[A-List] A Good Model for a Mugging

[Bill Totten <shimogamo@xxxxxxxxxxxxx>]

Labour's first full-scale privatisation 
involves the multiple fleecing of the taxpayer

by George Monbiot

Published in the Guardian (February 14 2006)


From the hubbub surrounding the privatisation of the British government's
defence research service - Qinetiq - last week, one statement stopped me dead.
Lord Drayson, the minister for defence procurement, asserted that it was a 
"good model for future privatisations" . Three things hit me. The first was that
Lord Drayson is minister for defence procurement. This remarkable fact had until
then passed me by (I will explain its significance in a moment). The second was
that, if the government really is envisaging further privatisations, this is the
first we've heard of it. What else did Drayson have in mind? Is there anything
that hasn't been sold already? The third was that, with the exception of the
privatisation of the railways in 1996, it would be hard to think of a worse
model for a government sell-off.

As everyone now knows, Friday's flotation of Qinetiq raised the value of the
shareholding acquired by Carlyle, the US investment firm, by around 840%.
Carlyle, whose board is graced, among other eminences, by the former prime
minister John Major, bought its stake at auction in 2002 when the stockmarket
had foundered. It paid GBP 42 million for a 31% share, which at close of play 
on Friday was worth around GBP 351 million. Last week it flogged over half its
shares. Its chairman, who paid GBP 129,000 for his stake in the company, is now
worth GBP 27 million, and its chief executive GBP 22 million .

As it was with the four directors of Rover (who walked off with GBP 40 million)
it is hard to see what they did to deserve it. As Lord Drayson's Labour
predecessor, Lord Gilbert, pointed out, "All the value was built up by public
servants using public money. I consider it a complete outrage ... a scandal". 
In a letter to the Telegraph on Saturday, the former managing director of the
Defence Research Agency - the government body that was split up and turned into
Qinetiq - described the profits as "greed of the highest order": the two men, he 
said, had captured the benefits of decades of work by the company's scientists
and engineers .

Lord Drayson's boss, the defence secretary John Reid, claimed that the company
is worth so much "because of the value that has been added there" by Carlyle's
management. "This is precisely why [we] brought them in".  But if the government
knew that Carlyle would make so much money, why did it allow the company to buy
its stake so cheaply? If it didn't know, then why should we take its
counterfactual accountancy seriously? In fact in 2002 the government was warned
by both Lord Gilbert and Lord Moonie, who was defence procurement minister when
Carlyle bought its stake, that the taxpayer was being fleeced . Moonie says he
was overruled by the Treasury . The government went in with its eyes wide open.

It is also arguable that much of Qinetiq's value was added not by the brilliance
of its directors, or even of its engineers and scientists, but by a huge
contract with the ministry of defence (MoD), signed on the very day (28th
February 2003) that Carlyle paid for its stake. The "Long Term Partnering
Agreement", under which Qinetiq manages the government's firing ranges, is worth
GBP 5.6 billion over 25 years . In fact, with a contract like this, any one of
us could have bought that 31% stake without having to open our wallets: you
could borrow the money, at cheap rates, against your guaranteed future income.
Carlyle admits that it raised part of the money by "refinancing" its revenues
from the contract . The Guardian has also reported that Qinetiq might have left
some of its liabilities behind during the flotation: the government may have to
carry the costs of cleaning up some of the land it has been using .

To anyone who has studied the private finance iniatitive, this story - of
guaranteed assets and reduced liabilities - will be familiar. Qinetiq's sale
carries fewer public dangers than the part-privatisation of our schools,
hospitals and whatever else remains of the public sector, as the potential
liabilities are much smaller, and the possible redundancy of the services 
bought by the long-term contract less consequential. But it seems clear 
that these generous provisions fattened up the company for privatisation. 
As Lord Gilbert says, "the MoD was taken like a lamb to the slaughter" .

In the past, ministers have sought to justify deals like this on the grounds
that corporate profits are good for the Exchequer. But they would struggle to
apply this argument to the privatisation of Qinetiq. Carlyle 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 . It says that the
government knew it would be using the tax haven before the deal was done. In
this respect, the Qinetiq story has some parallels with the sale of the Inland
Revenue's properties to Mapeley - an investment company registered in Bermuda.

As for Lord Drayson, I was staggered by his appointment not because I believe
that he has had too little experience of this branch of government, but because
I believe he has had too much. Before he took office, Paul Drayson knew quite a
lot about defence procurement: he had pulled off a remarkable deal with the
Ministry of Defence.

Until 2003, when he sold it for GBP 542 million, Paul Drayson was chief
executive of a pharmaceutical company founded by his father-in-law, called
Powderject . He was, and remains, a generous donor to the Labour Party. 
After 9/11, the British government decided to stock up on smallpox vaccine. 
On November 30th 2001, the Ministry of Defence decided that the kind of vaccine
it wished to buy was the Lister strain . The only company which possessed
sufficient stocks was a German-Danish firm called Bavarian Nordic. On December
6th 2001, Paul Drayson, with a few other businessmen, was invited to breakfast
at Downing Street. Soon after that, government officials visited Bavarian Nordic
to open negotiations to buy the vaccine. They were told that it was too late:
Powderject had just bought the exclusive distribution rights for the UK . 
If the government wanted the Lister strain, it would have to buy it from
Drayson's company. The government paid Powderject GBP 32 million for the
vaccines, of which some GBP 20 million seems to have been profit . The Guardian
tried to ask both Tony Blair's office and Paul Drayson whether the Lister strain
had been discussed at the breakfast in Downing Street, but neither of them would
comment. It is not clear whether Paul Drayson became aware of the government's
intentions at that meeting.

In May 2004, Tony Blair made Paul Drayson a life peer. This also attracted
controversy: six weeks after he received his peerage, he gave the Labour party
half a million pounds . In May 2005 he joined the government. Since then he has
been responsible for ensuring that the ministry of defence receives good value
from its contracts with private companies.

So here we have a privatisation - the first full-scale privatisation Tony
Blair's government has carried out - which has allowed a US investment company
to walk off with hundreds of millions of pounds of free money; much of which
will be tax exempt. It has been assisted by 25 years of guaranteed income 
from the government and the possible shedding of liabilities. It is overseen 
by a man who first came to public notice as a result of a defence procurement
deal surrounded by controversy, and who now turns up as minister for defence
procurement. Does anyone agree that this is a "good model for future
privatisations"?

http://www.monbiot.com

References:

1. Jason Nisse, 12th February 2006. Business View. The Independent on Sunday.

2. Michael Harrison, 11th February 2006. Anger as GBP 1.3 billion float of
Qinetiq gets away. The Independent.

3. Christopher Adams and Peter Spiegel, 26th January 2006. Qinetiq gains 
a scandal, says former minister. The Financial Times.

4. Peter Ewins, 11th February 2006. Scandal at Qinetiq. The Daily Telegraph.

5. John Reid, 27th January 2006. Quoted by BBC Online. Reid defends Qinetiq's
sale price.
http://news.bbc.co.uk/1/hi/business/4653722.stm

6. Christopher Adams and Peter Spiegel, ibid

7. Michael Harrison, 17th January 2006. Is the sale of Qinetiq a scandal? 
The Independent

8. Oliver Morgan, 29th January 2006. A swift killing in the defence sector. 
The Observer.

9. Oliver Morgan, 15th January 2006. Carlyle 'given sweetener' in Qinetiq deal.
The Observer.

10. Terry Macalister and Mark Milner, 17th January 2006. Tough battles ahead for
QinetiQ. The Guardian.

11. Oliver Morgan, 29th January 2006, ibid.

12. Richard Wray, 1st August 2005. US Qinetiq holding registered in tax haven.
The Guardian.

13. Geoffrey Gibbs, 20th May 2003. GBP 43 million windfall for PowderJect chief .
The Guardian.

14. David Leigh and Rob Evans, 29th June 2004. Papers detail Labour donor's
vaccine deal. The Guardian.

15. ibid.

16. ibid.

17. Michael White, 25th August 2004. On May 1 Paul Drayson was given a peerage.
On June 17 he gave Labour a GBP 500,000 cheque. The Guardian.

http://www.monbiot.com/archives/2006/02/14/a-good-model-for-a-mugging/

Bill Totten     http://billtotten.blogspot.com/