All that is about to change because Qinetiq is gearing up for a stock market flotation which could value the business at more than £1bn. Before an investment bank has even been selected to handle the sale, Qinetiq has run into a tumult of righteous indignation because of the profits its management and private equity backers will make, allegedly at the expense of the taxpayer.
Qinetiq was part-privatised two years ago when the Ministry of Defence sold a 31 per cent stake to Carlyle, the US private equity fund, keeping the rest for itself and the company's directors and employees. The Government made £150m from the sale and later raised a further £50m by redeeming preference shares.
If the company now floats for £1bn, valuing Carlyle's stake at £300m, it will have roughly doubled its money. But because of the way Carlyle chose to account for its investment, treating just £42.2m of it as equity and the rest as debt, the apparent profit it will make when the shares are listed is made to look a lot bigger. A £42m equity investment turns into a £300m windfall - in other words a 614 per cent profit.
The fact is that the taxpayer will realise some £700m from the doubling in value of Qinetiq between the original public private partnership and full flotation. So the brouhaha over the float is really a storm in a teacup, whipped up with the selective use of financial information.
What prospective shareholders should be more concerned about is whether Qinetiq really is worth £1bn and more. Qinetiq bears a lot of resemblance to two other government spin offs from the last decade - BTG, formerly known as the British Technology Group, and AEA Technology, the commercial arm of the Atomic Energy Authority. Both businesses have collapsed in value since privatisation. Of the two, AEA is probably the better match with Qinetiq because it too makes its money from exploiting dual-use technology - in this case from the nuclear field.
Qinetiq's chief executive, Sir John Chisholm, who stands to be £24m better off when the business floats, does not like the AEA comparison. He argues that Qinetiq is a different animal, first because its technologies embrace a broader spectrum and second because its has been commercialising its know how for a lot longer than AEA.
Qinetiq has also been careful to build three strong legs to its business - including a substantial presence in the world's biggest market for defence and security-related technology, the US. Following yesterday's purchase, which we report elsewhere, a third of Qinetiq's revenues will come from the US, where the Department for Homeland Security alone has a budget of $10bn.
But all technology companies are only as good as the inventions in the pipeline. In order to fatten the company up for privatisation, Qinetiq decided last year to cut the amount of spending on pure research into dual-use technologies in favour of exploiting more proven technologies. The result was 250 jobs and a £25m one-off charge but a one-third rise in profits.
When Qinetiq has picked its investment bank and comes to market with a fancy valuation, investors will need to be reassured that its future is as bountiful as its past.
Fuel surcharge by stealth at Ryanair
Michael O'Leary has vowed that hell will freeze over before Ryanair imposes a fuel surcharge on its passengers. The budget airline's latest sparkling set of results demonstrates why. Ryanair's yields - in other words the average fare per passenger - rose by 3 per cent in the first quarter when the guidance had been that they would remain flat. This enabled the Dublin-based carrier to increase net profits by 21 per cent, well above the consensus forecast.
The reason yields rose is because Ryanair did not need to adjust its fares in order to put bums on seats. The reason it did not need to do that was because of the fuel surcharges levied on passengers by its full-service rivals, British Airways, Air France and Lufthansa. These maintained the price differential with Ryanair without Mr O'Leary having to resort to a surcharge.
As long as oil prices continue to rise, the full-service airlines will continue to reflect that in their fares and Ryanair will benefit from higher prices than it could otherwise charge. It is a fuel levy in all but name, as Mr O'Leary well knows, but by not appearing to charge it he scores another PR coup over his rivals.
BA could do some damage to the Ryanair model by resisting the next rise in the fuel surcharge - knowing that it is a lot better hedged against rising oil prices than its low-cost rival.
But Ryanair is becoming just too big to be intimidated, even by the likes of BA. The 30 per cent rise in traffic in the first quarter puts it on course to increase passenger numbers to 35 million this year. Ryanair even looks to have weathered the London terror attacks, which sliced 10 per cent off bookings in the immediate aftermath. The bloodbath Mr O'Leary famously warned of at the beginning of last year looks further away with every quarter's figures.
Brown's borrowing thrown off track
There is some government borrowing which Gordon Brown has contrived to keep off the public finances with the aid of the Office for National Statistics. Most controversially, the £21bn of Network Rail debt which is miraculously deemed to belong to a private company even though the business was created by ministers, has no shareholders and relies upon a government guarantee for its borrowings.
But no amount of smoke and mirrors could hide the fact that the latest tranche of debt raised by the builders of the Channel Tunnel Rail Link should reside anywhere other than on Mr Brown's books. The original bonds raised to finance the £5bn link were underwritten by the Government but kept off the public finances on the grounds that there was only a small risk of the guarantee being called.
In the case of the most recent £1.25bn bond issue, the buck stops at the Treasury's door whichever way you view it because the holders of the bonds get repaid from future revenues provided by the taxpayer. These are the access charges which Eurostar and domestic train operators will pay to use the 68-mile high-speed line. The charges levied on domestic operators are funded direct by the Government. Eurostar's charges are also guaranteed to the extent that it cannot meet them from its passenger income. The latest estimate from the National Audit Office puts the taxpayer's potential exposure at £400m.
The £1.25bn which will be added to the Chancellor's ledger will not break the bank, much less his precious golden rule which says the Government may borrow only to invest. Nor does it threaten the stability rule which says government borrowing must be kept at a prudent level relative to GDP - in other words, about 40 per cent. But it goes a little way towards balancing the ONS's last strange ruling that motorway maintenance be classified as capital rather than current expenditure.Reuse content