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Treasury mugged itself

• Robert Peston
• 23 Nov 07, 08:30 AM

A battalion of former military bigwigs Gordon Brown of being tight-fisted on Britain鈥檚 defence. Which adds resonance to today鈥檚 that taxpayers were short-changed in the sale by the of a stake in , the technology and defence business.

The charge which sticks against the MoD and the (which always oversees these deals) is that they made a schoolboy error in the sale-process. They ran an auction and identified the , as the preferred bidder before nailing down all the financial variables.

Carlyle then succeeded in significantly negotiating down the price it would eventually pay, exploiting the absence of any rival acquirer. At the crucial moment, there was no competitive tension, which undermined the MoD鈥檚 bargaining position.

The deal was also done in the least favourable market conditions, when share prices were on their knees. So credit to Lord Moonie, who at the time was a defence minister, because he argued for the deal to be delayed. As he told me in an interview for the Ten O鈥機lock News , it was the Treasury which was as keen as mustard on a transaction and 鈥� no surprise here 鈥� the Treasury got its way.

That said, the uplift in the value of Qinetiq since Carlyle acquired its third stake has been a benefit to the taxpayer, because the MoD kept a majority holding. Realised and unrealised proceeds total about 拢800m for the public purse 鈥� which ain鈥檛 bad going for a research operation that may well have been a liability rather than an asset only ten years ago.

But let鈥檚 not overstate the gain for the Exchequer. For the Department, according to the NAO, the internal rate of return on this deal (the yardstick for success used by the private equity houses) was 14 per cent a year 鈥� which is respectable for the public sector, reason enough to open a good bottle of cider.

Carlyle鈥檚 internal rate of return was a staggering 112 per cent per annum. This wasn鈥檛 just a vintage deal for Carlyle, it was vintage Krug.

For those who ran Qinetiq, it was Krug in diamond-encrusted, solid gold goblets. The top ten executives in the business made 拢200 for every 拢1 of their own cash they invested in the business. Sir John Chisholm, Qinetiq鈥檚 chairman, turned 拢130,000 into 拢26m; Graham Love, the chief executive, scooped 拢21m from 拢110,000.

As it happens, they deserved to do pretty well, because they transformed a research cost-centre into an international hi-tech business with great prospects 鈥� and the UK has too few of those.

Did they 鈥渄eserve鈥� to do quite as well they did? Unanswerable question.

They benefited from the gullibility of the Treasury and the MoD, who sold off Carlyle鈥檚 equity at the least propitious moment in the stock-market cycle.

It鈥檚 spilt milk, lapped up by Sir John, Mr Love and a few other former civil servants at Qinetiq. And if there鈥檚 an unattractive sound from the NAO, it鈥檚 the mewling of public officials that there鈥檚 no cream for them.

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