QinetiQ deal 'lost taxpayer £90m'

Spending watchdog the National Audit Office have calculated that the taxpayer lost out to the tune of £90 million from the part-privatisation of QinetiQ, which carries out research for the MoD and advises on the procurement of equipment.

The 2003 sale of a minority stake in the company was conducted when the market for technology stock was weak and the Carlyle Group was offered an "unbeatable hand" when other bidders were eliminated by the MoD, said the report by the House of Commons Public Accounts Committee.

The MoD began the sale process before QinetiQ's most important contract had been finalised, making it difficult to judge the company's true value, noted the report.

This allowed Carlyle to negotiate a £55 million reduction in its £374 million offer after being appointed preferred bidder. But the MoD nevertheless agreed to sell the group 2.5% more of QinetiQ than they had specified in their bid.

The report also accused QinetiQ's directors of "profiteering at the expense of the taxpayer" after they were allowed to negotiate their own incentive packages with Carlyle before it was named as preferred bidder.

At the date of the flotation of the company in 2006, the top 10 managers held shares worth £107 million for an investment of just £540,000 - making £200 for every £1 invested, compared to £9 for the taxpayer.

The Public Accounts Committee found that privatisation was successful in protecting the viability of the business, and the eventual flotation of the Government's remaining stake on the London Stock Exchange was well handled.

QinetiQ's revenue grew by 48% and its operating profit by 197% between 2003 and 2007, as it expanded into the US defence market to offset a 10% fall in the UK defence research budget. The privatisation has to date generated £576 million in proceeds for the taxpayer. But the report said that the MoD should have obtained £90 million more from the initial sale to Carlyle.

It criticised the Treasury for giving the MoD an incentive to rush through the sale by promising to credit the department's budget with £250 million if it was completed by March 2003.