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Watchdog raps MoD over Qinetiq sell-off bonanza

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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.

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