MoD PLC - The sell-off of the Ministry of Defence's research agency

In case you missed it while checking your portfolios(!), last week ‘defence research’ group QinetiQ was floated on the stock exchange, which even in the world of cut-throat capitalism raised quite a few eyebrows and mutterings of ‘rip off’ - even from those unconcerned about the whole profiting-from-killing-people business.

QinetiQ was created in 2001, when the Ministry of Defence’s Defence Research Agency was split in two. The most sensitive work was taken on by the Defence Science and Technical Laboratory and the rest given to QinetiQ which, until last week, was still half owned by the MoD.

In 2002 everyone’s favourite secretive US equity power-players the Carlyle Group* - whose board includes such ‘luminaries’ as former PM, John Major and George W Bush - paid a mere £42 million for a third of QinetiQ and management control in the privatisation deal - one that actually cost the taxpayer double that amount in legal and advisory fees. Carlyle also managed to get out of any responsibility for expensive environmental liabilities, and then immediately started selling off thousands of acres of former military training grounds, target sites, tank lands and air strips for housing. Now thanks to the stock market flotation they have netted a cool £227 million.

Also doing very nicely out of the flotation are QinetiQ’s own fat cats. Chairman Sir John Chisholm has a potential windfall of £25m and chief executive Graham Love stands to trouser £22m. This makes a neat £42 million profit for shares they awarded themselves, swindling the taxpayer at the same time.

There’s been plenty of room at the trough for others however: consultants, advisers and other service providers also netted more than £100m by the time the flotation was completed, while investment banks and their clients - the faceless hedge funds and investing institutions who can be relied on to hoover up the shares - will turn a nice, quick profit out of the flotation process.

Seems that everyone has made a killing out of a dodgy arms company. But with New Labour forever banging on about the threat of terrorism and demanding new laws, why did they rush to sell off the UK’s sensitive defence-related inventions – from anti-missile programmes to guided weapons? Even QinetiQ have warned that it may not be able to “deter misappropriation of its confidential information.” Oh well as long as the profits keeping flowing in…

Last year 73 per cent of QinetiQ’s revenue came from the MoD, thanks to a cosy contract known as the Long Term Partnering Agreement. This agreement means QinetiQ runs the government’s test ranges for the next 25 years in a deal worth up to £5.6 billion. With such guaranteed income, no wonder everyone was trying to clamber on board.

MISBE-TAX-HAVEN

The National Audit Office, which monitors public sector spending, has said it will look at a range of issues raised by the privatisation, and would “examine whether the privatisation of QinetiQ was good value for money”, including whether Carlyle’s stake was sold too cheaply. Meanwhile former Labour defence procurement minister Lord Gilbert, says “the MoD was taken like a lamb to the slaughter”, loading up the company with a contract backed by the taxpayer in order to privatise it. “The sale was very much akin to Boris Yeltsin handing out the assets of the old Soviet Union to his chums at knockdown prices.”

Part of the Audit Office inquiry will also look at the investment bank UBS. It was UBS who advised ministers on the sale of QinetiQ to Carlyle. On the company payroll was one James Sassoon, the bank’s head of privatisation. In 2002 Sassoon moved to the Treasury to help advise them on, amongst other things, public private partnerships – like QinetiQ! Sassoon is well known to the Audit Office, as he was head of the privatisation team who helped with the sale of Railtrack, perhaps the biggest privatisation cock-up of them all.

In the past, such dodgy privatisation deals have been justified on the grounds that corporate profits are good for the Exchequer. Not so QinetiQ. Not only did Carlyle get the company cheap, it also bought its stake though a series of “special purpose vehicles” based in Guernsey, which means that it will not be paying tax on the sale of its shares - and it says that the government knew about the tax haven before the deal was done. In fact, the QinetiQ story has some parallels with the sale of the Inland Revenue’s buildings to Mapeley - an offshore property company registered in Bermuda. While the Inland Revenue will relentlessly pursue anyone who owes them cash, the government was happy to sell all their buildings to Mapeley who do their very best to pay no taxes in this country.

On an economic level the QinetiQ deal makes no sense, but on another level, it all falls into place with the free-market privatisation zeal of the New Labour fundamentalists. It just so happens that all the bean-counters and bankers that advise the government that the best thing they could do is to flog off the nations silver - schools, hospitals, inland revenue buildings - are the very same people that end up making shed loads of cash out of those same deals. Who said government wasn’t transparent enough?

* For more on the Carlyle Group see http://www.schnews.org.uk/archive/news380.htm and www.hereinreality.com/carlyle.html

Edited slightly from www.schnews.org.uk