Unsurprisingly, the NAO says that "the commercial value of the Long Term Partnering Agreement was not fully understood" by the government.
The NAO beancounters went on to highlight the role of the people who became Qinetiq's top executives.
"It is of concern that the MoD did not seek specialist advice on the incentive scheme, which resulted in the top ten managers owning shares worth £107m," said Bourn.
"This level of return exceeded what was necessary to incentivise management," he added, in dryly understated style.
In particular one can follow the progress of Sir John Chisholm, founder of defence contractor CAP Scientific, who was hired in the 1990s by the MoD to be head of the Defence Research Agency, which formed the core of the Defence Evaluation and Research Agency (DERA) in 1995. Chisholm continued as head of DERA, most of which he subsequently took private as CEO of Qinetiq.
DERA was established in April 1995 and drew together some twelve science and technology offices and the Defence Research Agency ... DERA received the vast majority of its revenue from the Ministry of Defence ... The head of the Defence Research Agency, Sir John Chisholm, who had formerly started the defence software company CAP Scientific, was appointed the chief executive officer of DERA.
Over the period 1992-1998 the MoD’s budget for research fell ... DERA’s chief executive officer proposed a range of options ... Although DERA’s top management could potentially benefit personally from the involvement of private investment, the case [for going private] was not validated by the MoD. The MoD sees no reason why it should have validated this policy decision which was based on analysis prepared by DERA management ...
As part of the process of creating Qinetiq, the MoD involved US private equity group Carlyle, who made out like gangbusters - scooping £300m profits after just three years on an investment of £42m. It is, of course, usual for private-equity groups to incentivise management teams with share plans.
"The MoD was not involved in the design of the share incentive scheme although it assessed and approved it," says the NAO. In other words, Chisholm and his fellow execs were allowed to set up the deal with Carlyle. In brief, this was what the private-equity guys and Chisholm's team decided:
All employees could choose to invest a minimum of £500 in the co-investment scheme, and got 40 share options for free [worth £80 on flotation, a bit less now].
The top 245 senior managers were given the opportunity to invest in ordinary equity that benefited from a performance ratchet.
The top ten managers were given the opportunity to invest in ordinary equity that benefited from a double performance ratchet.
The end result of this was that many of Qinetiq's ordinary employees, unable to scrape up £500, got £80. Those who could find £500 to chuck in made a return of £9 for every £1 invested as a result of their hard work in building the company's value up to 2006. Fair enough, one might say.
The 245 managers, on their special deal, made £145 - that's one hundred and forty five pounds for every £1 they invested over three years - collectively coming away with better than £65m, an average of £270,000 each.