Select Committee on Defence Minutes of Evidence



Examination of witnesses (Questions 40 - 59)

WEDNESDAY 28 FEBRUARY 2001

BARONESS SYMONS OF VERNHAM DEAN, SIR JOHN CHISHOLM, MR BILL CLIFFORD and MR TERENCE JAGGER

Chairman

  40. The trading fund is an interim trading fund. What will happen afterwards? What thought has been put in to what will happen to retain DERA after 12 months or two years? Will you come back to the Committee saying, "I am sorry, what you supported was only an interim arrangement and we have gone on and proposed something quite different and now we are going to add Retained-DERA and stick it under Sir John".
  (Baroness Symons of Vernham Dean) Mr Chairman, we have taken a deliberate decision, based on a great deal of consultation that part of what is currently DERA should remain in the public sector. We have stated the reasons for that. When the original consultation took place, if there was anything about which you were incandescent—I hesitate to use the word—I believe it was the suggestion that Porton Down was privatised.

  41. "Deeply repugnant" I believe was the phrase. That was not the first version; that was the watered down version.
  (Baroness Symons of Vernham Dean) I am sure that the language that you used was entirely consistent with the view that you took. As you know, it is not the view of either myself or the current Secretary of State that Porton Down, for example, should go into the private sector. I cannot envisage circumstances in which I would come back and say anything different to you about that. We have taken a deliberate decision about what we retain in the public sector. Some of it is very security sensitive, the sort of thing it is difficult to discuss in public, as you have acknowledged on previous occasions. To return to your question about where we are in the trading fund, currently as we stand, I have no reason to believe that we would want to change that status but we shall continue to monitor what is happening with DSTL. Of course, it will be different when New DERA becomes, first, a plc and then is ultimately privatised by whatever means, but we do not believe, from the financial forecast, that we have any reason to believe that it will not operate successfully as a trading fund both in the medium and in the longer term. Of course, we shall keep looking at it.

  42. Are you saying that the future of DSTL is not uncertain?
  (Baroness Symons of Vernham Dean) I do not feel uncertainty about it. It is impossible with all these things to bind future administrations to what is happening. From where I sit now, as the Minister responsible for defence procurement, I am comfortable with what is proposed, both as to its status in the medium term and in the longer term.

  43. A couple of weeks ago we had DARA here and they were telling us about their trading fund which gives far more flexibility. They were delighted with the trading fund surplus. But you are splitting this into two organisations. You will have to fatten Sir John's part of the operation in order to make it attractive to the market, otherwise the market will say, "Thank you very much, we have read the speeches of Baroness Symons and we are unconvinced that it is viable". Therefore, I assume that there will be a fattening up process which could come out of Retained-DERA. If it is operating on a trading fund status—DARA knows full well that it had to be viable financially—will there be enough work going around to fatten up a soon-to-be flogged off DERA? I am sure you have wondered how long it would take me to mention that.
  (Baroness Symons of Vernham Dean) I did. I think you have done quite well; it has taken about 40 minutes.

  44. Will it be possible to fatten up a flogged off DERA and to make Retained-DERA viable?
  (Baroness Symons of Vernham Dean) If you are suggesting that the fattening up, to use your not very attractive term, is at the expense of DSTL, I do not believe that to be true at all. Certainly we want New DERA to be an attractive proposition in the marketplace. Of course, we take a great deal of outside advice. I am sure that you know that Sir John has his own financial advisers and a chairman with considerable experience in the person of Sir John Egan who has been a considerable figure in this sort of process in the past. I know that he will give support and guidance to this Sir John, on my right, about the way in which DERA can be made an attractive proposition in the marketplace. I know that Mr Jagger has something to add.

  45. I want to read Mr Jagger's memoirs. He knows where all the bodies are buried!
  (Mr Jagger) You cannot be looking at me! You talk about the split between DSTL and New DERA as though it were just about people and assets, but another part of the split has been the split of the business that the whole of DERA does currently. Although that is different in proportion in different areas—for example, all the CBD work is with DSTL—the overall split is very much in line with a three-quarters/one-quarter split. The reason that New DERA will be attractive to the market is because of its ability to develop new business on top of the MoD business.

  46. Because there is a degree of uncertainty in upheaval and in getting the organisations up and running, has there been any reduction or delay in the MoD or its customers placing research work with New DERA?
  (Sir John Chisholm) No. The contracts on which we are now working are, of course, in existence. The contracts on which we shall work next year, as I said earlier, have been the subject of discussions with our customers and we are more advanced now in relation to our discussions with our research customers for next year's contracts than we have ever been before.

  47. Has the MoD said, "Come on, don't worry, Sir John, we will give you a lot of dosh", which will make it easier for the market to bear? Have they offered you a lot of research contracts that will not go out to competition?
  (Sir John Chisholm) I can safely say, Chairman, that that conversation has definitely not taken place with the MoD.

  48. Have you worked out who the directors of New DERA will be on 1 July? Will they come from the existing ranks of DERA's senior management, many of whom are here today? Was there any competition internally or externally for the new posts?
  (Sir John Chisholm) The board of New DERA, as yet, is not formed. It will be formed of non-executive and executive directors. We have already made one announcement in relation to the chairman, Sir John Egan. Currently, we are recruiting other independent non-executive and executive directors to participate in the oversight of New DERA. The number of executive directors on the board is likely to be less than the number of non-executive directors. So far only two executive directors have been announced as being on the board: myself and my chief financial officer who has been recently recruited, Mr Graham Love. Underneath the board, New DERA will be led by a leadership team of, currently, 13 members, of which seven come from elsewhere, but have traditionally been in the MoD—that is, if you do not count me as being traditionally in the MoD, if you see what I mean—and the other six have considerable experience outside, although many of those, like myself, have been in the organisation for a while.

  49. You are a competent person, so competent that I would prefer you to stay with Retained-DERA. Who chose you for your future role? It was a wise choice, but who formally appointed you.
  (Sir John Chisholm) I have a contract with the Ministry of Defence now. I expect to carry forward into New DERA and that is undoubtedly an appointment in the hands of the Minister.

Laura Moffatt

  50. I am sure that Mr Love has been involved in other organisations, has he not?
  (Sir John Chisholm) Yes.

  51. Could you give us a note on his background?
  (Sir John Chisholm) He was chief executive of a company called Comax, which was previously a privatisation. It was privatised out of DERA in a previous era; very successfully, I might add.

  52. I knew his name was familiar to me. I want to explore the issues of who will be interested in New DERA? Where will the strategic partner, or shareholders who may want to buy into this project come from? Baroness Symons, will there be any constraints on who will be interested, say, from foreign investors?
  (Baroness Symons of Vernham Dean) Yes. We shall want to have some constraints upon ownership and foreign ownership. There will certainly be limitations on share ownerships in a way that will be familiar to people who know about the golden share arrangements. We have not worked out what those limitations will be, but I think that at the moment we would wish to consider that that would be part of our overall thinking. As to who is interested, a number of organisations have been in touch, expressing an interest, from a whole variety of—

Chairman

  53. Countries?
  (Baroness Symons of Vernham Dean) Yes, I think there has been some overseas interest. I am going to ask Mr Jagger to speak about the sorts of organisations with which he has had discussions, without naming individual organisations. It would not be appropriate to go into detail about who they are, but he can give you a general flavour. I am sure that the Committee will understand that of course we want to maximise the benefit from a privatisation and we do not want to do anything that will prejudice the best possible outcome of such a privatisation, but within those constraints perhaps I can ask Mr Jagger to give a flavour of the sorts of people to whom he has been talking.
  (Mr Jagger) Perhaps I should first make it clear that I have not been engaged in any marketing campaign yet. These are people who have come to me on an unsolicited basis. Therefore, they reflect people who have an interest in taking up some kind of a strategic partnership. The customers for flotation would be more passive. Overwhelmingly, those have been British companies; there have been one or two overseas companies. Neither of those would, I believe, give any cause for alarm on a security or military basis, for example. They have been companies that are venture capital funds, equity investors, both publicly quoted and privately held who have existing interests in technology development and that kind of market.

Laura Moffatt

  54. That is helpful. I am grateful for that honest answer. This Committee must be convinced of those people who will have an interest in New DERA. I turn to you again, Sir John. So that there is absolute honesty and a sense of openness about where the process is going, we have to be sure that people outside who will invest in this business are absolutely legitimate. That must also go for those who may benefit inside the organisation. I ask you one more time: is there to be any financial benefit to you or to anyone else involved in this process?
  (Sir John Chisholm) I draw a salary from the Ministry of Defence at the moment.

  55. What about shares?
  (Sir John Chisholm) I hope that I shall draw a salary from New DERA plc in due course.

  56. There will not be any stock involved at all, will there?
  (Sir John Chisholm) The issue of share schemes for employees is an issue for the vendor to decide. It is not an issue for the company to decide. Previously, the Government have indicated in statements that it is favourable to them, but they have not yet decided.
  (Baroness Symons of Vernham Dean) We have said that we wanted to see broad share ownership. Obviously that depends on the route to market. You have mentioned strategic partners. We have been talking about the possibility of strategic partners. We have not taken a decision on how to progress that. I hope that we shall be in a better position to do that towards the end of the year. I am expecting two lots of advice: one next month, March, and another big block of advice in October or November that will be much more specific about the route to market. We have always thought that it would be a good thing to have a broad share ownership, but I do not want to nail my colours to the mast as we may be told that the financial advice is rather different and that the strategic partnership is going differently. If we are to have a broad share ownership, for example, employee share ownership, it follows, as night follows day, that that would include options for the chief executive. I would not exclude that entirely by any means, but I think that the sort of package of remuneration is something that we shall all be extremely sensitive to for obvious reasons. Sir John knows that and it is a point that I have made repeatedly. It is one that should reflect the responsibility of the job and it should reflect the marketplace. The privatised organisation will reflect the marketplace, but the details have to be worked out. I absolutely take your point that this is a very sensitive issue.

Chairman

  57. Laura Moffatt is much less polite than I am.
  (Baroness Symons of Vernham Dean) She is less polite?

  58. She is much less polite but she is behaving herself! For me it is unpalatable that this MoD organisation that Sir John has helped to make very viable—it is in an international class—is to be flogged off. It would be moderately bearable—not that you would be prepared to provide me with the assurance—if the companies or those who buy up this British asset were, at least, largely British.
  (Baroness Symons of Vernham Dean) Yes.

  59. We have been through the exercise of the MoD housing estate being purchased by Nomura. I suspect that the British public will not be as xenophobic as I am, but if suddenly Thales, Thomson-CSF, which has been busy buying up British companies, with collusion from the Ministry of Defence, what happens if a French company says, "It would be wonderful to get a real handle on British defence research", or what if the Japanese say, "We have bought up their housing estates, why don't we dive in and buy their wonderful defence research organisation that Sir John is running"? Are you prepared to give us assurances that, when this hits the market, the MoD will exercise not just its influence, but its dominant position, to say that it must largely be British companies that acquire flogged-off DERA because if it is to be an adviser to the Ministry of Defence, if it is to serve British defence interests, it must be largely a British-owned company?
  (Baroness Symons of Vernham Dean) In the compliance regime that we have outlined to you we have there specified limitations on share ownership. Limitations on share ownership implies limitations on individual share ownership and on limitations on other measures. As you will be aware, there are a number of companies in which the Government have an interest, not necessarily a financial interest, but an interest, which limits the overseas holdings. I would not wish to exclude overseas holdings entirely, but speaking personally, if I may, I have an enormous amount of sympathy with what you say about a majority British holding. I cannot give an absolute undertaking on that today, but it would be my personal wish to be able to give you such an undertaking. I shall take this matter away and see what I can do in order to give you more confidence on that issue. I cannot do that right now, but it would certainly be my wish so to do and it would not be out of line with a number of other constraints on share ownership in companies in which we have a very heavy interest for defence and security reasons.


 
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