Watchdog raps MoD over Qinetiq sell-off bonanza
Eyewatering Stealth raid by pinstripe execs
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Analysis UK gov watchdog the National Audit Office (NAO) has released a damning report into the privatisation of the country's top-secret defence research labs and facilities as Qinetiq.
The report, now available online from the NAO, severely criticises the Ministry of Defence (MoD) and some of the consultants which advised it during the selloff process - who themselves pocketed large fees. (Total spend on consultants was more than £28m.)
Sir John Bourn, NAO chief, said today:
"I believe more money should have been secured for the public purse."
That seems reasonable. According to the report:
The Department has received net proceeds of £576 million from the transaction to date... it also retained a 19 per cent shareholding [in Qinetiq].
The MoD has received £576m for 81 per cent of a business with annual revenues of £1.1bn (on which it makes approximately £120m profits). As the report also notes:
[The MoD is] still by far the largest customer [of Qinetiq], accounting for some 57 per cent of QinetiQ’s revenue in 2006. The majority of this business was awarded without competition.
And it will keep on being awarded without competition, because much of that business relates to operating UK test facilities and firing ranges which are effectively a monopoly which the MoD must use. Indeed, the MoD, as part of selling off Qinetiq, is tied into using these facilities until 2028 under a sweetheart deal called the Long Term Partnering Agreement, worth up to £5.6bn to Qinetiq just for keeping the facilities open. The MoD has to pay more on top when it wants to actually use them. And it's actually even worse than it sounds, because Qinetiq can crank up the price.
The MoD may be exposed to significant price increases... This risk is greater in year ten (and at each subsequent review), as QinetiQ has the right to terminate the contract if it does not agree to the outcome of the price reviews... If there are no other contractors that can supply these services in the market [and in most cases there aren't] QinetiQ may be able to negotiate significant price increases.
One reason that the test-ranges deal was such a big pillow for the MoD to bite was that the MoD has long failed to invest in the facilities and keep them up to scratch.
The LTPA was in part established to address the legacy of underinvestment in the assets used in the delivery of test and evaluation services. To this end, the contract is based on there being £136 million of capital and rationalisation expenditure in the first five years. QinetiQ receives funding for the depreciation of this capital expenditure through the contract.
In effect, then, the MoD still pays to fix up its old test ranges. It does so by borrowing the money from the private sector and then repaying over decades. At the same time it loses ownership of the assets it is paying to fix up.
This is a bit like being an Irish tenant of a rack-renting English landlord before the Republic became independent, paying for any necessary improvements of property you rent at extortionate terms.
COMMENTS
@Gulfie
>> When is the government going to see sense over PFI? (or, in long hand - Public F****d by Industry). We the UK taxpayers are funding obscenely long gravy trains for large UK and foreign companies to make the Government balance sheets look good.
The opposite point of view says the government knows exactly what is happening. The USA has its corporations profiting vastly and unaccountably in Iraq and Afghanistan at cost to their taxpayers. The UK, having been told that no way is it going to get a share of this action (remember BP started in Iraq), has, by some bizarre coincidence, entered into schemes which likewise cost their taxpayers vast and unaccountable sums, such as PFI and IT contracts. It could be argued that in both cases the vast debts from these government arrangements produce results which were either unnecessary or could have been achieved at less cost differently. (The UK example would require an understanding of the specific accounting rules of the IMF).
Except that is is not really coincidence. It is a way for the central banks (which supposedly stump up the money for governments to be able to pay for things) and their private operators to ensure massive recurrent revenues for the future, in the US from interest, in the UK from renting hospitals back and paying for their "management".
Dated ....Past Sell By Date
"Not quite as good as Chisolm and Loves 20 odd million though" If they are of any value to Qinetiq that will be Qinetiq Funding to Spend on Employee Programs/Inward and Onward In-House Investment. I try not to think of Carpetbaggers...that is just so Harold Robbins kitsch.
Business types running rings round Whitehalls politico's & mandarins ?
In the article you wrote:
"Three other executives are specifically named by the NAO: Graham Love, Hal Kruth and Brenda Jones, who made £20m, £13m and £11m respectively."
These three joined QinetiQ in 2001. Would it be unfair to assume that the civil service types they replaced might have been uncomfortable with setting themselves up for such a gargantuan windfall ?
Their leader, Sir John Chisholm, also has a business background, and was brought in by the MoD in 1991 to consolidate their research organisations, and ended up running the lot.
Speaking on Radio 4's Today programme this morning, Lord Gilbert said that Chisholm had misled him with regard to the possible benefits accruing to senior management following the privatisation. At the time Lord Gilbert was the minister at the MoD responsible for this matter. He presumably remains a relatively poor man.
These were the relative returns on investment:
Top ten - 200 fold growth (4.0 % of the shares)
Next 245 managers - 145 fold growth (3.1 % of the shares)
Staff 8000+? - 9 fold growth (3.4 % of the shares)
Why was it deemed reasonable that the top ten managers needed to be "Incentivised" at over twenty times the rate of incentivising the staff? In the outside corporate world, when staff, management and directors are awarded share incentives, they are usually at the same price discount at any one time, and the relative importance of the people being rewarded is accounted for in the number of shares made available to them. However in this case, QinetiQ's top management awarded themselves shares in large quantites, which would possibly be fair enough, but then they really gilded the lily by charging themselves less than a twentieth the price per share that the rank and file had to pay !!! A moral crime of the first order.
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