Qinetiq and MoD hit back at MP's dishonesty claims on 2003 privatisation deal

Qinetiq and the Ministry of Defence have lashed out at what they branded "unsubstantiated accusations" contained in a Parliamentary report into the defence company's controversial privatisation five years ago.

Edward Leigh, the Tory MP who chaired the Public Accounts Committee (PAC) inquiry, accused the civil servants, led by Qinetiq's chairman John Chisholm, of "behaving dishonourably" in pushing through a sale of the business to the US buyout giant Carlyle for a knockdown price that deprived taxpayers of at least £90m in proceeds while at the same time fabulously enriching themselves.

Mr Leigh painted the MoD as a department out of its depth in its dealings with Carlyle's sophisticated financiers. He said: "The MoD conducted the deal like an innocent at a table of cardsharps, with the taxpayer the fall guy losing out on nearly £100m. They [the civil servants] sold the idea to the MoD of privatising the business without explaining they stood to benefit, a serious conflict of interest."

Qinetiq's ability to remain impartial in its role as a technical adviser to the MoD was also questioned. "Their behaviour does not fill me with confidence that Qinetiq can be relied upon to advise the MoD on what military equipment to buy," said Mr Leigh. He also accused Mr Chisholm and other directors of devising their own compensation scheme that allowed them to "profiteer at the expense of the taxpayer."

However, the PAC report itself does not use such strong language and it acknowledges that the MoD actually signed off on the compensation scheme.

Mr Chisolm called the accusations "grossly unfair" and said the turnaround of Qinetiq was "the greatest achievement of my working life". Sir David Lees, head of Qinetiq's compliance committee, also took exception to the implication that the company was ill-equipped to handle its key government advisory role. He said: "We take the division of our role as supplier and adviser very seriously. Breaches of that firewall are very rare and are taken very seriously."

The airing of Mr Leigh's views, which are protected by parliamentary privilege, mark the latest chapter in one of the Government's most controversial privatisation deals. The MoD agreed the sale of the former Defence Evaluation and Research Agency (DERA) to the US buyout group in 2003 for £42m, a deal that valued the group as a whole at around £130m.

Carlyle negotiated an incentive scheme that fantastically remunerated the company's top directors – the top 10 executives shared £107m between them – and itself, when it was then floated on the stock exchange in 2006.

Mr Chisholm, for example, realised a 20,000 per cent gain on the £130,000 he spent on shares in the first phase of the privatisation. When the company listed with a £1.3bn valuation, Mr Chisholm's shares were worth £26m.

Neither Qinetiq nor the MoD can have been surprised by the committee's conclusions. The National Audit Office came to essentially the same conclusion in a report published seven months ago.

Qinetiq nonetheless reacted furiously to the report. It said: "Qinetiq strongly refutes any accusation that members of its senior management team acted inappropriately and without integrity during the transformation of DERA from a government agency into a successful public limited company."

Howard Wheeldon, an analyst at BGC Partners, warned that five years and two damning reports after the event, the value of combing over the detail of the process had diminished. "This is beating a dead horse," he said. "I can't disagree with what the reports say and the criticisms of the way it was handled, but Qinetiq is now an extremely sound company and they should be careful to not damage the future success of a very important defence and aerospace company."

The MoD, which retains a 19 per cent stake in the group, was equally withering about Mr Leigh. The MoD's procurement chief Baroness Taylor said: "I do not accept the PAC's conclusion that a further £90m could have been achieved from the sale. This is pure speculation, and fails to take into account the realities of what could be achieved in negotiation. The MoD was backed by a range of experienced specialist advisers during the sale process, including a leading merchant bank. The charge of commercial naivety makes a good soundbite but is not supported by the facts."