Original URL: http://www.theregister.co.uk/2008/06/11/commons_committee_qinetiq_profiteer_report/

MPs call Qinetiq sellout execs 'profiteers' - no, really?

Cutlasses, parrots retrospectively seen as clues

By Lewis Page

Posted in Government, 11th June 2008 11:02 GMT

Comment Another government oversight body has just revisited the case of the QinetiQ sell-off, in which a group of business executives mounted an astonishing ten-year corporate raid on the British defence ministry. This is not, however, a commendable bit of vigilance on our behalf; it's politicians seeking limelight by attacking a safe target.

This week's report by the Parliamentary Public Accounts Committee returns to the role of Sir John Chisholm and his inner circle at the Defence Research Agency and its successor DERA - the Defence Evaluation and Research Agency - most of which Chisholm & Co subsequently took private under the name QinetiQ. Chisholm and his nine closest confederates made out like gangbusters, scooping £200 for every £1 they invested in a share deal set up by themselves.

"Such profiteering at the expense of the taxpayer is not something this Committee would expect from former public servants," say the testy MPs, led by the Tories' Edward Leigh.

But the fact is that Chisholm and his confederates - for instance colourful biz-buccaneer Graham Love, who now heads QinetiQ - were never exactly Sir Humphreys. Chisholm and Love, rather than being career civil servants, were hungry 1980s biz execs who were brought in to the Defence Research Agency to get it ready for privatisation in 1992 in a classic last-gasp-of-Thatcherism move.

This was a bit like inviting a fox to handle the reorganisation of your chicken farm. Love in particular must have come to believe he could do anything he liked: having broken off a large chunk of DERA in a 1994 management buyout - his payout on that occasion was never made public - he was actually allowed back onto Chisholm's team of "public servants" afterwards, to scoop another thumping payout in the QinetiQ deal.

Leigh and the Public Accounts Committee say that £54m which should rightfully have gone to the taxpayer went instead to Chisholm, Love and the other eight top execs of QinetiQ. They were able to negotiate this incredibly lucrative deal, according to the parliamentarians, first by ensuring that the sale would be handled by private equity investors and then by playing private equity firm Carlyle against the mandarins of the MoD.

The Department ... received 16 expressions of interest ... only one of which came from a trade bidder, SERCO ... QinetiQ management strongly objected to trade bidders ... The 12 bidders that were taken forward were all private equity firms.

QinetiQ senior management were heavily involved in the design of the incentive scheme ... Carlyle initially proposed to set aside 10 per cent of QinetiQ’s equity for management ... Sir John Chisholm [said] that the proportion of equity Carlyle were offering to incentivise management was low ... QinetiQ management held discussions on the incentive scheme with Carlyle before they were appointed preferred bidder ... Following the discussions between QinetiQ management, Carlyle submitted a revised bid. The revised incentive scheme set aside 20 per cent of QinetiQ’s equity to management [and] offered the prospect of much greater returns ... especially to the top 10 managers ... If the Department had restricted the proportion of QinetiQ’s equity made available to staff to 10 per cent it could have realised additional proceeds of £76 million.

So, in short, Chisholm, Love and the others got Carlyle to bump up the management payout. Subsequently, Carlyle is named preferred bidder. As a result, the MPs say, £54m of the £76m unnecessarily paid to QinetiQ staff went to Chisholm's top ten.

But this is the way privatisations always go, and it's at least as much the government's fault as it is the raiders'. The unwritten talks go something like this:

Gov: Look, we've got a nightmare on our hands - a huge overstaffed bureau of boffins and loads of attached admin bottom-feeders that we don't want to keep paying for. But we don't have the guts to face a massive round of sackings either - the unions would skin us. How about you chaps take them on? You can fire them all later, as long as you wait for a while.

Raiders: Mmm. Okay, we can sort that out for you. We'll raise some private equity cash and use it to buy up a bunch of profitable American companies. The money from them will give us a balance sheet in the black when it comes to flotation. But if you want us to keep the loss-making Brits employed for any time at all, you'll have to give us a bloody enormous sweetheart monopoly deal. Won't cost you too much straight off, though - we'll collect later, over time, after all you guys have moved jobs and the story's gone away.

Gov: So we don't have to fire anyone, you won't fire anyone for a while at least, and we don't have to pay anything until later?

Raiders: Yup. And hey - you'll get a bit of cashback up front. Hire yourself a few doctors or teachers or something.

Gov: That's extraordinarily kind of you. It seems as though you deserve something for your trouble.

Raiders (wiping drool from chins): Oh, don't worry. We'll sort ourselves out.

And so the deal unfolds. Based on past form, we can expect the UK end of QinetiQ to shrink to the point where it matches the MoD's boffinry and testing budget - maybe a little bigger, if QinetiQ UK can win significant non-MoD business and use its privileged government access to advantage. Meanwhile, the company's capital and manpower base will gradually shift more and more across the Atlantic in pursuit of hugely richer pickings.

At the end of the process, the results in the UK will look much the same as if the MoD had just fired everyone it couldn't afford in the first place. The only difference will be that some money men and investors - having handled the MoD's dirty work for it spread over a long period, and charged hefty premiums over many years for doing so - will have become very rich, partly in the form of valuable American companies and partly in plain old money.

The money men don't really lie about what they do, though, or if they do nobody over the age of ten should believe them. They couldn't be more obvious about who they are or what they do if they had parrots on their shoulders and cutlasses in their hands.

Much of the weakness here lies in the government, which feels unable to be honest even with itself - certainly not with its own employees and certainly not with the taxpaying public.

Neither Tory or Labour governments can bear to just say straight up "we've decided to massively cut defence research funding, and that's going to mean there will be a lot fewer defence researchers". Instead they prefer to believe in some fantasy where a magic private-sector wand will be waved, the government will pay less - even make some money! - nobody will be fired and everyone will fly to work astride their winged pig steeds.

Naturally enough, once the men in eyepatches and big boots have been invited to take over the ship, they predictably unscrew and trouser most of the portable fittings before setting sail for the Spanish Main, making surplus British crew walk the plank as they go.

Then, sometimes, a few people will notice belatedly that something has gone wrong - that we don't have a ship anymore, and we have to rent it back at extortionate costs when we want it. Also that our former captains now indulge in such hobbies as collecting life-size elephant sculptures made of solid gold.

Then we spend the next decade with people like the Public Accounts Committee fighting over who can issue the most showy condemnation of the way the thing was handled - without recommending any action other than bolting that particular stable door in future (which in this case, as the MPs largely admit, has already been done).

Nobody has the guts to suggest that any of the supervising mandarins be fired, or have their pensions taken away. Nobody dares to stain the reputations of the political management who oversaw the deal. After a few years, people will dare to point to the hugely wealthy pirate skippers, and call them mildly ugly names like "profiteer" - like they care - but that's it.

And absolutely nobody bothers to spend time seeking out the skulduggery that's going on now, that didn't happen years ago. Things like Watchkeeper, and Eurofighter Tranche 3, and Future Lynx - and these are just in the MoD. The NHS gets three times the Defence budget - it probably has at least three times as much general burglary and waste going on. And even that is peanuts compared to the various forms of social-inclusion spending.

Come on, MPs. Come on, National Audit Office. We know about QinetiQ. Turn around and look into the future - or at least the present, for goodness' sake - why don't you? ®