is active management of the Compliance Regime which is regularly monitored by both parties
• Both parties are vigilant to guarantee the impartiality of QinetiQ’s advice
• The firewalls which are put in place under the Compliance Regime are intended to protect the independence of QinetiQ’s advice and to protect the UK's defence interests
• QinetiQ's Compliance Regime is the most stringent in the industry; the PAC Report states that the MOD is confident that it is working effectively
• There is active management of the Compliance Regime which is regularly monitored by both parties
• Both parties are vigilant to guarantee the impartiality of QinetiQ’s advice
• The firewalls which are put in place under the Compliance Regime are intended to protect the independence of QinetiQ’s advice and to protect the UK's defence interests
The MOD envisaged that the privatisation of QinetiQ would deliver reduced prices and improved services – has it?
• This award of work is taking place in a competitive market and not in the traditional area of research in which QinetiQ has historically provided services to the MOD. Research work is now also fully open to competition
• According to the MOD’s own Performance Review, conducted in 2006, QinetiQ is performing highly on 91% of the MOD programmes that it is involved in. In more than half of its work for the MOD, officials say that it is excelling at managing the relationship
• There is no evidence to suggest that QinetiQ’s entry into the US and Australian markets has been to the detriment of the quality or value for money of work undertaken on behalf of MOD
• This award of work is taking place in a competitive market and not in the traditional area of research in which QinetiQ has historically provided services to the MOD. Research work is now also fully open to competition
• According to the MOD’s own Performance Review, conducted in 2006, QinetiQ is performing highly on 91% of the MOD programmes that it is involved in. In more than half of its work for the MOD, officials say that it is excelling at managing the relationship
• There is no evidence to suggest that QinetiQ’s entry into the US and Australian markets has been to the detriment of the quality or value for money of work undertaken on behalf of MOD
A full copy of the Company’s statements in relation to these reports can be found in the newsroom centre
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QinetiQ Group PLC, Company Registration No 4586941, Registered Office 85 Buckingham Gate, London SW1E 6PD