Select Committee on Defence Minutes of Evidence



Examination of witnesses (Questions 100 - 119)

WEDNESDAY 28 FEBRUARY 2001

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

  100. That is a very evasive answer! Will it be anywhere near the £25 million?
  (Sir John Chisholm) It is £25 million.

  101. You think it will be?
  (Sir John Chisholm) Yes.

  102. Are you confident that the current financial position is a one-off and that both DERA and New DERA and the DSTL will have an adequate cash flow?
  (Sir John Chisholm) We have examined, obviously, in considerable detail our cash flow calculations in order to ensure it will have an adequate cash flow, and we are confident that we will succeed in running the business within the cash resources available to us.
  (Mr Clifford) I can confirm also that the modelling we have for DSTL shows adequate cash flow through the modelling period of the next few years.

  103. Thank you. That is reassuring. What is your projection of the value of New DERA's MoD work over, let us say, the next three years? What about non-MoD work? You did touch on this earlier, perhaps you can give us more information. Have you managed to negotiate any major joint ventures for New DERA work?
  (Sir John Chisholm) I can give you a lot of detail on this, Chairman, and there is much more detail of course in the corporate plan. Taking those questions as three different questions—MoD work, non-MoD work and joint ventures, on MoD work, our expectation is that our core business with the Ministry of Defence is likely to decline. It has been declining anyway, it is likely to accelerate in decline as our core business gets open to competition. We are not going to win all of it, so we would expect that work to decline. As has been happening within DERA, we nonetheless expect to find other opportunities to sell technology skills into other parts of the Ministry of Defence, which will have, we hope and believe, a mitigating effect. So overall our business with the Ministry of Defence, while not being a growth market, is by no means a catastrophe. As far out as we can see, the Ministry of Defence will still be the core customer of New DERA, the dominant customer of New DERA. On top of that, of course, the real excitement in terms of performance of the organisation comes from our development in other markets, and we have eight other target markets—for instance, the telecoms, media and electronics market, which is a fast growing market for us. We have been expanding our business in strictly commercial customers at around 20% or more per annum, and we certainly see opportunities for us to continue that performance. Indeed, it is our consistent performance over a number of years in that regard which gives us some confidence we can do that, as we focus more specifically on achieving those results.

  104. If, when you are privatised, you come to a major break-through, largely based on intellectual property rights transferred from the MoD, will the MoD have first choice whether to acquire it or purchase it, or will the MoD be subject to competition with others?
  (Sir John Chisholm) The terms on which we contract with the Ministry of Defence are the same essentially as the Ministry of Defence contracts with any other third party, and that is that the intellectual property belongs to the organisation which has created it, but the Ministry of Defence has free user rights for that technology. We have not signed the contracts yet but that is what I would expect it to say. In other words, if we invent something spectacularly important for the Ministry of Defence, the Ministry of Defence will have free user rights to that technology.

  105. But if they have no intellectual property rights?
  (Sir John Chisholm) They have the free user right; the Ministry of Defence has the free user right.

  106. They will know what is going on, I hope, in your new organisation?
  (Sir John Chisholm) As of July, the Ministry of Defence has already declared it will want to have two directors on our board, and therefore it will actually have visibility of the business of New DERA. Although there has been no discussion on the relationship subsequent to a privatisation, I would have expected the Ministry of Defence to continue to want to have visibility.

Mr Gapes

  107. Can I ask you about the staff situation? As I understand it, DSTL is going to have a quarter of the staff from DERA, but is it going to have a similar proportion of the assets on vesting day?
  (Sir John Chisholm) The assets for DSTL are in the Affirmative Order.
  (Mr Clifford) The split of staff and assets has been done entirely on a capability basis, identifying the work we need to do in DSTL and selecting the appropriate body of staff and assets to complete that work. As it comes out, the split is not numerically exactly the same, but the important thing is that the correct staff and assets have been transferred to security division and ultimately to DSTL.

  108. What is the figure for the assets?
  (Mr Clifford) I believe it is nearer 30 than 25%.

  109. That means, does it, that New DERA is actually in some way going to benefit from that or not?
  (Mr Clifford) I would say the asset-to-staff ratio varies hugely in DSTL, as it does now in DERA, depending on the style of business which is being conducted and the sort of work being done. From my point of view, DSTL has benefitted from successful capital investment in areas of the organisation which are going into DSTL, and therefore those are more asset-rich than others.

  110. Can I turn the question round and ask, what are you doing to enhance New DERA to make it more attractive, given this imbalance?
  (Sir John Chisholm) The asset equation does not play hugely in relation to New DERA's value. New DERA's value is essentially between the ears of its people, and that is not reflected well on a conventional balance sheet. It is our ability to create business in the future which is where the value of New DERA is. I would not expect investors to be investing in New DERA in order to acquire its fixed assets.

  111. Let us be absolutely clear, DSTL gets 25% of the staff and about 30% of the assets?
  (Sir John Chisholm) It gets the assets which are appropriate to the staff that DSTL has.

  112. There is no shaving at the margin? There must be some areas where it is difficult to be absolutely sure?
  (Baroness Symons of Vernham Dean) Can I say a little bit? For example, let us take Porton Down, Porton Down is asset-rich and that is going to DSTL. It is not something where you can do a pro-rata division of the assets. The assets go with the bits that we are either keeping or not keeping. The point is that if you were to take CDA, that is not asset-rich, but that is also going to DSTL.

  113. CDA?
  (Baroness Symons of Vernham Dean) The Centre for Defence Analysis. The Centre for Defence Analysis is not asset-rich and is going to DSTL; Porton Down is asset-rich and going to DSTL. It is where the assets fall with the way in which we have decided to do the division.

  114. Have you had to make bids and are there grey areas?
  (Baroness Symons of Vernham Dean) Not over assets, have we?
  (Mr Clifford) We have carried out a process which lasted through the summer and into the autumn which completed around Christmas of identifying the capabilities and the people and then ultimately the assets they needed. As you would expect, there was a robust debate but it was a debate which was concluded to the satisfaction of both organisations.
  (Sir John Chisholm) Just to give you some comfort in this, the person who chaired the group that was doing all of this was Bill.

  115. You are aware there has been some concern in the private sector about the consequences of this whole process, could you give me your current view of how much of the MoD research work will be opened up to competition and how quickly?
  (Baroness Symons of Vernham Dean) I think that is really a question for Mr Jagger.
  (Mr Jagger) We will obviously have to state when we do any transactions what our view on that is. Broadly speaking, the MoD's work at DERA falls into two categories—research, very roughly £400 million a year, and what you might loosely call "project and procurement support". The research has not been competed at all up until the current year historically, this year we have competed just over 3% of it and we will have a progressive plan to compete more of that each year from now on. The actual figures are subject (a) to financial advice and (b) talks with the Chief Scientific Adviser and Ministers, but I would expect something in the order of about half of the research programme being competed after a period of about ten years. The rest of the work the MoD gives DERA can already be competed; it is at the discretion of the customer, whether that is one of the Armed Forces or the Defence Procurement Agency, to compete it, if they think that is best value for their project. Very roughly about a third of this work, 30%, is already competed.

  116. The memorandum we had from the Minister says that you are all talking about a five to seven year period before all the MoD research work would be open to competition. Is that a realistic timescale?
  (Mr Jagger) I think there may be a misunderstanding, unless I am mis-remembering the document. I think there is a five or seven year period of guarantee envisaged, it may be that some research work is never competeable for the very simple reason that there is no one else to do it if there is a very particular facility required. We would envisage some sort of sloping guarantee period which will last five or seven years and the research competition ramping out in opposition to that.

  117. Have you had any concerns expressed recently and have there been continuing concerns from the private sector about New DERA having an unfair advantage in winning MoD work?
  (Baroness Symons of Vernham Dean) Overall I think that initially there were some concerns about that in the various industry groups that I have chaired and I think those concerns have been largely allayed in recent months. We have tried to do our best to describe to them the measures in place to ensure that does not happen but you have had detailed discussions, Terence.
  (Mr Jagger) Yes. Certainly people have been concerned about that. My response is to say that hundreds of millions of pounds worth of work which is not currently available to industry is being made available to industry and that is actually a positive advantage for them. I think when you explain that, and the process of transition, and the fact that even with the great success DERA has had in the pilot competitions, the pilot competitions have actually thrown up opportunities for industry because they have partnered with DERA to provide the MoD with a better service. In fact, the industry is likely to be a net gainer of business from this process, very considerably in my view, over the medium and longer term.

  118. Though not necessarily all the business.
  (Mr Jagger) In the position of vendor, if I was to sell John's organisation and say "And by the way we are not going to give it any business ever" I would not get a very good price.

  119. No. It is a question of whether things are open to competition.
  (Baroness Symons of Vernham Dean) I think clearly it is going to take time to introduce competition fully. We have always said that from the beginning of this whole exercise, so obviously there are going to be some transitional arrangements. Now we have talked in terms of the five to seven year tapering and I think that will obviously involve some initial guarantees to DERA, I think that is entirely sensible. They will get as close to zero as we can make them over the period so that there is genuine competition. We all know competition is not an end in itself but it is a jolly good tool for getting best value for money for the taxpayer and that is what we are about.

  Mr Gapes: I hope so.


 
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