Is the sale of Qinetiq a scandal? Only for those who forget the past

It is the first flotation of a public asset since Labour came to power nearly nine years ago. That alone would be enough to guarantee a frosty reception in certain quarters. But the sale of Qinetiq, the state-owned defence technology group, has gone beyond that, provoking paroxysms of rage, and not necessarily from the usual suspects.

Everywhere the Government's spin doctors look, the float seems to be embroiled in controversy - from the huge profits that Qinetiq's directors and private-equity backers stand to make to alleged sweetheart deals with the Ministry of Defence.

In the good old days of privatisation, when successive Tory governments sold off everything that wasn't nailed down and a good few things that were, the flotation of Qinetiq would have seemed a mere bagatelle. Compared with the billions of pounds that the taxpayer was diddled out of through the cut-price sale of the water, energy and telecoms industries and, later, the rail network, the sums involved in this latest privatisation look modest.

Moreover, whereas the rail industry, for instance, was sold lock stock and barrel with indecent haste and at a knockdown price, the taxpayer will continue to be by far the biggest shareholder in Qinetiq even after its shares begin trading on the London Stock Exchange next month.

Until a fortnight ago, few people would have heard of Qinetiq, even though its predecessor, the Defence Evaluation Research Agency, was responsible for some of the most important technological breakthroughs of the last century, including the invention of carbon fibre, liquid crystal displays and microwave radar. Today it has three main revenue streams - the MoD, for whom it runs firing ranges, civil exploitation of military technology, and the US.

Now, it is never out of the financial pages. The criticisms of the £1bn flotation break down into three broad categories: that the taxpayer is being shortchanged; that the deal is riven with conflicts of interest; and that private investors have been unfairly excluded from the offer.

The first of these is the most contentious and lies at the heart of the case against the Government. It is true that Carlyle, the US private-equity firm which bought a 31 per cent stake in Qinetiq in 2002, will make an 800 per cent profit on its initial £42.2m outlay. Lord Moonie, a former junior defence minister, says he argued against the involvement of Carlyle at the time, claiming the business would be worth more if the MoD held on longer, but was overruled by the Treasury.

But, as the Defence Procurement minister Lord Drayson pointed out last week, the sale to Carlyle followed an extensive auction with 40 companies expressing an interest in Qinetiq and 12 of them invited to bid. Nor has the taxpayer done too badly so far, having received £230m back from Qinetiq in the past three years.

Unabashed by their own privatisation record, a series of Tory spokesmen have torn into the deal. Gerald Howarth, the Conservative defence spokesman, described the float as "a desperate move to provide a quick buck for Gordon Brown". But if this were the case, then Labour would have sold the whole company at the earliest opportunity. As it is, the flotation will value the taxpayer's stake in the company at £500m-£600m and will leave it the biggest single shareholder in the business by far with a 25 per cent holding. Lord Drayson maintains: "The way in which the whole process has been done has learnt from past privatisations. This is an absolutely fabulous deal for the taxpayer."

Where the Government's critics are on firmer ground is in pointing to the huge rewards Qinetiq's directors will reap for being in the right place at the right time. Sir John Chisholm, the executive chairman, will turn a £129,000 investment into a £22m profit, while the chief executive Graham Love will make about £18m. But even these sums are pale by comparison with the amounts made in the sale of the railway rolling stock company Porterbrook in the late 1990s (see panel below).

The second criticism concerns conflicts of interest. The Conservative trade and industry spokesman Alan Duncan, points to the presence on the Qinetiq board of Noreen Doyle, who is a director of Credit Suisse First Boston, one of three investment banks advising Qinetiq on the sale of its shares. Although she was appointed a director of Qinetiq only after CSFB had been selected to handle the float, the arrangement smacks of jobs (and fees) for the boys - or girl, in this case.

However, the Tories cannot afford to crow too loudly in this respect. Another of those making money out of the flotation is the former Qinetiq chairman and former intelligence chief Dame Pauline Neville-Jones, who will net about £400,000. She has just been appointed as an adviser to the Conservative party leader David Cameron.

The third charge, and one Mr Duncan again has sought to drive home, is the iniquity of allowing only institutional investors to buy shares in the flotation. The subtext of this is that the sale will be underpriced, in which case private investors will lose out to big professional funds. This again is a minefield in which to tread: the Tories cannot attack the sell-off for short-changing taxpayers on the one hand while demanding on the other that private investors be allowed to buy the shares on the same preferential basis as the institutions.

The decision to make the offer an exclusively institutional one and to set the price through a book-building exercise will at least, ensure that the valuation of the company on flotation bears some relation to demand for the stock, say supporters of the flotation.

Better ammunition for critics of the float would be to point to the sheer number of investment banks involved in the listing and the consequent reduction in the amount of independent investment advice therefore available. Qinetiq is being advised by three banks - CSFB, JP Morgan Cazenove and Merrill Lynch - while the Government has retained ABN Amro and Rothschilds.

That makes this sale another gravy train for the army of financial advisers, lawyers, accountants and PR agencies which have grown fat on two decades of privatisation. But whether it is any more egregious than those that have gone before depends on your point of view.

Four sell-offs that gave privatisation a bad name

By Susie Mesure

PORTERBROOK Sandy Anderson

It was all aboard the privatisation gravy train for Porterbrook's Sandy Anderson in 1996. That was the year he scooped £33m from selling his rolling stock company on to Stagecoach for £825m, months after leading a management buyout to acquire Porterbrook from British Rail for £565m. The National Audit Office eventually found the sales of Porterbrook and two other train leasing companies - Angel Trains and Eversholt - had short-changed the taxpayer by £700m. Two years after the Government sold the three for £1.8bn they had all been sold on for a total of £2.7bn, a 50 per cent mark-up.

BRITISH COAL Richard Budge

A minefield of controversies dogged the sale of British Coal to Richard Budge's RJB Mining in 1994 for £814m. The man later christened "Old King Coal" was under investigation by the Department of Trade and Industry for his role in the collapse of his construction company, AF Budge, at the time. He escaped censure, despite admitting he took loans that breached the Companies Act. He was also an unofficial adviser to John Wakeham, the cabinet minister who privatised the coal industry that he eventually bought. Mr Budge later became the scourge of Labour, who felt he underpaid for the pits, for playing hardball over pit closures.

NATIONAL GRID David Jeffries

The National Grid was dubbed "National Greed" after its 1995 flotation, which fuelled the furore over fat-cat utility company directors that overshadowed John Major's privatisation programme. David Jeffries, the Grid's chairman, and three fellow directors, shared £1.5m profits from share options on the company's flotation, providing fodder for the then shadow chancellor, Gordon Brown, who railed against the "Tories of the boardroom of our privatised utilities" for coming before the consumer and the taxpayer. Mr Major had to step in to ask the Grid directors to waive some of their windfall.

THE STATIONERY OFFICE Rupert Pennant-Rea

The Conservative government had to pay a £4m sweetener and accept a knockdown offer to get Her Majesty's Stationery Office off its hands in 1994. A consortium headed by the former deputy governor of the Bank of England, Rupert Pennant-Rea, received the payment to stop it walking away, the National Audit Office disclosed after the sale. National Publishing Group whittled down its bid for HMSO to £54m after it discovered the business was almost bankrupted. Its debts swallowed any proceeds from the sale, leaving the taxpayer out of pocket.