This article by Prem Sikka, appears in The Guardian.
"Privatisation" is the ideological mantra of all major political parties. It has been used to transfer huge amounts of wealth from the taxpayer to private companies, entrepreneurs, accountants, lawyers, bankers and sundry business advisers. Major industries built by taxpayers, such as railways, mines, buses, steel, shipping, gas, water, engineering, petrochemicals, airlines, motor vehicles, biotechnology, electricity, telecommunications, computers, armaments, space and pharmaceuticals have been handed to companies at knockdown prices. Many still receive public subsidies or rely on the state to buy their products. Yet governments seem to have learned little from the past and the routine fleecing of the taxpayer continues.
The most recent example relates to the privatisation of QinetiQ, Britain's defence research organisation. A report by the all-party public accounts committee provides a brief glimpse of conflicts of interests, failures and the private gains that can result from a coming together of the public and the corporate sector.
A stake in the company was bought in 2003 by Carlyle Group, a hedge fund with close connections with leading politicians. Former prime minister John Major was chairman of Carlyle Europe from 2002 to 2005. The company had close links with the family of US president George Bush. At the time of QinetiQ's privatisation, Carlyle was headed by Frank Carlucci, former CIA director and defence secretary under Ronald Reagan.
A stake in QinetiQ was bought at an initial investment of around £42m, and within three years it was worth £350m and floated on the stock market. For reasons best known to senior civil servants, Carlyle had been given preferred bidder status even though six other firms were competing for the defence contractor.
QinetiQ's top 10 managers, which included former civil servants, saw the value of their shares rise from £540,000 to over £107m, a near 20,000% increase. Overall, senior management received £200 for each £1 they invested. All this from technology that was entirely funded by the taxpayer who took the initial risks that the private sector was not willing to take. The government can always introduce legislation to claw back any excessive gains, but all political parties seem to be imitating Trappist monks on this issue.
The increase in value of the company was not due to some invisible hand of the market. Most of it came from the billions of pounds worth of contracts that QinetiQ signed with the Ministry of Defence around the time of its privatisation, including training for the RAF. Subsequently, the company was also the preferred bidder for the government's defence training rationalisation programme, estimated to be worth around £16bn over 30 years.
This guaranteed cash flow provided profits and higher market values. Wars in Iraq and Afghanistan have increased the potential for even more government contracts and profits. So the taxpayer funded the company, absorbed the risks, provided the contracts and guaranteed future cash flows, but the private sector took almost all the gains and profits. Unsurprisingly, the private sector wants everything privatised.
Business advisers also did very nicely out of the privatisation of QinetiQ. They included lawyers Simmons and Simmons, accountants Pricewaterhousecoopers and Arthur Andersen and bankers UBS Warburg, Merrill Lynch, Credit Suisse, JP Morgan Cazenove and ABN AMRO Rothschild, which between them managed to charge £28m (plus VAT) in fees. No doubt, there are considerable difficulties in valuing businesses, especially where the markets are thin, but how could the valuations in this case be so wide of the mark? At the very least, the government should refuse to give those involved with the valuation any more business until there has been a very thorough public investigation of the quality of their advice. It should amend the law so that the National Audit Office can investigate companies receiving public money. Even better, mobilise the public to scrutinise the privatisation deals by publishing all contracts, correspondence and reports. After all, the public has borne the risks and built the industries. What objection can there be to letting the taxpayer see the details?
The parliamentary committee reports are supposed to enhance public scrutiny and accountability. Yet there are other aspects of the QinetiQ story that deserve further investigation. QinetiQ is a story of political and economic elites combining to profit from war and doing so behind a wall of secrecy.
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I have worked for this firm so it is not possible for me to reveal my identity. What has happened in this case. While the agency DERA was in public hands, people had to be boarded to be accepted into the firm. Almost invariably one had to have a first class honours degree from Oxford, Cambridge or Imperial to get into the agency as a junior member of staff and an outstanding PhD from such places to come in at a more senior civil service role. Shortly before the privatisation the rules relaxed. No longer was it necessary to have these high qualifications and friends of those in power started to get hired as business group managers and spread sheet jockeys. The company encouraged a man-hour culture and scrutiny of work via time sheets. Later, the staff were segregated in a stoved piped and wicked form of segregation accounting so that scientists could not speak to each other unless their time (hourly rate) was internally charged. While the rest of the world moved to interdisciplinary wealth creation, this firm became increasingly stove piped. Then salesmen who did not sell joined the fowl, and the hourly rate of scientists was deliberately increased so they would have to do much more work in shorter time scales to pay for the overheads of the so called business guys (the A students paying for the salary of the F students; the effective paying for the private schooling of the ineffective). The thing became so corrupt. At no time were the senior scientists given any share incentives or any knowledge of what was going on behind the scenes. Any inventions by staff were rewarded with a pittance (£150 GBP) and if anything made it for spin out then accountants were put in charge of it and not the scientists (almost invariably and increasingly). Eventually the scientists decided not to do anything. Incidentally, this new management moved all scientists into the noisy open plan where they could not work or invent anything. Then news of the rich pickings of the top 245 (the spread sheet jockeys and top brass) came in. Everyone became even more demoralized. Now most of the brains have left. The ones who could left early, and the rest are desperate to go. The place has become completely dumn down and people just want to go and under the illusion that they will receive severance pay. However, severance pay was only given to the sales and marketing people who did not contribute hardly anything (the late comers) and no scientist has been made redundant. Opportunities have been missed. Such is the unacceptable face of this privatisation.
I would like to add that this whole debacle of privatizations: Enron, QinetiQ, etc. is the fault of politicians who listened to Milton Friedman and his libertarian views about natural monopolies. Up until the mid 80s all of the American universities were teaching the concept of "natural monopoly" as something needing government ownership and intervention and regulation. The example they would use was one of people taking a short cut through the park and burning out the lawn. Surely in such cases government had to interfere to keep people from doing this. Friedman changed all that by advocating that the best of all evils was a private company in charge of the natural monopoly. We see today how disastrous was this advice. The French kept EDF (Electricite du France) in government hands and developed all of the technology of nuclear power. Now we are going to buy the nuclear power plants from EDF and they are treating us much as we would treat third world countries. Nothing is achieved by these privatizations because no innovation or complex idea that requires sustained funding can be accomplished in the free market. Most complex things require a form of regulation because otherwise private companies that are run by the Oxford Blue rower or the American Basketball star, just think of short term money, of the balance sheet, and forget that sustained knowledge is required to achieve technological domination and success. By definition anyone who is involved in an intellectual pursuit is not going to have time to climb the greasy pole of management. Hence, legislation must protect the people with great knowledge but with low gearing. It must protect the guy who fixes the ditch in the road because YES we do care about the ditch being fixed correctly, we do care about our Civil Engineering and houses that are built by PhDs and not by ignorant brick layers, yes we do care for the technical, and no we do not care for the profiteering of a few greedy individuals and traders. The law needs to make this clear and yes the government has a role to play to regulate these things, particularly now that the world has become so complex. We can no longer leave it to the market when Far Eastern economies are so directed and strategic, and Far Eastern economies elect Stanford EE PhDs for Ministers while we in the UK must select an MP as minister, select someone who cannot even spell the word "computer", or have a leader of the opposition who is a PPE graduate from Oxford, what on Earth does he know about technology I ask you? and what can he do for our future? The technologies of the future are developing at an unprecedented pace: robotics, nano technology, autonomous devices. Most of the jobs that we do today will be wiped out, but look at our leaders!!! they need entrance requirements as well. We should have a rule that anyone who enters politics must have a PhD in a technical subject. That would be a very healthy way to get the leaders that MAY guarantee our future survival, prosperity and happiness.
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