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6.41 p.m.

Lord Craig of Radley: My Lords, this was my first experience of a Select Committee, at least of sitting at the round end of a Select Committee table. I am most grateful for the friendly support that I received from the chairman, the noble Earl, Lord Selborne and from the rest of the committee. As the noble Earl mentioned, the topic of our investigation was not unfamiliar to me. I had some involvement with the work done in the Ministry of Defence which led Ministers to amalgamate the research establishments into the DRA, and the subsequent introduction of a trading fund in 1993. Following the collapse of the Soviet threat, it was also clear that the MoD's research requirements would need to be scrutinised most thoroughly against the background of the post cold war world.

Change in any large and complex organisation is never easy. Those involved in the formation of the DRA faced a double whammy: the amalgamations and restructuring of the former research establishments and the downward pressures on their future budgets. Some argue that in periods of peace and retrenchment, expenditure on the strategic research programme should not be curtailed. Indeed, the Statement on the Defence Estimates 1994 (CM2550 at page 64) said:

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f such aspirations are to be realised, it is not only a matter of money but of staff with the right background and motivation to deliver on good ideas. With that in mind, and the unprecedented changes which had already taken place in forming the DRA with its trading fund, our committee called for a period of consolidation and stability. Indeed, several of our witnesses stressed that need.

It was, therefore, with no little surprise that I read in the Defence Costs Study report, Front Line First, issued in July 1994 after our review had been completed, that savings estimated at £12 million a year could be expected, subject to further work (I note the reservation implicit in that phrase) if the DRA principles were applied as widely as possible to other MoD organisations which provide scientific and technological services.

It is a fundamental precept of scientific experiment that to get a proper evaluation the introduction of too many variables at the same time will almost certainly distort the conclusions. Fifteen months' experience of the DRA with its trading fund seems perilously short to conclude that it is not only a goer in its present form but that it will be able to absorb new resources and organisations immediately with cost savings and no adverse effects. It was an unfortunate matter of timing that our committee could be given no hint in MoD evidence of such further major changes. Time will tell whether the MoD has got that right or has fallen once more into the trap of piling change upon change to such an extent that quality of output cannot be sustained.

There is just one other aspect of our report that I should like to touch on. We concluded from evidence that Treasury rules place an unnecessarily high burden upon the DRA. I understand that the 6 per cent. risk-free target rate of return set by the Secretary of State for Defence is the same as applied across other government trading funds. They say that it provides a necessary commercial discipline. At the same time, the DRA is said to be free to charge what it deems appropriate for its facilities, provided that it does not disadvantage the MoD. Is there not some inconsistency in those approaches? Why should the DRA be grouped with every other trading fund? Should it not be treated on its own merits? We are told that the DRA is free, but only so long as it charges—at least—what the MoD says it must. Treasury and MoD rules seem to be inflexible, and not always in the best commercial and wealth-creating interests that we would all like to see from the DRA.

The DRA enterprise fund should be developed to give both the encouragement and the wherewithal to exploit the considerable financial potential of the DRA. While the MoD as sole owner of the DRA must be given priority, and every effort made to meet the MoD's legitimate requirements, it should also be possible for the chief executive and his team to seek to enhance the national wealth-creating potential which lies within the DRA. That may be difficult to achieve in a meaningful way if the MoD insists that any capacity surplus to defence needs must be removed. The DRA seems to be between a rock and the hard place.

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Finally, the DRA and its predecessor research establishments have been through a period of unprecedented change, financially, organisationally and functionally. I hope that no "Johnny come lately" will feel that the DRA needs to be reviewed yet again in the near future; for example—and I note what the noble Lord, Lord Trefgarne, said—with a view to privatisation or further restructuring. The agency needs stability to set itself on its new course, to allow time to assess properly the success of the new arrangements and, above all, to allow the scientists and others who have been so personally affected by so much upheaval to plan ahead for their families and themselves. If not, morale and quality of output could be badly hit.

6.48 p.m.

Lord Redesdale: My Lords, I welcome the opportunity to make a few brief comments about the report. I should also like to say that I welcome the Government's reply; indeed, it is extremely comprehensive. However, the area that I most welcome about the Government's reply can be found at the end of paragraph 3. I know that the noble Lord, Lord Trefgarne, will not agree with me in that respect, but I think that those words are most important. They read:

    "There continue to be no plans for privatisation".

ike many members of the committee, I believe that privatisation of the Defence Research Agency will not be in the best interests of the country.

When I was considering my speech, I realised that many noble Lords would speak in great detail. As many speakers were members of the committee and know a great deal about the subject, I should like to discuss a few areas that concerned the committee over all.

While thinking about the speech I would make in this debate I received the Defence Research Agency's annual report 1993-94. It is quite an exciting document. The first section of it reads very much like an episode of "Tomorrow's World". I say that with no disrespect at all. The document shows how the Defence Research Agency is at the cutting edge of advanced technologies. I was particularly interested in the work being done on light emission from silicon.

The document almost states why the reforms we are discussing were undertaken. The Defence Research Agency carries out exciting research. The 10 per cent. of it which is directly outside the MoD's control can be used for wealth creation and for the benefit of the country. The report describes the vast areas of expertise that are covered by the Defence Research Agency and many areas which are not limited just to defence.

The second section of the report lists the enormous changes that have taken place within the Defence Research Agency. I believe that these changes are mostly for the good. However, I have one or two points to add on this matter. I believe that one of the driving forces behind the changes is efficiency. But there is a slight dichotomy as regards pushing for efficiency in research. On the one hand one is trying to limit the money being spent and on the other one is trying to achieve as much with the research as possible.

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I have talked with the noble Baroness, Lady Hilton of Eggardon, about the role of efficiency within the DRA. I believe we share the view that one area that has been particularly discussed is that of blue sky research. While there is a strong push for efficiency, that will cut down on the eventual returns from blue sky research. Also, as the research becomes more specialised, that could lead to short-termism. Although I realise that often few benefits are to be gained from pouring vast amounts of money into research without a direct aim in mind, I believe that one area that has to be carefully monitored is that short-termism might become an in-built factor in all the research undertaken by the Defence Research Agency.

I also wish to discuss intellectual property rights. I believe strongly that there is no reason why the country should not benefit from any revenue that may accrue from this work and that intellectual property rights should fund other areas of the Defence Research Agency. However, I disagree with the Government's response in one respect. I believe that, if at all possible, intellectual property rights should be sold to British companies below the rate of return that would normally be expected if they can show that such a course would create jobs in this country and add to the manufacturing base. I believe that that is an important point. One may forget that a small loss of a few million pounds in intellectual property rights could be compensated for if a factory could be established in this country to produce goods as a result of acquiring the intellectual property rights.

I also wish to mention the Treasury rules, as did the noble and gallant Lord, Lord Craig of Radley. They can be inflexible. It seems to be a case of taking from one pocket and putting into another. The Treasury can push for more stringent controls of the Defence Research Agency. However, it is a publicly funded company, and if it can be shown that reducing the Treasury rate of return would benefit the country, I do not believe that one should necessarily have to stick to the 6 per cent. figure, which is an artificial creation.

I wish to end by considering the role of stability. I shall quote from the Defence Research Agency report and the statement of the chief executive, Mr. John Chisholm:

    "After two years of preparation, 1993/94 saw the Defence Research Agency launched as a fully trading organisation. It has proved a daunting but so far successful task. The mechanics of making an enterprise of more than 10,000 highly skilled individuals into a disciplined trading entity were sufficiently challenging in themselves; to achieve that transformation while retaining the focus and innovation from DRA's staff has been a rare and important task. Despite many difficulties, some of them relatively major, that task has been by and large accomplished".

There have been massive changes in the Defence Research Agency. I wish to mirror some of the views that have been expressed already by stating that I believe a period of time needs to be set aside to see what effect those changes have had. It would seem to me to be short-sighted to try to attempt major changes in the short term. I believe that a period of stability of perhaps more than two or four years —perhaps six or eight years—should be instituted so that the effects of these

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changes can be seen. Then, if any further changes are necessary, they can be implemented with the benefit of wisdom.

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