For sale to the highest bidder:Britain's secret weapons labs
Jamie Doward reports on how UK defence research
could be compromised if innovator QinetiQ is bought
by a venture capitalist firm linked to the BUSH family
Sunday September 15, 2002
The Observer
Not even Tom Clancy could have dreamt it up. The government
plans to sell a stake in its top secret defence laboratories -
responsible for inventing the sort of hardware that would make
007's Q green with envy - to a shadowy American organisation
that boasts ex-Presidents and Prime Ministers as special
advisers and has invested millions of dollars for the bin Laden
family and Saudi royalty.
This is not paperback fiction, however. It is the Government's
latest plan for QinetiQ, the rebranded Defence Evaluation and
Research Agency (Dera) that in recent years has developed a
diverse portfolio of inventions, including a plastic tank that avoids
radar, a new system for mapping the seabed, and technology
that allows third-generation mobile phone masts to be installed
in churches.
Having opted against floating the company on the stock market
because of the global economic downturn, the government
decided instead earlier this month to invite venture capital firms
to take a stake in the business, which employs more than 9,000
people.
The deal is hugely controversial. The government's plans to
privatise the defence laboratories drew fierce criticism when they
were announced four years ago. Experts warned it was a way of
allowing Ministers to distance themselves from allegations that
Britain was underfunding such research.
Now, by opening up QinetiQ to outside interests, the
government is accused of sacrificing the crown jewels of the UK
defence industry because of the Treasury's addiction to public
private partnerships at the expense of all other funding
alternatives.
Few were surprised when the Carlyle Group emerged at the
head of the stampede to acquire the QinetiQ stake, beating
fierce competition from a reputed 40 firms. Carlyle is one of the
biggest venture capital groups, a leviathan that commands
respect and inspires awe in equal parts. Chaired by former US
Defense Secretary Frank Carlucci, the group's tentacles spread
far and wide.
John Major, George BUSH Sr and his former Secretary of State,
James Baker, are on its payroll. Arthur Levitt, former chairman of
the US Securities and Exchange Commission, and
ex-Bundesbank president Karl Otto Pohl are among its advisers.
Besides the bin Laden family, which has disowned Osama, it
has managed funds for Prince Alwaleed and the likes of George
Soros, earning its investors spectacular returns by taking
strategic stakes in everything from Socpresse, parent company
of French newspaper Le Figaro, to a subsidiary of the Japanese
supermarket giant Daiei.
But the group, which has invested more than $13.5 billion
across 20 private equity funds, is also renowned for investing in
the defence industry, and QinetiQ fits its portfolio perfectly.
'It's a good, solid, well-run company. We believe it's well
established as a supplier to the Ministry of Defence and the
non-MoD sector. We conduct a lot of due diligence checks
before making any proposals,' a Carlyle spokeswoman said.
Some have suggested that the MoD was keen to see a US firm
win the bidding war. 'The Americans were very concerned when
the government announced it was privatising its research arm
because of the close relationship between the US and the UK
defence departments. There were huge ministerial efforts to
reassure the Americans that nothing would change, and it might
have crossed the government's mind that bringing a US venture
capital firm in might not be a bad thing,' said one expert familiar
with the situation.
Carlyle is no stranger to controversy. Last year the group floated
its biggest defence holding, the armoured vehicle and howitzer
manufacturer United Defense, on the New York Stock Exchange
via an initial public offering. The timing of the float - announced a
couple of months after the 11 September atrocities - drew
criticism that it was cashing in on terrorism.
US pressure groups such as Judicial Watch started to point out
links between Carlyle and the White House. The close friendship
between Carlucci and Defense Secretary Donald Rumsfeld -
wrestling buddies from university - was subjected to intense
scrutiny.
Under the US Freedom of Information Act, Judicial Watch
obtained letters exchanged between the two men in which they
discussed the 'restructuring' of the Defense Department. 'Dear
Don, thanks for lunch last Friday. It was great seeing you in
such good spirits,' writes Carlucci in February 2001, before
going on to introduce his ideas for the project.
Two months later Rumsfeld wrote back, congratulating Carlucci
and his fellow director William Perry on their work. 'I may ask
the two of you to come in and meet with some of the key staff
folks who are working on those types of things here in the
department,' Rumsfeld says.
As concerns about the links between the White House and
Carlyle grew, pressure groups campaigned for George Bush Sr
to relinquish his links with the group after its relationship with
the bin Laden family was exposed. Carlyle and the bin Ladens
dissolved their relationship, but critics continue to harry the
former President. 'Bush Sr has to seriously consider the
propriety of sitting on the board of a group that is impacted by
his son's decisions,' said the campaign group, the Center for
Public Integrity.
Attention has also focused on links between Bush Jr and
Carlyle. In 1991 the firm gave George W. a seat on the board of
the Texas-based Caterair International, an airline meals firm.
Now history is repeating itself, as Carlyle's defence interests
again come under the spotlight. The putative QinetiQ deal has
raised a series of questions.
First, MPs are demanding
assurances that UK expertise won't be sucked overseas. Sir
John Chisholm, QinetiQ's chief executive, went some way to
assuaging their fears by saying: 'Carlyle has undertaken to
select investors who are predominantly UK or European, so
economic ownership remains overwhelmingly British, while
QinetiQ business management will continue to remain the
responsibility of the QinetiQ management team and the board.'
The presence of government advisers on the company's board,
coupled with the MoD's right to veto all of Qine tiQ's plans, will
also act as security measures.
But there are also concerns that QinetiQ, which acts as
independent adviser to the government on defence, should not
be allowed to judge any tendering involving firms in which Carlyle
has money invested.
In addition, Carlyle must prove to the government that its
investors do not include any defence manufacturers, something
that would open it up to conflict of interest claims. The group
appears to have satisfied the government that this is so,
although some critics have called for more transparency over the
bidding process.
'There is a question about the process by which the government
is satisfied that the company is not a defence manufacturer,'
said Major General Alan Sharman, director general of the
Defence Manufacturers' Association.
Then there is the issue of price and the size of the stake in
QinetiQ that is up for grabs. The Government will keep a 'special
share' in the firm to protect the UK's defence interests, but the
exact size of Carlyle's stake is open to debate.
So far no one has managed to put a value on the deal. It is
clear, however, that QinetiQ will not come cheap. Last year the
QinetiQ group generated operating profits before exceptional
items of £42.7 million from a turnover of £653.3m. Last year it
paid £346m to acquire Dera from the MoD. There have been
suggestions QinetiQ could be valued at £500m when it
eventually floats.
There will be a huge public outcry if the government - which has
argued that its plans are good for the taxpayer - is seen to be
letting it go too cheaply.
Ultimately, though, the main problem could be that the presence
of the Carlyle Group might actually threaten the value of QinetiQ,
rather than enhance it - something that undermines the
Government's main claim for legitimising the deal. By allowing a
commercially orientated firm to take a stake in the business,
experts fear the Government may end up risking QinetiQ's
unique position within the defence sector.
'Who owns the technology? As long as QinetiQ was owned by
the government, British industry was prepared to share its
technology because there was no risk it would be exploited
commercially,' Sharman said.
After privatisation, however, firms started breaking their links
with QinetiQ. Carlyle will hope its reputation ensures a trickle
does not become a flood.
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