WEDNESDAY 28 FEBRUARY 2001
                               _________
  
                           Members present:
              Mr Bruce George, in the Chair
              Mr Julian Brazier
              Mr Jamie Cann
              Mr Harry Cohen
              Mr Mike Gapes
              Mr Mike Hancock
              Mr Stephen Hepburn
              Laura Moffatt
              Mr Peter Viggers
  
                               _________
                                   
                 BARONESS SYMONS OF VERNHAM DEAN, a Member of the House of Lords,
           Minister for Defence Procurement, SIR JOHN CHISHOLM, Chief Executive
           of DERA, MR BILL CLIFFORD, Managing Director, Security Division,
           DERA and MR TERENCE JAGGER, Head of DERA Partnering Team, Ministry
           of Defence, examined.
  
                               Chairman
        1.    Baroness Symons, Sir John Chisholm, Mr Clifford and Mr Jagger,
  thank you very much for coming.  Baroness Symons, I understand that you would
  like to make an opening statement.
        (Baroness Symons of Vernham Dean)   If I may, yes.
        2.    First, I shall make an opening statement.  Two of our colleagues
  are taking part in the debate on Sierra Leone so they will join us later. 
  Throughout the current Parliament, the Defence Committee has been closely
  monitoring the progress of the proposed public-private partnership for DERA. 
  We have produced three reports.  Our Defence Research report highlighted our
  concerns about the MOD's plans, concerns shared by many important
  stakeholders:  industry, the trade unions and the US authorities.  The MOD
  abandoned its plans for a "Reliance" model for the PPP, to which we had very
  strongly objected.  It launched a consultation on an alternative "Core
  Competence" approach in April 2000, which involved a much bigger proportion
  of DERA staying within the MOD.  "Retained-DERA", as it was then called, would
  keep about a quarter of DERA within the department, leaving most of it in a
  plc called "New-DERA".  Our latest report on The Future of DERA, published
  last June, welcome these improvements but warned that the fundamental
  weaknesses of the proposed PPP had not all been removed, and that there were
  still significant areas of uncertainty which the MOD had yet to resolve.  We
  promised that we would return to this subject.  The MOD announced its
  intention of proceeding with the PPP on 24 July last year, and it has since
  been dividing DERA into its two new entities:  New-DERA and Retained-DERA (now
  re-titled the "Defence Science and Technology Laboratory").  The immediate
  occasion for our session this morning was the laying of a draft Order to
  establish the DSTL as a trading fund from 1 July, paving the way for the
  incorporation of the rest of DERA as a plc.  So the focus of our session this
  morning is on the current state of play on the privatisation, in particular,
  the move to Vesting Day for the new organisations and what that involves;  the
  MOD's progress in resolving the outstanding issues that we flagged up in our
  earlier reports;  the way New-DERA and DSTL have been divided up;  and how the
  Defence Diversification Agency fits into the new scheme of things.  I
  anticipate that our session will be largely public, but should we ask
  questions on the Untied States and the degree of support or acquiescence that
  they have given, perhaps it may be more prudent to go into private session,
  but I would prefer not to do that.  It will depend on how much you are
  prepared to say.  On a previous occasion I was accused by one distinguished
  journalist of being "incandescent with rage".  I promise you that it will
  require extreme provocation for me to degenerate into incandescence, but it
  cannot be ruled out totally.  I thank you for coming and I hope you have
  brought your sandwiches with you!
        (Baroness Symons of Vernham Dean)   Thank you.  I shall try to do my
  best not to provoke you.  I thank you and the Committee for providing me and
  my colleagues with the opportunity to discuss the amended DERA trading fund
  order laid before Parliament on 17 January.  As you can see, I have with me
  a team of officials who I hope will be able to talk in some detail about some
  of the issues that you have raised.  You know Sir John Chisholm, the chief
  executive of DERA, Mr Bill Clifford, who is managing director of the Security
  Division which consists of those activities that will be retained within the
  MOD and I believe that you have also met Mr Terence Jagger before, who leads
  the MOD's DERA Partnering Team.  I would like to say a word about my two
  colleagues on my right, Sir John and Bill Clifford.  They and the staff of
  DERA have carried out an immense amount of hard work over the past few months
  in undertaking the work that we believe is necessary to ensure that we stay
  on track over a successful public-private partnership.  As you know, the
  announcement that we made in Parliament last July followed an extensive
  consultation exercise.  We believe that substantially ended some of the
  uncertainty and the degree of frustration apparent in DERA staff.  Sir John
  has had a difficult task in ensuring that he kept his organisation on the
  tracks, and he has delivered the programmes that MOD customers have wanted to
  see delivered during that period.  It is always difficult in a period of
  change to sustain that but it has been carried out successfully.  It has given
  us the confidence that the new organisations will be capable of being as
  professional and as successful in the changing environment in which we hope
  that they will operate.  Mr Chairman, you have read out some of the background
  in relation to the decision over core competence, which was taken having had
  the consultation that we had over the earlier proposals.  We now turn to the
  proposed amendments to the trading fund.  The purpose of the changes are
  twofold.  Firstly, it is to remove from existing DERA trading funds a number
  of activities that will form the basis for New-DERA, which will be vested as
  a plc on 1 July 2001.  Initially the plc will be wholly government-owned, but
  work will continue to prepare the company for a transaction.  The precise
  nature and timing of the transaction is dependent on value-for-money
  considerations and, to a certain extent, upon the market prevailing at the
  time.  Secondly, the order allows for the creation of the Defence Science and
  Technology Laboratory, which we now refer to as DSTL, in time-honoured MOD
  fashion.  That will continue as an MOD trading fund and will be responsible
  for carrying out functions that our consultation showed could not be easily
  transferred to the private sector.  Perhaps I may remind you of those.  That
  is, first, research into certain very sensitive areas;  secondly, the
  provision of a high level of overview of defence science and technology - that
  provides the overall core competence - thirdly, acting as an in-house source
  for impartial advice, free of all commercial considerations;  and fourthly,
  the management of international research and collaboration.  You yourself
  referred to the interest that our international partners have had in that. 
  The order represents a further step in a successful transition towards the
  PPP.  A substantial volume of the work is already complete.  Although until
  the order is approved the DSTL and New-DERA are still part of the single
  trading fund, they are progressively being managed and operated as separate
  entities already.  The allocation of staff between DSTL and New-DERA was
  agreed in November last year and the internal transfers took place on 2
  January this year.  So by April we envisage that the physical separation of
  the organisations will be completed to a level that will satisfy the MOD's
  normal accreditation authorities.  An initial split in the current year's work
  programme was completed in December and from 1 April 2001 MOD customers will
  place work on the two organisations as though they were separate entities at
  that date.  Our experience so far indicates that separation has progressed
  well and that the two organisations are already operating with a high degree
  of independence, hence both my colleagues on my right being here today.  As
  we announced in July, we shall conduct a rigorous process of shadow operation
  and testing aimed at demonstrating the robustness of the organisations and the
  supporting infrastructures.  I understand that that began about two months
  ago, but it will continue until the end of June.  We are determined to test
  as fully as possible.  I believe that we have listened carefully to what you
  and other interested organisations have said to us about this.  We have taken
  an extensive period of consultation and I believe that, having made the
  announcement that we have made, we are making good progress and are able to
  set up a route-map of where we see matters progressing over the next year or
  so.
        3.    If you had listened to us, Baroness Symons, you would have heard
  us say that you are separating two parts of a viable organisation.  I am
  delighted that everyone is really happy with what is happening.  I understand
  that there was a MORI survey.  Did you bring it with you?
        (Baroness Symons of Vernham Dean)   No, Mr Chairman.
        4.    We could see how happy everyone is.
        (Baroness Symons of Vernham Dean)   I am aware that there have been a
  number of different surveys.  I believe you will also be aware that during the
  course of our consultation we received 125 individual letters - a substantial
  number of individual letters - but taken as representational of the 12,000 or
  so staff that represents about 1 per cent.  I agree that 1 per cent is a
  substantial number of people when they write as individuals.  The trades
  unions have left us in little doubt that they had apprehensions and
  misgivings.  I am sure that you know, Mr Chairman, as I do that the trades
  unions are prepared to get behind the new proposals and that they acknowledge
  that we have listened.  You said that if only we had listened to you.  We did
  listen to you, but in the end we did not agree with everything that you said. 
  That does not mean to say that we did not listen to you.  We have listened
  very carefully and the trades unions in a letter to me dated 23 February this
  year have said that they now want to see us progressing these proposals and
  that they believe that they will behind the proposals, as will the
  overwhelming majority of staff in DERA.
        5.    You should have no objection to showing us the MORI survey.
        (Baroness Symons of Vernham Dean)   I do not know the status of the
  MORI survey at the moment.  I have no objections myself, but I look to Sir
  John.
        6.    Everybody is blissfully happy so there is no problem.
        (Baroness Symons of Vernham Dean)   Are there problems with this, Sir
  John?  Is it MORI's property or is there a legal doubt about this?
        (Sir John Chisholm)        I am not sure to what you are referring
  when you talk of a MORI survey.  We had a Gallup survey carried out.
        7.    The Gallup survey then.
        (Sir John Chisholm)        We published the results of a Gallup
  survey of our staff in our newspaper.
        8.    When was that?
        (Sir John Chisholm)        That was in the autumn.
        9.    We do not receive your staff newspaper, but if there is raw data
  we would love to receive that, to see whether it confirms that everybody is
  idyllically happy.
        (Baroness Symons of Vernham Dean)   Mr Chairman, that is a little
  unfair.  I made a particular point of not saying that they were idyllically
  happy.  I have been very clear that there are still misgivings and worries,
  but the trades unions have said that, recognising the way they are going, they
  wish to progress matters as quickly as possible.
        10.      I understand their motives.  I have spoken with them too.  They
  are not idyllically happy;  they are acquiescent.  They recognise that further
  disruption would be damaging to the operation.  That does not mean support for
  what is happening, but they are looking to the future and trying to salvage
  something from what they regard, as we do, as being anti-structural. 
  Acquiescence does not indicate enthusiasm.  In your summary of the
  consultations, you hardly give a flavour of what the views were.  People are
  apparently reasonably satisfied, or whatever the phraseology was.  You would
  not even send us copies of the report and said that to get their views would
  entail a disproportionate cost.  I could not see why a first-class letter or
  one sent by internal mail to the people who gave evidence to you saying,
  "Would you be prepared for this document to be released to the House of
  Commons Defence Committee?" would be more than 0.0001 per cent of the money
  spent on splitting the two organisations.  Why could we not have access to the
  organisations that you have apparently managed to get on board over this
  consultation?
        (Baroness Symons of Vernham Dean)   As I understand it, when the
  consultation was undertaken, we did not make it clear to people that we wanted
  to put their views into the public domain.  People gave us their views on the
  basis that they were giving them to us and that they were not for publication. 
  I think we would run into considerable difficulties were we to put into the
  public domain the views that people felt that they had given to us on a
  confidential basis.
        11.      If you said, "The Defence Committee has asked to see the views,
  so are you prepared for us to send them to the Committee", that would require
  one letter to the people and one letter back.  If they had said "No", we would
  have respected that.  Our safe is not necessarily open to the general public. 
  We have lots of information stored in our private secure accommodation that
  is available for the Committee to see on a very sensitive basis.  I cannot see
  why those conditions could not apply.
        (Baroness Symons of Vernham Dean)   On the second point, I agree with
  you.  If the Committee were able to undertake to keep the results
  confidential, we may have room for some progress.  If I may, I would like to
  take that away with me to see whether there is more information that we can
  give you on that basis.  It would be quite difficult for us now to write to
  people, sending them copies of what they said, and asking what they want in
  the public domain or do not want in the public domain.  That may be quite a
  problem.  If there is a way forward on this I shall examine the matter.  I did
  so at the time that the request came to me and I felt that we were in some
  difficulty over this matter, given that individuals had given their views on
  a private basis.  If you want me to re-examine this issue, without prejudice
  to the outcome, I shall certainly do so.
        12.      Please do.
        (Baroness Symons of Vernham Dean)   Like you, I believe that we should
  have as much as possible in the open and not putting things in the open
  actually breeds suspicion and doubt.  I do not believe that we have anything
  to hide.  It is purely a matter of safeguarding the position of individuals
  who thought that they had given information on one basis instead of on another
  basis.
        13.      As such a major change in policy is unfolding, and as we, as a
  committee, are charged with monitoring what is happening in the MOD and in the
  agencies, we have a right to approach you and to seek information.
        (Baroness Symons of Vernham Dean)   Absolutely.
        14.      We would be very relieved if the majority of the stakeholders
  are, if not just acquiescent, reasonably enthusiastic.
        (Baroness Symons of Vernham Dean)   It may be easier if we were to
  concentrate on organisations rather than individuals in trying to obtain
  release of what they actually said.  I do not know how that strikes you, but
  that is a way forward.
        15.      That is fine.
        (Baroness Symons of Vernham Dean)   If I were to go to all 125
  individuals from DERA that may be rather more difficult, but if I were to go
  to the organisation that submitted evidence, that may be a way of giving you
  more information.  I rather doubt that anybody from those organisations would
  have a problem with that.  Presumably they have already consulted extensively
  within their organisations before sending it to us.
        16.      That is fine.
        (Baroness Symons of Vernham Dean)   Would that be helpful?
        17.      That would be wonderful - and the Gallup survey.  We would then
  have our finger on the pulse in a better way.
        18.      The Gallup survey results have been published and we shall
  certainly send you that information.
  
                              Mr Hancock
        19.      You made a fairly intensive opening statement about the
  background and how you have arrived at where you are today.  I am interested
  to know whether there were any significant issues raised in the consultation
  which actually put serious doubts in your mind about whether or not you would
  get support in reality and I am interested to know whether writing to
  stakeholders and asking them for their comments was a cosmetic exercise.  What
  significant reservations did they have?  You did not mention any of those.
        (Baroness Symons of Vernham Dean)   We have carried out two lots of
  consultation.  To which one are you referring?
        20.      The second one.
        (Baroness Symons of Vernham Dean)   The second lot of consultation was
  on core competence.  We tried to lay these out in the document that we sent
  to you on the outcome of consultation.  We put together the sorts of issues
  that have been raised.  For example, there was a view taken that there was a
  lack of detail in the consultation document itself and, therefore, people were
  concerned about whether there was a hidden agenda behind what was happening. 
  They felt that it was made difficult for respondents to feel confident about
  the future trading relationships.  If you have not had a copy of that I can
  send you one, but as you go through that document we have tried to be very
  straightforward about the sorts of issues that people raise.  One point, as
  I am sure you know, and it is one that the Committee itself has expressed, is
  that the PPP is being pursued solely as a means of dealing with some of the
  perceived shortfalls in the defence budget.  That has been a feeling that
  people have pursued generally.  I am sure you do not want me to go through all
  the individual points, but if we had felt that there was, what you may
  describe as a "show-stopper", in the same way that we did for the original
  proposals, I personally would not have had an insuperable difficulty in
  thinking again about this.  I genuinely would not, in the same way that I did
  not have an insuperable difficulty in thinking about the original proposals
  that we have now altered considerably.  Yes, there were doubts and
  difficulties.  I believe that they have been laid out in the document that you
  have already, together with the response that we have given to those doubts
  and difficulties.
  
                              Mr Viggers
        21.      On the timing of these proposals, the letter written to us by the
  Secretary of State on 24 July clearly envisaged that there would be a vesting
  day on or about the 1 April.  It is not specific about that, but it talks
  about a period of some three months after the shadow operation and that would
  imply a vesting date of 1 April, but in fact the vesting date is now the 1
  July.  What is the reason for that delay?
        (Baroness Symons of Vernham Dean)   You are quite right on both the
  points that you have made.  We were aiming for the 1 April, but you are also
  right in saying that we never stated that it was a hard and fast date.  It was
  a date that we had as a working supposition.  As I indicated in my opening
  statement, some of the shadowing work has started, about which Sir John may
  be able to tell you more, and it has been going on for a couple of months. 
  The advice that I received from Sir John and others has been that a lengthier
  period, until 1 July, would give us greater confidence.  We want to carry this
  out in a thorough manner and we want to be able to know that the results that
  we have are really robust.  We have felt it wise and prudent to extend what
  was originally in our minds from 1 April to 1 July as a sensible working
  position.  I am prepared to take the advice of those who are undertaking this,
  that they would like longer in order to have a higher level of confidence.
        22.      You have paid tribute to your colleagues on your right for
  keeping the programme on schedule, but that programme has slipped a little.
        (Baroness Symons of Vernham Dean)   I do not believe that it will make
  an overall difference to the ultimate position.  If you like, we can go
  through the route-map of this year.  I do not believe that it will make any
  difference to the time that we are able to take decisions about the way in
  which it would be best to market, which I have always seen as something that
  would happen towards the end of this year.  I believe that it has given us
  greater confidence about the way in which the organisations are working. 
  Would you like Sir John to add something on the shadow period?
        (Sir John Chisholm)        We started with a pilot separation in
  the autumn of last year.  We took one of the small parts of the Security
  Division and proved to ourselves that the system was working.  From the 2
  January, we separated internally the Security Division from the rest of DERA
  and implemented the systems - the management information systems, the
  financial systems, the personnel systems and the management structures - to
  make that separation work completely.  The overall executive committee that
  had run DERA previously was split into two.  Bill runs his part and we run the
  New-DERA part separately.  We carried out that complete separation as of 2
  January.  The reason why July looked to be a safer bet than April was that
  three months is a very short period.  The figures come up for the first month
  just about now, so only now can we tell whether the management information
  systems are working well.  We took the view that if there had been a problem
  there would not be time to put it right and to check that we had got it right
  in that first three-month period.  So allowing ourselves six months, rather
  than three months, gave us greater security so that we could prove to
  ourselves that all the systems were working and working well.
        23.      Are there other issues that may need to be resolved that may
  further delay the programme?
        (Baroness Symons of Vernham Dean)   I am unaware of any now.  I shall
  receive further advice in March as to how things are going.  I do not expect
  there to be any difficulties or surprises in that advice.  I do not want to
  prejudice the position of the officials;  they will give me as honest a view
  as they want, but I shall be in a better position to answer that at the end
  of next month than I am now.
        24.      New-DERA becomes a public listed company on 1 July, vested as a
  public listed company.  I imagine that means that it will operate as a plc
  from 1 July?
        (Baroness Symons of Vernham Dean)   Yes, but it will still be owned,
  at that stage, by the MOD.  Mr Jagger says he has something helpful to add.
        (Mr Jagger) It is not a plc at the moment.  It will become a plc on
  1 July.
        25.      Are you confident that you have been able to organise New-DERA's
  work programme before vesting day so as to ensure that there is no pause in
  its activities?
        (Baroness Symons of Vernham Dean)   I turn to the chief executive on
  that, who is smiling so broadly that I imagine that he is confident.
        (Sir John Chisholm)        Not surprisingly, that is an issue into
  which we have put tremendous concentration.  Clearly, it is something that
  could financially significantly disturb the progress of the organisation.  We
  have discussed with customers in detail the contracts that we expect to be let
  on the new organisation and we have, as a consequence, a high degree of
  confidence that our customers understand the urgency of that task.  We are
  likely to receive a satisfactory launch platform for the new company.
  
                               Chairman
        26.      I recall asking Dr Gielgud for permission to see the DERA
  corporate plan, but he declined.  We cannot make a judgment unless we see that
  plan.  With a package of data from MORI, would you put in the package your
  latest corporate plan, Sir John?
        (Baroness Symons of Vernham Dean)   Perhaps I may answer that.  The
  corporate plan is due to come to Ministers in March and they will want to have
  a look at it.  Perhaps I may consult with the Secretary of State.  I am sure
  that after the Government have duly consulted, we shall do our best, as
  always, Mr Chairman, to comply with your wishes.
        27.      As usual, not as always!  Certainly we could view it in the
  Ministry of Defence with two MOD policemen, fully armed, and with Sir John
  standing behind us as we read it and with no photocopying facilities.
        (Baroness Symons of Vernham Dean)   That is a novel idea.  We have
  talked about how things are progressing with New-DERA.  I do not know whether
  you feel that this is a suitable juncture at which to ask Mr Clifford to give
  you an update on what is happening with DSTL.
        28.      We shall come on to that.  I thought that DSTL was a delivery
  service.
        (Baroness Symons of Vernham Dean)   I hesitate to use initials.  I
  still find them extremely confusing, but none the less I am falling into the
  bad ways of the MOD.
        Chairman:   No doubt it is sufficiently exciting to be a bureaucratic
  decision.  We shall move on to the trading fund status.  
  
                                Mr Cann
        29.      What do you mean by a trading fund?
        (Sir John Chisholm)        A trading fund is set up under
  legislation and there is legislation to support it.  Essentially it means a
  separate bank account and the organisation operates from a separate bank
  account to that of the department at large.  All our transactions with respect
  to the department at large are through what looks like ordinary contracts with
  the passing of monies in response to tasks put upon the organisation.  So the
  organisation acts as though it is a private company.  With respect to the
  department, it acts as though it were a private company, but it is owned by
  the department.
        30.      Is it inside or outside PSBR?
        (Sir John Chisholm)        It is inside PSBR.
        31.      If it is inside PSBR, what is its function?
        (Sir John Chisholm)        Its function is to allow the management
  of the trading fund to manage its resources in a coherent way, operating on
  an arm's length basis with respect to its customers and managing its resources
  so that they match the demands of the customers.
        32.      So it is no different from an agency?
        (Sir John Chisholm)        It is an agency, of course.
        33.      Why do we not call it an agency?
        (Sir John Chisholm)        Because there is a difference between a
  trading fund that is on the Vote, whereby the money gets parcelled down
  through the chief executive, in a hierarchical way, to a trading fund where
  the money comes from customers.  No money comes to me by way of the
  department.  No money comes through the line structure of the organisation to
  fund the trading fund.  If we cannot find customers to support our costs, we
  have to reduce our costs.  There is no Vote that we can call upon to support
  our costs.
        34.      That is the old Thatcherite concept, that if a hospital cannot
  pay for itself it should be closed down.
        (Sir John Chisholm)        I am not able to comment on that.
        35.      Will it provide services other than to the MOD?
        (Sir John Chisholm)        At the moment DERA certainly does.
        36.      No, DSTL.
        (Mr Clifford)  The vast majority of the work will be for the MOD, but
  there will be other customers, principally in Government, but outside the
  department.
        37.      That is interesting.  You have to make a profit;  you have to
  keep going, but on the one hand you are Government, but on the other hand you
  are commercial.  Is that viable?
        (Mr Clifford)  DERA has operated in that way for the best part of a
  decade and has achieved major efficiency advances from which our customers in
  the MOD and in other parts of British industry have benefited.  Our modelling
  suggests that DSTL will be able to continue with that.
        38.      Will the MOD open it to competition in relation to the sort of
  work that DSTL may be expected to do?
        (Mr Clifford)  The work that DSTL will carry out will fall into two
  categories:  that work which can only be done by DSTL because of its
  sensitivity and its role in international collaboration as Baroness Symons
  identified, but DSTL will include the chemical and biological defence sector
  of DERA which has other customers, and will continue to have other customers,
  outside the MOD and outside Government.
        39.      In splitting DERA it seems to me that you are splitting up the
  scientific base of the MOD.  You are commercialising some of it and making the
  rest of it, the rump of it, into DSTL.  Do you consider that the scientific
  and research base of the defence establishment of this country will be as well
  run as it was previously.
        (Baroness Symons of Vernham Dean)   Perhaps I can answer that.  We
  would not be doing this if we did not think that it would be as well run, if
  not better.  One of the problems, which I know has been in the mind of the
  Committee in talking to us, is that this has been seen as an asset-stripping
  exercise on the part of the Government.  That genuinely is not how we see it. 
  We genuinely take a quite different view.  Part of what we are doing is trying
  to open up the interesting work that DERA undertakes in a variety of different
  ways through commercial exploitation.  That is an absolutely fundamental
  motivator.  One of the others is that through DERA the Government can get more
  alongside some of the leading-edge technologies, like communications and
  information technology.  We want to ensure that the two-way street operates
  better than it does at the moment.  Yes, of course, there are questions about
  investment.  I have said to the Committee before when we have discussed this
  that the need for investment is very great.  We need to attract private-sector
  money into DERA in order to sustain the scientific effort.  That is an
  absolutely genuine motivation on our part.  I understand that you find that
  view one that you genuinely do not agree with, but it is one that we think is
  enormously important.  You use the term "rump" about DSTL.  I hope that you
  will accept that, as far as the Government are concerned, this is absolutely
  not a rump organisation.  It is enormously important as an organisation
  because of the great deal of sensitivity of the work that it carries out,
  which is absolutely vital.  In doing what we have done, in getting the core
  competence across a whole range of scientific activity has been absolutely
  crucial.  Emphatically, we do not see it as a rump organisation.  We believe
  that it will be an important, vibrant part of the science establishment.
        40.      Even though it is only a quarter of what it was?
        (Baroness Symons of Vernham Dean)   There are such organisations, for
  example, in Australia, where I have just been, which are smaller for the whole
  of the scientific effort.  The quality of the people involved is a really
  important matter.
  
                               Chairman
        41.      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.
        42.      "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. 
        43.      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.
        44.      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.
        45.      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.
        46.      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 CDTD 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.
        47.      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.
        48.      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.
        49.      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 directors.  We have already made
  one announcement in relation to the chairman, Sir John Egan.  Currently, we
  are recruiting other independent non-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.
        50.      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 Prime Minister.
  
                             Laura Moffatt
        51.      I am sure that Mr Love has been involved in other organisations,
  has he not?
        (Sir John Chisholm)        Yes.
        52.      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.
        53.      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
        54.      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
        55.      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.
        56.      What about shares?
        (Sir John Chisholm)        I hope that I shall draw a salary from
  New-DERA plc in due course.
        57.      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 root 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 root 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
        58.      Laura Moffatt is much less polite than I am.
        (Baroness Symons of Vernham Dean)   She is less polite?
        59.      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.
        60.      We have been through the exercise of the MOD housing estate being
  purchased by Namura.  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.
        61.      Another matter that Laura Moffatt would have asked about has been
  asked before, but I shall ask the question.  I am sure that the directors will
  be paid the market rate for the job because we must have people who will make
  the new company very successful.  The only thing that I am concerned about,
  as are others, is that in previous privatisations the people who have steered
  a publicly-owned company into the private sector are rarely out of pocket as
  a result of the experience.  We want to have assurances - from which Sir
  John's bank manager will dissent strongly - that there will be a legitimate
  salary and legitimate remuneration and that we will not see the kind of a
  abominations that we have seen in many other privatisations over the past 10
  years, where the senior directors are able to sell off their shares and
  disappear into a life of luxury.  If the Government are divesting themselves
  of something of which they should not be divesting themselves, at least we
  shall be partly satisfied if we feel that those standards are adhered to and
  not the standards that we have already seen, much to our dissatisfaction.  I
  am sorry to ask this embarrassing question, but it needs to be asked.
        (Baroness Symons of Vernham Dean)   Of course, it is a reasonable
  question.  Given some of the matters that we have seen in the past, it is a
  question that would occur to every reasonable person dealing with this.  I
  have no problem with you asking the question at all.  The legitimate salary
  must reflect the market.  That is very different from public sector salaries. 
  As all of us who work in the public sector know, there is a different market
  in the private sector.  I absolutely agree with you that it should take that
  as its benchmark right across the private sector.  Of course, we shall take
  advice on this from outside the department as well as having views of our own. 
  You say that you do not expect anyone to be out of pocket - of course not -
  but we expect those appointed to earn reasonable salaries for what they do,
  which will be different from what they are doing now.  We shall also expect
  there to be MOD approval of all the New-DERA board appointments.  That relates
  to another part of the compliance regime.
        62.      What are the current constraints on people inside the Ministry
  of Defence or its agencies on accepting directorships?  How long is it before
  it is open-house?
        (Baroness Symons of Vernham Dean)   It is the same as it is for all
  civil servants.  As a Minister in a previous incarnation in the FCO I have
  seen the applications made by senior civil servants to go into the private
  sector.  Most of them are unexceptional;  on occasions some are referred and
  there is a period known as "purdah" with which I am sure you are familiar,
  which may be only a matter of weeks in some cases and maybe months in other
  cases, but that is to ensure the proper separation of the public and the
  private sectors over highly sensitive matters.
        63.      Perdu followed by Shangri-La.  So there will be constraints but
  they might be a matter of months?
        (Baroness Symons of Vernham Dean)   Mr Chairman, they would be the same
  constraints as they are for the rest of the Civil Service.
  
                                Mr Cann
        64.      I thought that was two years.
        (Baroness Symons of Vernham Dean)   It is up to two years.
        65.      That is the way they sell you things.
        (Baroness Symons of Vernham Dean)   Who sells you what?
  
                               Chairman
        66.      Hang on!  One fight at a time.  You are satisfied with these
  constraints?
        (Baroness Symons of Vernham Dean)   Mr Chairman, they are constraints
  which have been adopted across the Civil Service for a number of a years.  In
  a former incarnation I was General Secretary of the First Division Association
  of Civil Servants and was part of looking at the way in which perdu operated
  from, if you like, the point of view of the Civil Service.  I was satisfied
  with it then and I am satisfied with it now as a Minister.  The question must
  arise with people looking at individual cases and about the sensitivity of the
  individual going from one job to another and whether or not that is
  appropriate.  As you know, Mr Chairman, there are those who think those
  constraints ought to extend to politicians as well as to civil servants.
        Chairman:   So we will have no revolving door between one part of the
  building and the next with people moving out swiftly?
  
                                Mr Cann
        67.      Within a week or so.
        (Baroness Symons of Vernham Dean)   You have to look at each case and
  each case is scrutinised.  There is a committee to which these cases go
  outside the Department - I have momentarily forgotten who chairs the committee
  but I am sure we can get the name to you, but a person of unimpeachable
  integrity outside the Department - which looks at these cases.  Very often
  they pass without comment and without constraint or restraint, as they
  probably should.  Individuals have a right to earn their living outside the
  Civil Service.  Why not?  But there are occasions when, of course, there are
  difficulties raised in relation to individuals and companies to whom they are
  going and the information they take with them, and they are then instructed
  to go through this period which is known as perdu - rather inappropriately but
  nonetheless that is what it is known as - and those periods usually start at
  about three months and can run up to two years.  
  
                               Chairman
        68.      You know what I am getting at.  I do not want to see people
  leaving the Ministry of Defence who have been part of the negotiation for New-
  DERA and within 6 months, 12 months or two years ending up on a tripled salary
  at the expense of the public purse, be it politicians or civil servants or
  whoever.  I really feel this is a very sensitive subject, we have gone through
  this before in other privatisations, and I would be reluctant to acquiesce to
  any system which would allow people who were part of the negotiations to
  profit significantly from their work.  Politicians have done it, civil
  servants have done it.
        (Baroness Symons of Vernham Dean)   Chairman, I will send you papers
  about the system we have in place for civil servants.  I do genuinely believe
  it is robust.  I am absolutely certain we do not need an extra layer of
  bureaucracy to deal with this specific privatisation that we are talking
  about.  There will, of course, be vacancies which arise - I am not talking
  about director level - in New-DERA, vacancies which arise in DSTL, and those
  will be for open competition in the usual way, or however New-DERA decides it
  is going to do its appointments as time goes on.  The important point to
  remember is that there is already a very robust monitoring of how civil
  servants move from the public to the private sector and I am very happy to
  send you the details of that.  Mr Chairman, Sir John wants to say something.
        69.      Sir John, you have every right to defend yourself.
        (Sir John Chisholm)        Do you mind, Chairman, if I just say a
  word about our remuneration policy, just to address that?
        70.      Please.
        (Sir John Chisholm)        It is clearly an issue that we face,
  that when we recruit people from the private sector who join us having been
  successful managers, successful scientists, et cetera, in the private sector,
  we recruit them on a higher salary than our public sector colleagues have. 
  Clearly that creates a demand within the organisation; what about us?  To
  which I say, we are being challenged as an organisation to prove ourselves
  successful in the private sector, when we have proven ourselves successful in
  the private sector, we can expect to enjoy the kind of rewards that people who
  prove themselves successful in the private sector get, but we cannot get that
  until we get to that stage.  In regard to bringing in executives from the
  outside, if they have a proven private sector record, then we are prepared to
  pay those sort of salaries.  In regard to people who are already in the
  organisation, certainly when they have proven themselves successful they can
  expect to earn the reward, but they cannot expect to earn it just because we
  have been privatised.
        71.      Will there be any similarity of salaries between those in
  Retained-DERA and New-DERA at least in the next 12 months?
        (Sir John Chisholm)        In the next 12 months for certain there
  will be.
  
                               Mr Cohen
        72.      I have a question on this point, directed to you, Minister, on
  the advice you get as a minister, because in your previous incarnation you
  very much signed up to the idea of impartiality of advice to ministers.
        (Baroness Symons of Vernham Dean)   I still do.
        73.      Absolutely.  Are you satisfied with this process at work here,
  that you and other Ministers in the Defence Ministry have had absolutely
  impartial advice when, to put it bluntly, the person giving the principal
  advice, Sir John in this case, does stand to gain personally if his advice is
  taken?
        (Baroness Symons of Vernham Dean)   To be honest, I do not think he has
  been the person giving me the principal advice.  He has certainly been one of
  the sources of advice but he has not been the principal source of advice.  If
  I may say so, that has come rather more from Mr Jagger's side of the House,
  and Mr Colin Balmer (?), who is not here today, who is the Principal Finance
  Officer in the Ministry of Defence.  The impartial advice, of course, has a
  particular party political context in the sense we have discussed it in the
  past, but, you are quite right, it is important for individuals to be
  impartial right the way across the spectrum of activity.  I am sure Sir John
  will not mind my saying, Sir John was very much a proponent of the original
  model we discussed and which we then decided was not something we wanted to
  go ahead with.  I am sure Sir John gave me entirely impartial advice, and in
  the end we sought to do something rather different with this core competence. 
  The advice I have received from civil servants varies enormously, it is
  between civil servants who have a whole variety of different views.  Sir John
  had a different view and others have had different views, and in the end one
  has to take responsibility as a minister for taking a decision about how to
  go ahead, and one hopes it has been done on the basis of sensible advice which
  has been properly looked into by the minister before taking what are, as you
  rightly acknowledge, very important decisions.
        74.      You are happy that vested interest has not come into the advice
  process?
        (Baroness Symons of Vernham Dean)   I am absolutely happy that vested
  interest has not come into the advice process.  Absolutely.
  
                                Mr Cann
        75.      Can you reassure us please that anybody involved in DERA now will
  not be getting share options when it is privatised?
        (Baroness Symons of Vernham Dean)   No, I cannot give you that
  assurance.  What I have said is that we want to spread the share ownership. 
  I think it would be very unfortunate if you were to say, for example, that
  individuals who are working at what might be fairly junior levels in DERA
  could not have shares in the company in which they operate.
        76.      I did not say "shares", I said "share options".
        (Baroness Symons of Vernham Dean)   I cannot give you that assurance. 
  I think that is something we would want to look at in terms of the
  remuneration packages and I hope we will be able to talk rather more about
  that towards the end of this year.  I do not think it would be fair all round
  to give you that assurance at the moment.
        77.      What you are saying to me basically is that you will not reassure
  me that what happened at the privatisation of British Rail, for example, where
  train leasing companies were set up and people were made millionaires
  overnight, will not happen under the proposals you are making?
        (Baroness Symons of Vernham Dean)   I can give you an assurance that
  I do not want to see anybody become millionaires, as you put it, overnight
  simply by virtue of DERA being privatised.  I thought that the point Sir John
  made in relation to remuneration goes as well for the point over share
  ownership.  I would not wish people to become, as you put it, millionaires
  overnight.  Should people prosper because the organisation prospers, that is
  a different matter, but I think we are all aware of the very considerable,
  frankly, affront that was caused to very many people through some
  privatisations in the past, and we will be alive to trying to ensure that
  similar affront is not caused this time.
        78.      May I ask Sir John then?  Sir John, would you, if offered, not
  take share options?
        (Baroness Symons of Vernham Dean)   I think that is a very unfair
  question.
        Mr Cann: It is a perfectly fair question.
  
                               Chairman
        79.      Absolutely, totally fair.
        (Sir John Chisholm)        If I may say, Chairman, this whole
  conversation raises the issue of my motivation in this, am I allowed to make
  a personal statement?
        80.      Of course, and protected by privilege as well.  No one is
  questioning your motivation at all, Sir John, not at all.
        (Sir John Chisholm)        Can I say something about myself?
        81.      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.
        82.      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
        83.      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 establishment 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
        84.      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
        85.      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 Pricewaterhouse
  Coopers and Warburgs, and Simmons and Simmons are our lawyers.
        86.      Do you have bankers?
        (Mr Jagger) Warburtons (?).  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.
        87.      So they are advising the Ministry of Defence?
        (Mr Jagger) Yes.
        88.      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.
        89.      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.
        90.      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.
        91.      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 technically 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.
        92.      Just for clarification, at this stage, you have not ruled out,
  Minister, the possibility and even likelihood of the Government stake falling
  below 50 per cent of control?  You have not yet decided on any particular
  long-term strategic holding?
        (Baroness Symons of Vernham Dean)   No, you are right.
        93.      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.
        94.      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 was part of the
  Ministry of Defence.  They are all employed by DERA at this moment.  
        95.      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.
        96.      And the other six?
        (Sir John Chisholm)        Are also employees of DERA at the moment
  and will be employees of New-DERA.
        97.      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
        98.      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.
        99.      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.
        100.     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.
        101.     That is a very evasive answer!  Will it be anywhere near the
  25 million?
        (Sir John Chisholm)        It is 25 million.
        102.     You think it will be?
        (Sir John Chisholm)        Yes.
        103.     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.
        104.     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 per
  cent 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.
        105.     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
  contract 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.
        106.     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.
        107.     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
        108.     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.
        109.     What is the figure for the assets?
        (Mr Clifford)  I believe it is nearer 30 than 25 per cent.
        110.     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.
        111.     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 the years
  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.
        112.     Let us be absolutely clear, DSTL gets 25 per cent of the
  staff and about 30 per cent of the assets?
        (Sir John Chisholm)        It gets the assets which are appropriate
  to the staff that DSTL has.
        113.     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.
        114.     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.
        115.     Have you too 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.
        116.     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 procurement support".  The research
  has not been competed at all up until the current year historically, this year
  we have competed just over 3 per cent 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 our work, 30 per cent, is
  already competed.
        117.     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.
        118.     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.
        119.     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.
        120.     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.
  
                               Chairman
        121.     If DERA are going to do quite well out of research maybe you
  should look again at DARA which is guaranteed six per cent of Eurofighter
  work. Maybe you should have a look, Baroness, at whether DERA are getting a
  better deal than DARA or whether DARA are getting as good a deal as DERA in
  guaranteed work.
        (Baroness Symons of Vernham Dean)   I shall report your remarks to Mr
  Spellar, who I am sure will take a very healthy interest in the differences.
  
                              Mr Brazier
        122.     We have already had some questions on staff morale and
  questionnaires. Have you actually finished the split between the two
  organisations?
        (Sir John Chisholm)        Yes.
        123.     How many people wanted to go one way and have ended up going
  the other way?
        (Sir John Chisholm)        I am glad, Mr Brazier, you asked that
  question because Bill and I informed ourselves of that yesterday. The maximum
  number that we have been able to run to earth of people who have raised an
  issue at this moment is less than half a dozen, of which only one who is
  currently in DSTL and wants back into New-DERA has actually raised it in any
  way informally, actually not yet a formal complaint but it might well become
  a formal complaint.
        124.     Right.  How does your staff turnover over the last 12 months
  compare with the previous 12 months? Has it gone up or gone down?
        (Sir John Chisholm)        Our staff turnover over the last three
  years has been pretty much solid.  When I talk about staff turnover, just to
  define my terms, I am talking about voluntary staff turnover. Also we have
  people leaving through retirement and all sorts of other things but the
  voluntary staff turnover, people resigning, has stayed pretty much solid
  between five and six per cent.  
        125.     While we are on personnel issues, I would like to come back
  to what seems to me to be a very central one here.  There are obviously one
  or two retained areas where you are keeping the whole of it and, in fact, Lady
  Symons mentioned two earlier on, the defence analysis and the MBC side. 
  Looking at the vast majority of areas within the retained area you are
  inevitably dealing with relatively small numbers of people in each group as
  the bulk of the research side has been taken away and you are more involved
  with the management side of providing scientific advice to the Government in
  the retained areas.  The question I have for Mr Clifford is how many of the
  remaining areas of the company are close to critical mass, in other words you
  have got one or two people in a particular area providing the necessary
  scientific advice and where perhaps one resignation or retirement or move or
  whatever could leave you without a capability?  How large and how viable?  I
  see we have a figure of 130 technologies and scientific areas mentioned
  earlier on in the whole investigation process.
        (Mr Clifford)  Personally I have been involved in the split, the choice
  of staff for many months, and in the more sensitive areas, as Sir John said,
  have had to operate as Chairman of the Committee which made final decisions.
  I take the view that there are no areas which are currently critical in the
  way you define them. One of the issues we have which any technological
  organisation has is the maintenance of critical mass and that is something we
  are giving a good deal of thought to, both internally in DERA, DSTL and with
  our MoD colleagues. I am quite satisfied that on 1 July when DSTL, as it were,
  launches separate from mother DERA it will not be critical in the sense you
  defined in any area.
        126.     Right. If I understood Sir John's earlier answer you have
  only got one person who is actively campaigning to go back to mother DERA and
  be part of the brave new world?
        (Mr Clifford)  Indeed, and I am due to talk to that person myself in the
  next week.  I do not currently know why he is so campaigning.
  
                             Laura Moffatt
        127.     On our travels and speaking to governments and companies
  involved in defence, Baroness, some shared with us some concerns about the
  Chinese walls and how effective and how robust and sturdy the Chinese walls
  would be between the two new organisations. Could you tell us what the process
  was to facilitate that, where shared facilities are?
        (Baroness Symons of Vernham Dean)   I was very concerned about this
  when we began to discuss the way in which we would undertake the separation.
  From the beginning I was very keen that the premises should be as separate as
  we could possibly make them. We had a great deal of discussion about this over
  the course of last year and we decided that it was indeed very important that
  the two organisations where they currently share a site in so far as we can
  are in separate buildings and over the course of time actually go to separate
  sites. It was also very important to disentangle the information technology
  systems and a good deal of time and effort has gone into that, and also of
  course to disentangle intellectual property in order to ensure the integrity
  of both the organisations.  I think we have done a very thorough job on this.
  I am conscious of the fact that people will always argue about costs involved
  but I did think it was very important indeed for the confidence of both sides.
  I am going to ask Sir John to talk about fire walls now within New-DERA
  because I think that has been another point of interest, and of course he is
  the expert on the fire walls within the new organisation.
        (Sir John Chisholm)        The fire walls can use various levels of
  defence. The first and most important level of defence is that we create in
  all our key projects compartments in which all the data associated with that
  compartment sits and people outside the department have no access to it. Now
  in making fire walls work, it is crucial that no layer of management is in
  both those compartments so there is no opportunity for any influencing from
  a management point of view of what is going on on both sides of the fire wall.
  That is the crucial and fundamental separation that you have got to have in
  making fire walls work. On top of that, you can add other means which actually
  address more the apparency of the fire wall rather than the actuality of it
  because once you have done the first, you have actually separated the two
  organisations in a fire wall sense.  You can separate them to make other
  people more comfortable by separating them geographically, having them in two
  buildings or in two sites. You can separate their information systems, you can
  separate all sorts of other things just to make people feel more comfortable
  about it, but the key thing is the first one where you create compartments
  where all the information associated with that project sits and no level of
  management has access to both of them.
        (Baroness Symons of Vernham Dean)   Can I just make it clear that
  ultimately, of course, this is the responsibility of MoD and we will audit
  what is being undertaken.
        128.     Obviously that was going to be my next question. You must be
  satisfied naturally.
        (Baroness Symons of Vernham Dean)   Yes.
        129.     Have you any feedback from industry? Are they satisfied?  Has
  any work been done to put their fears at rest?
        (Baroness Symons of Vernham Dean)   I have not had any indication to
  the contrary.
        (Mr Jagger) The fire wall between New-DERA and DSTL will be exactly
  the same as the relationship between the MoD and British Aerospace, for
  example, and we can demonstrate that to anyone who chooses to ask. Fire walls
  within new-DERA will only happen at the discretion of the MoD customer.  The
  MoD customer will, exactly as he does now, have complete freedom to withhold
  his agreement to audit those fire walls and, indeed, normally he has to seek
  the agreement of other industries involved. DERA has, if I may say so, a very
  good history of running fire walls, where necessary, with excellent external
  audit results and industry contentment.
        130.     I was interested to hear what you were saying, Baroness,
  about the computer systems, that it is difficult to separate them. Will they
  be two completely separate systems or are they able to speak to each other in
  any way? How has that been set up?
        (Mr Jagger) They will be able to speak to each other, I think, in the
  sense that my MoD central system at the moment can speak to any other system
  through a fire wall and an e-mail service or something like that, but in
  principle they will be as separate as your domestic or the House of Commons'
  system and the British Aerospace system.
        131.     They are entirely different.
        (Mr Jagger) I confess to not being a technical expert. I know Bill is
  actually extremely knowledgeable in this area.
        132.     Come on, Bill.
        (Mr Jagger) He made my e-mail work.
        (Mr Clifford)  Yes. Terence, however, is as knowledgeable as he needs to
  be in this subject.
        133.     Excellent.
        (Mr Clifford)  We have already separate servers, separate computer banks
  which hold the information.  There comes a point when one uses British Telecom
  lines to go from site to site and, in fact, then we are talking about
  encrypted data being passed so it matters not that they are shared facilities.
  Yes, totally separate physically, physically separate boxes you can go and
  touch.
  
                               Chairman
        134.     On this British Aerospace and MoD, British Aerospace do not
  occupy three floors of the main building in Farnborough I presume. Will they
  be using the same canteen facilities in Farnborough?
        (Sir John Chisholm)        As of now we do but we have a programme
  of progressive physical separation into entirely self-sufficient sites.
        135.     How about security?  Will it be the MoD police for the whole
  site, one head of security for the Farnborough site, or will you be employing
  block security on your site and cutting down costs and MoD using more
  expensive but more professional MoD police? In Farnborough what are the
  security arrangements or what are they likely to be?
        (Sir John Chisholm)        Obviously we will have on separate sites
  separate security arrangements.
        136.     In Farnborough?
        (Sir John Chisholm)        In Farnborough when the separate DSTL
  site is established the separate DSTL site will have its own security
  arrangements.
  
                              Mr Brazier
        137.     I would like to follow that with a question on computers
  before coming on to my questions on intellectual property rights. As I
  understand it the reason why MoD has avoided the kinds of horrors over the
  internet which have afflicted the Pentagon is the physical gap, the air gap,
  the fact you are not plugged in.  How will that work when you are on the
  outside?
        (Sir John Chisholm)        I would very much like to answer that
  question, if I can, Mr Brazier, because actually we feel quite proud of the
  fact that we have our fire walls, DERA's fire walls, which actually also
  protect. The Ministry of Defence survived the I Love You bug whereas many
  other people, who I would not want to mention here, were not able to.
        (Baroness Symons of Vernham Dean)   --- were incapacitated.
        138.     When your organisation is owned by an outside company it will
  presumably be directly on e-mail to that outside company, it will become part
  of that.
        (Sir John Chisholm)        I think you have a different model of
  what we are about to the one that I have but when our organisation is a
  private company then it will clearly have, as it does now, its own networks.
  It will protect its own networks through the kinds of mechanisms which we know
  well how to protect them. 
        Mr Brazier: Could I bring us on to intellectual property rights.
        Chairman:   Can we just follow the script and I will ask Peter Viggers
  next.
  
                              Mr Viggers
        139.     Just a mop up question on the last series of questions about
  fire walls. Sir John, you twice used the expression "no level of management
  has access to information", is that a work of art?  Does it mean people other
  than management do have access beyond fire walls?
        (Sir John Chisholm)        I was just relating to management
  because management might be thought of as having a commercial interest but
  actually it is no-one.
        140.     Right. What has been the cost of separating the two
  components of DERA?  
        (Baroness Symons of Vernham Dean)   I would like you to treat the
  figures with a certain amount of caution because we have not bottomed out all
  the figures at the moment. It is likely to be of the order of 70 to 80
  million.
        141.     You will have probably seen rumours of 30 to 130 million, 70
  to 80 million is your best estimate?
        (Baroness Symons of Vernham Dean)   Best estimate as of today, but
  obviously we will keep you informed of any changes in that.  
        142.     Can you please give us now, or if you cannot will you write
  to us, a breakdown between consultants' fees, physical works, computer site
  reconfiguration and other main aspects?
        (Baroness Symons of Vernham Dean)   Yes, I can give you some figures,
  not now but certainly I will write. Again they will have a health warning on
  them at the moment because they will not be complete figures.  Those are
  estimates but we will certainly give you what we have got to work on at the
  moment.
        143.     Who will pay for these conversion costs?
        (Baroness Symons of Vernham Dean)   Sir John pays the lion's share but
  some of it does come to MoD where it reflects MoD's own advice costs.
        144.     These costs will be a burden on New-DERA?
        (Baroness Symons of Vernham Dean)   Sir John was describing a little
  earlier that he has not yet completed his financial report for the year, and
  I think he is due to do that over the course of the next month or so.  Then
  those will be in the public domain.
        145.     I take it that not all of the 70 to 80 million will come out
  of the 250 million the MoD has been promised from the sale proceeds, they will
  be left on the balance sheet of New-DERA?
        (Baroness Symons of Vernham Dean)   Perhaps you would like to explain
  how it will work.
        (Sir John Chisholm)        You are right, the costs have to be
  borne off the trading fund. The assets of the trading fund including those
  liabilities, so to speak, go into the PLC and have to be taken into
  consideration by investors when the time comes.
        146.     The plan continues that MoD will receive approximately 250
  million having sold a vehicle which will include some debt?
        (Baroness Symons of Vernham Dean)   We hope that we will receive as
  much as we can persuade the Treasury to part with. The figure of 250 million
  as being in the public domain, I am sure you will recall that the last time
  we discussed this I was rather reticent to go nap on any of these figures
  because I am sure that is a discussion that we will wish to continue with the
  Treasury.
  
                               Chairman
        147.     In our last report we commented on the Nomura sale and the
  fact the MoD got very little and the Treasury got a hell of a lot.
        (Baroness Symons of Vernham Dean)   Yes. Well, from the point of view
  of an MoD Minister, of course, we would like to see a substantial amount of
  money coming to the MoD. I am sure that our friends in the Treasury will be
  robust in their arguments with us.  
        148.     Probably win in the end.
        (Baroness Symons of Vernham Dean)   Who can tell, Chairman, I would not
  throw in the towel at this stage and, with your admirable support, I am sure
  we will make some progress.
  
                              Mr Viggers
        149.     The figure of 250 will not be eroded?
        (Baroness Symons of Vernham Dean)   I regard the figure of 250 as an
  opening point price. I very much hope that we will be able to build on that.
  These are all bargains, as I am sure all of you around the table will know,
  the discussions continue.  I do not think we will be dipping under that.
        150.     In your response to our last report on the future of DERA it
  was noted that you were "... exploring the potential to re-invest a proportion
  of the privatisation receipt in research and development...". How are your
  plans firming up on that front?
        (Baroness Symons of Vernham Dean)   We have not got any firm plans to
  give you on how we are going to deal with any of the receipt.  I hope that we
  do invest a certain amount on research and development because I do think that
  overall that is where the thrusts of the arguments in Government are taking
  us. I know that my colleague, Lord Sainsbury, is extremely interested in how
  we are going to deal with the receipt.  We have not, as yet, got anything firm
  to tell you about in respect of that.
  
                              Mr Brazier
        151.     Intellectual property rights.  Can I ask what intellectual
  property rights will be owned by New-DERA or rather, to be more specific,
  because obviously you are not going to give us a long list now, are there any
  outstanding disputes about this?  How much has it cost to untie the ownership
  claims on DERA's IPR?  Are there people out there in the private sector who
  feel the work they have done is technically the property of DERA?
        (Baroness Symons of Vernham Dean)   Can I say, before I give further
  detail, this is a process that is going on at the moment and is due to be
  completed by the vesting date and is then subject to an independent audit. It
  has not been completed as of now, physical separation has. We have dealt with
  the computer side. The winnowing out on the intellectual property is still
  going on at the moment.   You have the detail on this, Terence.
        (Mr Jagger) I was just going to say, obviously we are absolutely
  determined that New-DERA should only go into the market with IPR it is
  entirely entitled to and should not take any foreign governments' IPR or
  industry IPR. That is a position we have explained at length.
        152.     Sorry, or any industry IPR, what do you mean by that?
        (Mr Jagger) IPR may exist in New-DERA because the MoD has spent money
  with New-DERA in the past and that is New-DERA's IPR and we will have, as Sir
  John was explaining earlier, free user rights.  Undoubtedly there has been a
  lot of information shared with the UK Government, with the MoD from industry
  and from foreign partners which has gone to DERA in the past because it has
  been part of the MoD in support of Government work. All of that is being
  extracted and New-DERA will take none of it into the private sector with it. 
  Sir John has been managing an extremely comprehensive programme called RASP
  which will cover everyone's records, paper records, software models, e-mails
  on their hard disk.
        153.     We have heard rumours of costs of up to 23 million. Can I
  just pursue this a little further because I want to be clear I have understood
  it.  One of the concerns when I was a consultant in the industry a very long
  time ago, even in those days, was that MoD usually in letting contracts for
  research has a contractual position which is legally much stronger than in
  practice you would normally want to enforce.  If you have let a contract with
  a particular company you own the property rights at the end of it but normally
  the company would allow you to get on and use them because they actually
  carried the work out and very often ended up subsidising it themselves.  When
  you say there will be no industry research IPRs left with New-DERA, do you
  mean no IPRs funded by industry or do you mean no IPRs carried out by industry
  because there are a lot of smaller companies who, I imagine, that distinction
  will be particularly important to?
        (Mr Jagger) I am not clear that the understanding of exactly how our
  contracts are let is correct, if I may say so. If we let a research contract
  at the moment, the IPR belongs to the contractor, it belongs to whoever it may
  be. We keep free user rights for all defence purposes and if they can use it
  for some civilian purpose we may take a licence but it is actually their IPR
  if it is a non MoD body. As far as your second point goes, I am talking about
  the actual ownership of the IPR and access to it. New-DERA will not have
  access to or be allowed to use any intellectual property that belongs to
  anyone other than the MoD other than by agreement with that external
  organisation.
        Mr Brazier: I am delighted to hear that.  Can we come on to the US
  position now.
  
                               Mr Cohen
        154.     Can I just follow up one point on that because I tabled a
  parliamentary question only about a month ago asking for a list of the IPRs
  that will go with New-DERA or be retained and I did not get an answer, or I
  got an answer but certainly not a list.  Will you be able to produce a list
  in due course of what goes where?
        (Mr Jagger) The list would be a huge document.
        155.     Surely someone has got to know it, have they not?
        (Mr Jagger) No, I do not think they have.  What we have to do is to
  do an exercise to take out all the intellectual property that is not New-
  DERA's or to which New-DERA is entitled to access in support of an MoD
  contract. What remains lies where it falls so the intellectual property, for
  example, in Porton Down will belong to the Secretary of State and DSTL will
  hold it. Intellectual property which is in New-DERA and has been funded by the
  MoD will be part of New-DERA, MoD retaining the rights.
        156.     That strikes me as a recipe for absolute confusion.  Surely
  what you are saying is what the MoD want to keep it will have to name and
  everything else will basically go across to New-DERA, is that what you are
  saying?
        (Sir John Chisholm)        It is actually the other way round.
        157.     That is not what you said before, if we look it up. You are
  now saying that New-DERA will have to have it named and everything else will
  stay with the MoD.  What are you saying? Surely even if you are saying one of
  those, a list of one could be produced.
        (Mr Jagger) I do not think we are saying absolutely either of those
  things. We are going through all the intellectual property which is physically
  within New-DERA and saying "Is this the MoD's? Is it legal and appropriate for
  it to go into the private sector with New-DERA?" If the answer is no or if
  there is any doubt about it then we are taking it out of New-DERA. It is a
  very long, complicated and painful process involving hundreds of thousands of
  records.
        158.     The key thing is transparency.  Someone must know somewhere
  which IPR is with who, surely, even if it is at least one of the groups
  involved having it.
        (Baroness Symons of Vernham Dean)   I think we are talking about
  hundreds of thousands of bits of information and I think that to give a list
  of hundreds of thousands of bits of information, even if it was a practical
  thing to do, would involve time and expenditure which would be really quite
  extraordinary.  Would it help if we were to give some indicative headings of
  the sorts of information that will go one way or the other? I really am
  enormously reluctant to involve people in something that I do not think would
  add to the sum of the whole knowledge. 
        159.     My next question is are you contemplating squabbles,
  including legal squabbles?
        (Baroness Symons of Vernham Dean)   No, we are not, absolutely not. 
  This is a process that will be very carefully audited, as I have said. It will
  be looked at independently. As I say, I do think that lists of hundreds of
  thousands of bits of information would not be particularly helpful to you or,
  indeed, to anybody else.  
  
                              Mr Brazier
        160.     There would be a security aspect too.
        (Sir John Chisholm)        Can I make a comment? I think it is
  useful to distinguish between intellectual property and intellectual property
  rights, they are frequently used the same way in the same sentence. What we
  have been mainly talking about here is intellectual property, of which there
  is a vast amount. Every document, every file, every computer programme, all
  of that is intellectual property. All of that is being carefully audited at
  the moment and New-DERA can only keep that which it has been audited that it
  should keep.  Okay?  That is the first point. Intellectual property rights ---
  
                               Mr Cohen
        161.     That is where the big money is.
        (Sir John Chisholm)        --- are essentially things like patents.
        162.     Yes.
        (Sir John Chisholm)        Okay.  Now we have got some 4,000
  patents and they are all in the public domain, or at least nearly all of them
  are in the public domain.  Certainly, if it would be useful, a list could be
  provided.
        (Baroness Symons of Vernham Dean)   What I think we can do is to try
  to give - how can I put it - an indication of how it has been done, the sort
  of criteria applied. It is the process that you are concerned about, not the
  actual individual bits.
  
                              Mr Brazier
        163.     Absolutely.
        (Baroness Symons of Vernham Dean)   Perhaps if we can do that that will
  help.
        Mr Cohen:   I will settle for that.
  
                               Chairman
        164.     It seems the acronym should be GRASP not RASP.
        (Baroness Symons of Vernham Dean)   You are good at these, are you not,
  Chairman?
        Chairman:   GRASP as much away from Sir John as you possibly can.
  
                              Mr Brazier
        165.     I have to say, the IPR thing will be very, very pivotal to
  outside industry seeing the process it is in being fair minded.
        (Baroness Symons of Vernham Dean)   I am happy to try to expose more
  of the process that has been gone through but I am extremely reluctant to send
  you loads of bumph.
        166.     Could I just move on to the American angle on this. Have the
  American authorities expressed their satisfaction with the allocation of IPR
  between the two organisations? Have they taken an interest in it? I imagine
  they have.
        (Baroness Symons of Vernham Dean)   The Americans have taken a very
  close interest in all this and we discussed this the last time I appeared
  before the Committee. This has been discussed at what I might describe as
  "political level", my level, right the way into the roots of the organisation.
  Terence has done a great deal of it. I have been to the United States to see
  our friends in the Pentagon and elsewhere who have had very great concerns
  about what has happened, legitimately and quite rightly and properly. They
  have been to this country and we have been through it with them on a number
  of occasions. The previous administration issued a very helpful statement on
  this when Mr Rudi Deleon (?) was the Deputy Secretary.  With the current
  administration we have not had the chance of discussing it at a political
  level simply because people have not yet been appointed to the jobs concerned.
        167.     You have answered the last of my three questions. Let me come
  to the middle one.  If I understand you correctly, you are saying they have
  been very heavily involved in the IPR aspect.
        (Baroness Symons of Vernham Dean)   I think Terence can give you
  further details because he has dealt with that.
        (Mr Jagger) Yes.  To broaden it, both on IT separation and
  intellectual property, the US Government nominated independent officials of
  their own, one of them based in London. They liaised with us very closely.
  They have been down to Farnborough and had presentations from the team doing
  separation more than once.  They have an open invitation to have updates on
  that process and they will, like industry I should add, have sight of the
  report of the independent auditors of the process. Those auditors are skilled
  in this particular area. They have expressed to me considerable satisfaction
  with both our willingness to involve them and with what they have seen so far. 
        168.     Lastly, a more general question on the US involvement. I am
  still puzzled as to how we get over the fundamental hurdle that American
  Government owned organisations are not, as I understand it, allowed to -
  perhaps I misunderstand it - collaborate on an unequal basis with outside
  contractors which New-DERA will be. This tremendously valuable, fruitful
  relationship that we have across the Atlantic with DARPA, I am simply puzzled
  as to how it can continue?
        (Baroness Symons of Vernham Dean)   The Americans have give us, I hope
  you have a copy of the statement that we had from Mr Deleon saying that they
  were happy that it was business as usual.  "Welcome the proposal. Believe it
  is constructive and workable. There are detailed issues to be resolved but I
  am confident they can be addressed satisfactorily".  This is dated July last
  year and a lot of that detailed work has gone on since then. "Look forward to
  working closely with the UK and maintaining our strong collaborative research
  links".  We have had no hint from them, for all the fears that were expressed
  by others about a whole range of collaborative issues, including the most
  sensitive ones in relation to defence, where there would be any diminution of
  the collaborative effort between us.
        169.     The problem for us as a Committee - and I will pass on
  because we are running out of time - and the problem we all face is we have
  sat in rooms in the Pentagon and heard people at working level, very senior
  parts of the working level, and in one case at political level too, expressing
  - admittedly when we were looking at the old arrangement but nonetheless
  expressing in very general terms - the most severe concerns, in one case in
  really extraordinarily strong language. 
        (Baroness Symons of Vernham Dean)   Yes, but, Mr Brazier, that is one
  of the reasons why we did not progress.  As I said, in Mr Deleon's statement
  he says "We did have some concerns about the previous proposals".
        170.     Some concerns, they were completely up in arms.
        (Baroness Symons of Vernham Dean)   Those are the words he uses, and
  those were the previous proposals. I think it is a little unfortunate to visit
  the problems of the previous proposals on the current proposals because he is
  saying very clearly in the statement that he is happy with the current
  proposals. There are still things to work out, as I said, we have been doing
  that. Mr Jagger has been able to tell you that this has happened at a very
  detailed level.  We have had people looking at the presentation of how it is
  done in Farnborough and they have had very considerable access to the way in
  which the detail has been worked out and have expressed themselves confident.
  
                               Chairman
        171.     Will they treat Sir John's bit of the carve up differently
  from what is retained?
        (Baroness Symons of Vernham Dean)   Yes.  Of course, as I said in my
  initial reiteration of what was being held back in retained DERA, DSTL as we
  must now remember to call it, part of that was because of the international
  collaboration.  Yes, indeed, one of the points that was raised with me when
  I first came into this particular job and the original proposals were still
  on the table was that the government to government relationship was what
  absolutely had to be safeguarded.  That is what has been safeguarded and, of
  course, there will be a different relationship with DSTL to New-DERA.
        172.     Have you any idea when the new appointments, the Dr Eta (?)
  replacement or anybody above her level, are going to be in situ to give their
  approval as to whether they agree with the assessment finally given by the
  last administration?
        (Baroness Symons of Vernham Dean)   I do not know. Those appointments
  are all coming through, as I am sure you know, Chairman. They do sometimes
  take quite a long time.
        173.     Months.
        (Baroness Symons of Vernham Dean)   They do take quite a long time.
        174.     Things will proceed and then at some stage they will say
  afterwards they agree.
        (Baroness Symons of Vernham Dean)   We have no reason to believe that
  there are any problems about this. I was in Washington myself at the time of
  the inauguration. I saw members of the transition team just before the
  inauguration. Nobody raised any problems with me about it and I am sure if
  they did have problems that they would move very, very quickly to tell us
  about them.  Terence, we have not had anything other than business as usual
  in progressing the project?
        (Mr Jagger) No, that is right. We have had continuing official contact
  with the continuity team and we have been progressing all discussions about
  the TTCP arrangements, for example, individual projects, and they have gone
  pretty well.
  
                              Mr Brazier
        175.     Just one last thing on that. On the government to government
  side, obviously we heard what you say, although I have to say I find it
  astonishing, even with the change of scheme, how far the view seems to have
  moved. There is one other angle on it which is that the Government in America,
  of course, is much more hemmed in by the courts than you are over here. There
  is nothing in principle to stop contractors in America who feel the
  relationship between a particular scientific element of the American
  scientific establishment and New-DERA is disadvantaging them from taking their
  problems straight to court.  A lot of the law in this area is actually backed
  by criminal sanctions not just civil ones, just to make that point. I remember
  wading through the Harts Gobbamino (?) amendment and all the rest of the anti-
  trust stuff, there are very significant legal problems behind the American
  Government's stand.
        (Mr Jagger) The government to government relationship will be 100 per
  cent with DSTL. DSTL, and indeed people like the Defence Procurement Agency,
  if they wish, contract out work to other people in support of those
  arrangements, New-DERA among them. That is something which is not only
  widespread in the United States, it happens to a much greater degree in the
  United States than it does here.  There should be no difficulty.
        176.     Forgive me, we have actually then got slightly further into
  the onion then because what you are effectively saying is there cannot then
  be the kind of direct relationship between DARPA and teams in Sir John's New-
  DERA that there used to be.  There cannot be that direct relationship any
  longer, it all has to be indirect. Sir John is nodding, that is the basis of
  what you have just said.
        (Mr Jagger) DARPA lets contracts on a wide range of organisations and
  if it wishes to let a contract on New-DERA in the future it will be able to.
  The government to government relationship will all be through DSTL.
        (Baroness Symons of Vernham Dean)   That has been part of the whole
  point of modifying the plans that we had.  There were a wide range of
  different views about them. Part of it was in order to safeguard government
  to government, not solely with the United States, there are other government
  to government relationships as well which are enormously important to
  safeguard.
  
                               Chairman
        177.     The other countries in this special intelligence loop -
  Australia, New Zealand - they are reasonably happy as well?
        (Baroness Symons of Vernham Dean)   I have discussed it with my
  colleagues in Australia. I was in Australia only a couple of weeks ago, there
  were no outstanding problems that they raised with me then.
  
                                Mr Cann
        178.     Just a couple of simple ones, I think.
        (Baroness Symons of Vernham Dean)   Unlikely.
        179.     The New-DERA will not be involved in manufacturing but the
  MoD says "systems integrator". How do you separate manufacturing from being
  a system integrator when most manufacturing nowadays is systems integrated?
        (Sir John Chisholm)        I do agree that manufacturing is one of
  these things that is getting to be you know it when you see it.  New-DERA will
  not, it will be a rather foolish thing to enter into. It will not be making
  aeroplanes or ships or tanks or anything that looks anything like that.  What
  we have in New-DERA is a very considerable systems engineering capability. 
  I distinguish between systems engineering and systems integration.
        180.     I am a layman and I do not understand that.
        (Sir John Chisholm)        Well, systems engineering is an
  intellectual activity to do with providing advice and understanding how
  systems work as a totality and helping those who are involved in the building
  of systems to help them understand how the totality of what needs to be
  assembled can best be done. That is something which we are very skilled at,
  we have lots of people who are very skilled at doing that and we will continue
  to do that, principally for the Ministry of Defence. That is an activity which
  we will continue to be involved in.
        181.     Okay. I accept that.  Does industry accept that?
        (Baroness Symons of Vernham Dean)   We have to winnow out the
  definition. Industry has to comment on the definition that we will have to
  reach with them and that is work still in progress. 
        182.     Are we talking about contracts here?
        (Baroness Symons of Vernham Dean)   We are talking about the definition
  of what we mean by defence manufacturing. Sir John was trying to give you the
  definition which he is in a position to give you and I am not.  All I am
  concerned about is that we do have proper understandings with industry about
  the terminology that we are using.
        183.     BA systems, for example, Boeing or whatever.
        (Baroness Symons of Vernham Dean)   As I say, we have to do proper
  consultation with them. That is still part of work in progress on this issue.
        Mr Cann: It is elastic at the moment.
  
                               Mr Gapes
        184.     Have you yet decided what New-DERA assets are of strategic
  importance and thereby will fall under the protection offered by the golden
  share?
        (Baroness Symons of Vernham Dean)   Do you want to deal with that?
        (Mr Jagger) There is an exercise going forward at the moment run by
  a individual in the Defence Procurement Agency.  The short answer to your
  question is no, but work is well advanced at identifying both the strategic
  assets and the relationships which will support them.
        (Baroness Symons of Vernham Dean)   We hope it will be ready within a
  matter of weeks.
        185.     Will it be announced in the sale prospectus?
        (Mr Jagger) It will absolutely have to be identified within
  transaction documents, yes.
        186.     If it is not ready then it has to be delayed.
        (Baroness Symons of Vernham Dean)   It will be ready.
        187.     My next question, DSTL, as I understand it, is not going to
  have more than 3,000 staff.  How many of those are going to be involved in
  knowledge integration to give you this backbone of intelligent customer
  function?  Are you confident that there will be enough people within DSTL to
  keep track of developments and evaluated technological developments going on
  in New-DERA and in foreign research organisations and in industry?
        (Mr Clifford)  You are quite right, we are running about 3,000, in fact
  it is 2,835 at the last count yesterday morning. It is very difficult to
  define who will be involved in knowledge integration and who will not be,
  quite honestly.  In the same way that systems integration, systems engineering
  and manufacturing is becoming less easy to define because of new technologies,
  that is true of knowledge integration. The people we extracted from DERA
  specifically to do that task numbers around 800 to 900 but, for example, I
  would expect many of the members of the Centre for Defence Analysis, one of
  the so-called strategic extract sectors, would themselves also be involved in
  systems integration in the analysis they are doing, similarly for people in
  Porton Down.  To give you my personal estimate I would say about 1,200 to
  1,300 across the organisation as opposed to people working on pure technology
  in as much as that can be defined.
        188.     Have you worked out a career structure for your scientists
  that is going to keep them in touch with current developments in the outside
  world and how will they be able to stay up to speed without being involved in
  hands on laboratory work?
        (Mr Clifford)  We have not yet finished the work.  I personally became
  involved in this in May last year and we have been talking to our colleagues
  in the Ministry of Defence, other Government departments, universities around
  the UK.  We have been talking on this subject with people in the Pentagon and
  we are bringing together a career development and mid term refresh process
  specifically to address that issue.  As you know the Ministry of Defence will
  be competing research so we must expect to work with a broader base of
  technology suppliers over the next decade.  That is a key issue for us. As I
  say, the work began in May, it is not quite finished but it is well advanced.
  I am confident that it will give us the sort of staff capability we need.
        189.     Will you in that context be sending people on secondment to
  New-DERA?
        (Mr Clifford)  We have a wish for our staff to become involved with teams
  around the world, as you said yourself, where technology is created.  New-
  DERA, as Sir John has said, and as Lady Symons has said, will be a major
  supplier to MoD, therefore that must be one of the options for us. I suspect
  secondment will not be the word. New-DERA will be as any other industry will
  be in that respect.  The answer is yes.
        190.     Do you not see a potential problem given all that we have
  said about Chinese walls and everything else?  Have there been any concerns
  expressed either by defence industry outside generally and the US authorities
  about the potential of such a relationship?
        (Mr Clifford)  Not at all.  I tried to make the point in my previous
  answer that that relationship will not be special other than in the sense that
  New-DERA will be a major supplier. It is actually quite common in the United
  States for people to be seconded from government to industry and vice versa.
        (Baroness Symons of Vernham Dean)   And in this country.
        (Mr Clifford)  And in this country, indeed. One simply puts in place
  appropriate processes to make sure information stays where it is. Very much
  part of our life is dealing with highly classified information which we have
  to maintain in compartments so we have the processes which are well tried to
  do that.
        191.     You do not see this as being a kind of cosy relationship with
  a privatised organisation which does not apply in general elsewhere?
        (Mr Clifford)  Most certainly not.  We need to have an intellectually
  stimulating relationship with anybody who provides technology, advice,
  research, capability to the Ministry of defence. One of those organisations
  will be for a very long time New-DERA. It will be quite wrong for DSTL to put
  up the shutters in that respect against New-DERA. It will be equally wrong for
  us to treat new-DERA specially other than as a major supplier.
        192.     You do not seem to have any concern but would not some
  foreign governments or companies in industry regard this as being not a level
  playing field because of the history?
        (Mr Clifford)  I have travelled to the USA and, indeed, I was also in
  Australia a couple of weeks ago. I have not heard that concern at all.
  
                               Chairman
        193.     One of the concerns we have and I know the Defence Science
  Advisory Council has expressed its concerns about the structure of scientific
  research in the MoD. Traditionally the MoD has contracted some of the very
  best scientists and now with the split I am not sure whether Sir John will be
  so keen as to allow the fluidity of movement of very, very good scientists
  from his section back into the MoD or the circulation of scientists that
  currently exists who have entered the service of the Ministry of Defence. I
  hope that Stephen Lyons is going to look at this as well as the structure and
  ethos of scientific research in retained DERA.  Are you going to be generous
  by letting your very best scientists move around back into the MoD, Sir John,
  or are you going to keep them?
        (Sir John Chisholm)        As a manager of a large scientific
  organisation, I know well the value, exactly as Bill has been expressing, of
  maintaining good contacts with all other players in the field, you have to.
  It is not a business which you can succeed in by thinking you invented world
  science all on your own. Maintaining fluidity, as you put it, in our resource
  base is just as much a challenge and objective for New-DERA as it is for DSTL.
        Chairman:   Thank you. We have one last lot of questions. Harry Cohen.
  
                               Mr Cohen
        194.     Yes, on the Defence Diversification Agency which was a
  manifesto commitment of the Government. Indeed, I was the chair of the Labour
  backbench Defence Committee which worked through to this, and although it is
  a small agency it is an important one.  It does seem to me that it is being
  treated as an afterthought as part of these changes and I am concerned about
  that. It is going to be divided up under your consultation document,
  headquarters at the MoD. Most of the technology diversification managers will
  stay in current locations but being with New-DERA and some being with the
  retained DERA.  Surely this division is unsatisfactory. What will the
  relationship be between the Defence Diversification Agency HQ and the front
  line managers within the New-DERA, for example?
        (Baroness Symons of Vernham Dean)   Can I say, first of all, that we
  actually do regard the Defence Diversification Agency as a little jewel, but
  it is a jewel.
        195.     It is.
        (Baroness Symons of Vernham Dean)   It has had a very successful start
  in delivering our objective since its establishment since 1999 and the DDA has
  helped more than 300 small and medium sized businesses solve their problems
  since it got underway. If you have taken from the consultation document an
  idea that it is a sort of tail end Charlie in all this, I am very sorry
  because that is certainly not how it is viewed. As you rightly say, it was
  part of our manifesto commitments last time and we are rather pleased and
  proud with what the Defence Diversification Agency has been able to do. The
  fact is that life is moving on with the public/private partnership proposals
  and we have honestly tried to set out what we think is the best course of
  action for it in this consultation document.  This is a period of genuine
  consultation, Mr Cohen, and I hope you will accept that for what it is, a
  genuine assurance on that point. I am looking for input. I know that
  particularly many of my own party are very concerned with what will happen
  with this and this is a genuine exercise that we are trying to progress. I
  would be very sorry and disappointed indeed if it was felt that somehow this
  was all being put on one side because from our point of view it absolutely is
  not, from the Secretary of State's point of view it absolutely is not. We have
  had discussions about this and I know that he is very keen to ensure that it
  goes on doing valuable work.
        196.     I appreciate that comment about it being in the consultation.
  I think it is quite important that it be kept unified as much as possible and
  I hope that there will be improvements on the consultation document.
        (Baroness Symons of Vernham Dean)   Any particular comments that you
  have I will be very happy to take into account over the way forward.
        197.     Can we explore some of this detail then on the technology
  diversification managers. Who will direct their work: the MoD or New-DERA? 
  Who will pay for them?  Whose interest will they serve: the MoD or New-DERA?
        (Mr Jagger) Perhaps I can start as it involves both organisations. I
  think the real critical point about how we try to arrange this is that the job
  these people do depends on being close to where the technology is generated.
  Obviously some of our technology is generated in what will be New-DERA, some
  in DSTL.  To take everyone in the DDA and put them in one organisation or the
  other or in the MoD would actually be to take a lot of people away from, if
  you like, the front line of technology which would  not enable them to do
  their jobs well. The thinking behind the current plan is to leave, if you
  like, the front line people where they are best able to keep in touch with
  technological developments, whether that is at Porton Down or at Fort Halstead
  or Farnborough or wherever, under the general direction of the MoD. The Chief
  Executive of the DDA, Damian McDonald who has been in front of this Committee
  before, will report to the MoD, he will be a member of MoD staff. He will be
  responsible for directing them and paying them and saying what the strategy
  should be. The key thing is to keep them close to the technology that John's
  and Bill's organisations are developing.
        198.     Let me push on quickly. On your main activities which you
  summarise in your consultation documents, which again I think are successes,
  "to encourage as wide as possible exploitation in the civil sector of defence
  technology... to provide information on defence equipment for the defence
  industry's own diversification planning and to facilitate civil spin in the
  defence programmes".  All very important but will this not all be being done
  through a filter of New-DERA, it will not be industry-wide? How will it go
  industry-wide other than through this filter of New-DERA?
        (Baroness Symons of Vernham Dean)   If it were to be solely in New-DERA
  I think there would be some validity in your fears and criticism but as Mr
  Jagger has said the fact that we have got people working closely with people
  in New-DERA on the one hand but with overall control from the MoD does I hope
  give you some confidence that it is not through a filter. It is nonetheless,
  obviously, drawing on New-DERA experience and expertise and that, of course,
  we hope, as I was indicating a little while ago will be both in the opening
  up of DERA expertise but also in DERA being open to what is going on in the
  private sector as well. I have some difficulty with your idea that this is
  somehow closing it down, working through a filter when actually I believe it
  is rather the reverse.
        199.     We have not got much time to explore this but they are going
  to be based at their current locations.  Many of them are going to be working
  directly with New-DERA.
        (Baroness Symons of Vernham Dean)   Yes.
        200.     And are going to be involved in their directions through New-
  DERA in some form or another.  New-DERA is going to be a competitor with other
  sectors in the defence industry.  Getting this information, which is industry-
  wide, out to all the defence industry is limited by New-DERA's interests, or
  potentially limited.
        (Sir John Chisholm)        That is not exactly how it works at the
  moment, to be honest. The way it works is that there is a networking process
  whereby particularly SMEs can articulate the issues that they need a solution
  to and the technology transfer managers can access the technology which is
  going to solve that problem.  That is the way it works at the moment.
  Therefore, if you cut them off from those laboratories then actually you might
  very significantly reduce their effectiveness. That is why, as Terence Jagger
  has said, keeping that contact going is really rather important. I do not
  recognise at all the context of competition with other defence suppliers, that
  is not really the context in which this is happening. What is happening is
  SMEs who are typically not involved in defence are accessing some defence
  technology in order to solve their problems.  Actually being able to access
  that technology is what the key thing is.
        201.     For all the defence industry?
        (Sir John Chisholm)        Yes. Anybody can use the DDA. 
        202.     All right.
        (Baroness Symons of Vernham Dean)   Chairman, might I suggest, would
  it help any Members of the Committee who felt that they would benefit to have
  a meeting with the Chief Executive of the DDA?
        Mr Cohen:   That is helpful.
  
                             Laura Moffatt
        203.     Very interesting.
        (Baroness Symons of Vernham Dean)   It might help deal with some of
  these problems that Mr Cohen is expressing which are obviously ones which are
  concerning him and other Members of the Committee. I am very happy to
  facilitate that.
  
                               Mr Cohen
        204.     I appreciate that. One last question, one of the options not
  considered in the consultation document is to move the whole of the DDA to the
  Department of Trade and Industry.  Why was that rejected as even an option
  worthy of considering?
        (Mr Jagger) I think it is this question of access again. For a DTI
  organisation to have this role, these people would be even further, if you
  like, from the front line than they would be if we put them in DSTL or MoD.
  It is the same rationalisation, I think, that we are just trying to explore
  about leaving them where the technology is. 
        Mr Cohen:   All right. Thank you for the offer of the meeting. I still
  have a number of questions but I will take them up with him.
  
                               Chairman
        205.     I think Sir John will be with the new Defence Diversification
  and any good ideas from the MoD will be quickly whipped around his
  organisation so we will have no anxiety whatsoever, Mr Cohen. Thank you very
  much. I am sorry we could not beat your earlier record of 25 past one but I
  am afraid you snookered us by offering Mr Cohen a visit.
        (Baroness Symons of Vernham Dean)   I am very grateful to be allowed
  to go and answer the questions in the House of Lords, Chairman.
        206.     Nobody was incandescent with rage, we have tried our very
  best. I think you have convinced about as many people this time as you did
  last time which is very few. However, it occurred to me that whilst we have
  disposed as a Select Committee in the short term with this issue, I do note
  the Leader of the House said that there is going to be a Committee set up on
  the Defence Science & Technology Laboratory Trading Fund Order so we might all
  move en masse to that Committee.  Tell Lewis Moonie that maybe we will see him
  there to be allowed to participate.
        (Baroness Symons of Vernham Dean)   I am sure Dr Moonie will be
  delighted.
        207.     However, I suspect the Whips will round up the usual suspects
  of loyalists which will exclude anybody serving on this Committee.
        (Baroness Symons of Vernham Dean)   I am sure that is not true,
  Chairman, I am sure you are all jolly loyal.  I will certainly let Dr Moonie
  know.
        Chairman:   Thank you all very much indeed.