Select Committee on Defence Minutes of Evidence



Examination of witnesses (Questions 80 - 99)

WEDNESDAY 28 FEBRUARY 2001

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

  80. If you feel it is necessary.
  (Sir John Chisholm) I feel this whole conversation has been underpinned by a suspicion and I think it might be helpful if I said something about myself, at least from my point of view.

  81. Please.
  (Sir John Chisholm) I am an engineer and I was educated at Cambridge—indeed where my tutor was one Harry Cohen, amazingly.

  Mr Cohen: Not me!

Mr Cann

  82. That did not do you a lot of good then!
  (Sir John Chisholm) In my research work I was going to do work on optimal controls—I am basically a mathematician by inclination—but I actually took up an opportunity that came into the labs to study a problem the printing industry was having over breaking webs when they were printing newspapers, which was an odd thing to do but I was very keen to get a practical result from the science. I then joined a computer consultancy and although the high prestige thing to do was to go and write software for banks, the thing which really grabbed my attention was taking the science I had and using computers to make it practical, and for ten years I did that, and I then formed a company called Cap Scientific, and that was our absolute stock-in-trade. We wanted to use these new micro-processors to implement what we knew in science, to make it into practical propositions. That was very successful in the 1980s and I went through an IPO and mergers and acquisitions and ended up as UK managing director of the Sema Group, which for a while was a FTSE-100 company—it was not in those days. I then got invited by the then Secretary of State to do essentially this job. It was an odd thing for me to decide to do because I was a whole lot better placed financially where I was, but I saw the research establishments as being just a wonderful national asset which was in danger, because of the end of the Cold War and all of that, of going to waste. I thought this was something which really needed to be done. Here was a national asset, defence may not need as much of it in the future but it could be made into something else which we could really be proud of as a nation, so that is why I took the job. It is why I have always wanted to do this job, it is about turning science into something valuable for the nation.

Chairman

  83. Sir John, I do not think anybody here questions your motives, your competence, what you have done for DERA, it is just that we have a very sad historical experience of what happens to people who have gone through your process, and that is why, because we are very protective towards the budget of the Ministry of Defence, which we fight for on a daily basis—unsuccessfully, I might add—we are nervous about this happening to something which was up until this point in time within a beleaguered organisation fighting for adequate funds. We are nervous that if a part of the Ministry of Defence goes floating off into the free market, for all of the motives, that a Railtrack situation, a National Bus Company situation—and there are dozens of others—is not replicated without us raising our voices of concern when still some assurances might be given that that is not going to happen.
  (Baroness Symons of Vernham Dean) Can I assure you that the nervousness you feel—and that was the word you used—is a concern that is felt by Ministers in the MoD as well; of course it is. None of us have short memories, we all remember some of the things which have happened in the past, and we cannot be hard and fast over remuneration packages today but I think we can say that we will keep you informed of our thinking on these as we go along, and we are absolutely alive to the concerns and worries that you and others round the table have raised with us.

  Mr Cann: Sir John has not answered my question, Chairman

  Chairman: We have to move on, Jamie.

  Mr Brazier: Forgive me saying a very short personal thing, but I think I was the only member of the Committee who knew Sir John before coming into the Parliament, and I underpin in the strongest possible way what he said at a personal level and the transformation he has achieved; he brought a tremendous amount to it and it has been absolutely remarkable. From the other side though, as someone who shares the really extreme concern on this Committee, when we went through the business with the married quarters, for example, the key person in the personnel slot then was Air Vice Marshall Peter Squire, an airman of considerable distinction who is of course Head of the Air Force, I have to say I had exactly the same view of his integrity then and everything I have seen so far and more that I have heard about which will come out in the next year or two convinces me that was a disastrous move. Just to finish the Chairman's earlier point, I hear on my pager there has been another tragic rail accident this morning. Nicholas Ridley, the apostle of privatisation, the greatest single exponent of it in this country, the last thing he did four days before he died of cancer was to write an essay for the Times saying that there must be limits on the privatisation of public services and he took the railways as one example, and I am sure he would have regarded this as another example.

Mr Viggers

  84. I must say, as a Thatcherite former Minister, responsible for two very successful privatisations, I take some wry amusement in the role reversal aspects of the passing theatre of life. Who are the advisers to MoD on the DERA privatisation?
  (Baroness Symons of Vernham Dean) Their advisers are Price WaterhouseCoopers and Warburgs, and Simmons and Simmons are our lawyers.

  85. Do you have bankers?
  (Mr Jagger) Warburgs. Those advisers report to me, they have no responsibility whatsoever to Sir John, and he has completely separate advisers on issues with which he is concerned.

  86. So they are advising the Ministry of Defence?
  (Mr Jagger) Yes.

  87. That is exactly what I would expect. In that case, is it reasonable to ask whether New DERA has started taking advice of its own on the Stock Exchange aspects of this operation?
  (Sir John Chisholm) We have advisers. We have Rothschilds as our financial advisers and Herbert Smith as our legal advisers.

  88. Minister, you said you envisaged some limitations on shareholdings. You have presumably looked at previous privatisations and you know the extent to which those limitations tend to erode and fall away over time, do you envisage the same will happen here?
  (Baroness Symons of Vernham Dean) I cannot give you chapter and verse on all the limitations on all the privatisations but I am aware that they do change over a period as the market changes and as the needs of the companies change. Indeed, we have discussed the international aspects of the privatisation in relation to New DERA. Of course, the defence market globalisation is entirely a case in point, where there will be, I suspect, continuing changes both in Europe and with our transatlantic partners as well. I would hope that whatever we do agree is the compliance regime initially is in place for a number of years, but what I have tried to do is lay out—and we have given you a written note on this already—the sort of compliance regime we would envisage to start off with, but at the moment of course it is lacking any detail about the limitations we would want to place on such things as share ownership, but we hope to be able to give you more detail on that as the year progresses.

  89. You have made two references to "later this year", about the time when you will receive a second batch of advice and the time it will be possible to take further decisions, it sounds as if your thinking has evolved to a slightly longer timetable than envisaged earlier. In other words, there would not be an earlier strategic partner but that you would be launching as a plc on 1 July with perhaps some months of experience under your belt before you move on. Is that your way of thinking at the moment?
  (Baroness Symons of Vernham Dean) Yes, that is how I see it. As Sir John has indicated, New DERA is currently working on its corporate plan. We will be looking at that with them over the course of March/April—and your Chairman has made clear he would like to see that but it will obviously have to go through the Ministerial process and I shall consult with my boss on how it is got to you and in what form—and at that point, March/April, we are likely to be given advice on how robust New DERA is looking forward to its sellable proposition in the course of the year. Of course there is the possibility we may offer advice at that stage. Once we get them passed the vesting as a plc on 1 July, there will be further advice coming to Ministers, as I indicated, after the plc has run for a while, and I would expect that to be about October/November, and at that point if I was doing a route map that would be when I would think that the next real Ministerial decisions will be needed as to the sort of route we take to market, as you say whether there is a strategic partner, flotation, and all the options which are likely to be put up to us.

  90. The strategic partner is presumably a device to seek to test the market for price as a safer way of ensuring value in the public domain?
  (Baroness Symons of Vernham Dean) Yes. Mr Jagger has already indicated to Ms Moffatt the sorts of people he has been talking to. I do not know whether you can say any more about the nature of those discussions without prejudicing our position overall when we do want to go to the market place, but I am sure the Committee would be grateful if there is something more you can say.
  (Mr Jagger) Certainly. The concept is obviously tactical vis-a-vis the market, we do not particularly want to commit ourselves going one route or another, we want to create market interest. We will have Sir John's corporate plan in the next few months and whether the company is performing to that, out-performing it or having some difficulty with it. On the basis of that and the financial advice we receive, we will take a view as to whether flotation is likely to realise full value and, if not, why not. It might be felt there was a lack of investment understanding about certain things, it might be that certain strengths that, for example, venture capitalists could provide, would enable the company to evolve. I have no idea if that is the case, I am just giving a hypothetical situation. So the idea of involving a strategic partner would be to tap either financial strengths or technical or marketing experience as it was deemed necessary by us having reviewed the corporate plan before us. As I indicated to you, those are exactly the kind of companies which would be approaching us, but at the moment it is entirely hypothetical and it would be wrong for me to pre-judge in any way what advice it might be.

  91. Just for clarification, at this stage, you have not ruled out, Minister, the possibility and even likelihood of the Government stake falling below 50% of control? You have not yet decided on any particular long-term strategic holding?
  (Baroness Symons of Vernham Dean) No, you are right.

  92. Can I put in my own three-ha'p'orths on the issue of options. I would envisage that management would indeed expect, and it would be appropriate for management, to be offered options, but there is one area where I think even I would find it difficult to justify the granting of options, and that is if the options were to enable senior and other management to benefit not just from the enhancement of the business but from the exploitation of the property aspects of DERA, because DERA does have very substantial property. I hope that the attention of the advisers would be drawn to the fact there would be criticism if the options enabled the recipients to benefit from property development or other aspects of DERA which are not related to the enhancement of the scientific skills within DERA.
  (Baroness Symons of Vernham Dean) That is very useful advice. Thank you.

  93. Finally, on the point of management, there will be a management team—Sir John used a different phrase—of 13 immediately below the board, of whom seven, I understand, would come from the Ministry of Defence. Would these be people recruited from the Ministry of Defence and who would sever their links with the Ministry of Defence, or would they be on some form of secondment? I did not quite understand that point.
  (Sir John Chisholm) I was not at that moment distinguishing between the Ministry of Defence and DERA, because DERA is part of the Ministry of Defence. They are all employed by DERA at this moment.

  94. So they would have total loyalty to New DERA?
  (Sir John Chisholm) They are currently employees of DERA. They will be employees of New DERA.

  95. And the other six?
  (Sir John Chisholm) Are also employees of DERA at the moment and will be employees of New DERA.

  96. So what is the distinction between the seven and the six?
  (Sir John Chisholm) Only where they come from.

  Mr Viggers: Okay. Thank you, Chairman.

Chairman

  97. Last year, DERA made a profit of £41.5 million and paid a dividend of £25 million to the MoD. Pretty good. To what extent have these commendable numbers suffered in the current year with the upheaval of preparing for PPP?
  (Sir John Chisholm) We, of course, have not yet published our results, indeed our year does not end until the end of next month, so I cannot give you a precise figure for the outturn. I can tell you, at the half year our trading was good, and we were on target for the objectives set for us by Ministers at the half year. I expect our full year results to show really three things. One is underlying trading performance, which will probably be, if not sparkling, at least satisfactory. Second to that, there will be exceptional costs which you will have seen year on year have come through our books relating to the changes in our business; there will be some exceptional costs. Thirdly, you will see the costs of the process through which we are now going, where there are some direct costs, for instance setting up the new secure arrangements, which are also falling to the trading fund to fund.

  98. So DERA is bearing that cost, the cost of consultancies and the cost of splitting the two organisations?
  (Sir John Chisholm) Not entirely. Except for the advice specifically to the partnering team, the rest of the costs fall upon DERA.

  99. Can the MoD expect a nice little dividend of the order of £25 million at the end of this financial year?
  (Sir John Chisholm) We will pay the dividend that is due to the Ministry of Defence this year, yes.


 
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