SIXTH SPECIAL REPORT
The Defence Committee has agreed to the following
THE DRAFT DEFENCE SCIENCE AND TECHNOLOGY
LABORATORY TRADING FUND ORDER 2001
The Committee published its Fifth Report of Session
2000-01, on The Draft Defence Science and Technology Laboratory
Trading Fund Order 2001 (HC 289), on 13 March 2001. The government's
response to this report was received on 3 May and is published
as an Annex to this Special Report.
1. This is the Government response to the 5th Report
of the House of Commons Defence Committee on the Draft Defence
Science and Technology Laboratory (DSTL) Trading Fund Order. The
Government welcomes the opportunity to provide more information
following the evidence session with Baroness Symons, Minister
of State for Defence Procurement, and officials on 28 February
2001. The Committee, in its report, has drawn particular attention
to a number of key issues, which are highlighted below. The Government's
views on these issues follow the highlighted text.
2. In addition, this response addresses the points
raised in the Audit Adviser to the Committee's letter of 12 March
3. The Government remains confident that the PPP
represents the best way forward for providing the UK's future
defence science and technology requirements. It is, therefore,
disappointing that the Committee's stance is still vigorously
opposed to the trading fund Order, and wishes to abandon the formation
of NewDERA and DSTL. However, the Government is pleased that the
Committee saw no advantage in delaying the Order, with possible
adverse impact on staff morale, and the best science and technology
support for MoD should continue to be developed.
4. Following the successful passage of the Order
through Standing Committee, the Government is now committed to
continuing dialogue with all interested parties, as implementation
of the PPP moves through vesting of the two organisations, towards
transaction of NewDERA.
5. Paragraphs 7 and 3. We are disappointed
that that evidence shows that four of the outstanding areas of
uncertainty that we had previously identified (points (a) to (d)
in paragraph 3) remain unresolved.
3 (a) NewDERA would not be permitted to undertake
defence 'manufacturing', but there remained uncertainty about
what exactly the MoD meant by that term. The MoD seemed to be
suggesting that NewDERA would be barred from 'manufacturing' equipment
but could be a 'systems integrator', and in its response to our
Report stated that 'we accept that clarification is required to
define the parameters of defence manufacturing'.
The Government's policy is clearly defined; what
remains is the drafting of a final definition. The broad principles
(a) NewDERA would not,
without the express permission of MoD, be permitted to undertake
the manufacture or supply of equipment, products or systems whose
principal use is intended to be for a military, defence or security
application, other than small numbers of prototypes or demonstrators.
(b) Unless there was a clear conflict of interest,
NewDERA would be permitted to act as a Systems Integration contractor
and to work in partnership with, or as a sub-contractor to, industry.
This is seen as an important mechanism for ensuring that the results
of work within NewDERA can influence the design of new defence
Under any agreed definition of Defence Manufacturing
NewDERA will be specifically prohibited from the manufacture of
commercial quantities of any material or system that is designed,
developed or assembled specifically for military purposes. There
will inevitably be some cases that are less clear-cut and these
will be referred to a compliance committee for consideration.
The precise rules for enforcing the prohibition are still under
discussion, but all parties accept the principle behind the ban.
It is not proposed to prohibit NewDERA from undertaking
any activities performed by the current DERA. The prohibition
is intended to be consistent with the present restrictions on
the development and manufacture of equipment for sale by DERA,
which are set out in the Framework Document that governs the activities
of the trading fund. It is recognised that, for this prohibition
to be effective, it must be defined in an unambiguous way and,
similarly, the processes and procedures used to administer this
provision must be clear and not intrusive.
The prohibition of defence manufacturing will be
an important mechanism which will ensure that a conflict of interest
does not arise in NewDERA's ability to advise and support MOD
in the delivery of military capability. Indeed, this reflects
current practice whereby DERA are prevented from engaging in defence
manufacturing through their framework agreement.
3 (b) The MoD had not
made a final decision on which of NewDERA's assets would be regarded
as of 'strategic' importance, and thereby falling under the special
measures afforded by the MoD's golden share in the privatised
firm (the MoD would have first refusal to acquire such assets
if NewDERA were to dispose of them).
As part of the ongoing PPP implementation work, MoD
is currently undertaking an extensive exercise to identify what
assets or facilities are considered to be strategic. This work
is complex involving consultation with all of DERA's customers
and will be completed prior to vesting on 1 July. As outlined
in last year's Consultation Document on the future of DERA, a
set of compliance controls will be established either in the Articles
of Association or in specific contracts between MoD and the new
company. Under this compliance regime, the strategic assets that
will be listed will be protected and their continuing availability
to MoD as required will be ensured. In particular, disposal of
such assets would require prior consent from the MoD and a mechanism
will be established for the return of such assets to the MoD if
it is felt to be in the national interest to do so. In addition,
mechanisms will be put in place to allow the list to be updated,
for example to include facilities that may be built in the future
if customers chose to place this as a contractual condition on
the new company.
3 (c) There remained uncertainty
about the extent of controls on foreign and individual share-ownership
of NewDERA, that would be introduced in its 'compliance framework'.
The exact details on control over ownership do not
need to be finalised until a sale transaction. As with all commercial
organisations, NewDERA will have to meet all the prescribed security
requirements for defence contractors and statutory protections
already exist to prevent the export of sensitive defence technology.
In addition, the NewDERA compliance regime will ensure the protection
of essential UK security interests and this will include:
- retention of a Special Share. The share will
not have an expiry date and will be retained for as long as is
- restrictions on ownership of shares above a specified
limit. This limit has yet to be determined.
3 (d) With the bulk of DERA's research work to
be put in NewDERA, there were doubts about how the scientific
foundation of DSTL would be maintained in the long term.
The previous HCDC report on the DERA PPP highlighted
the concern that some stakeholders have over the ability of DSTL
to maintain sufficient capabilities and it is important that this
is addressed. The analysis conducted provides confidence that
the proposal would result in the establishment of DSTL as a vibrant
and sustainable organisation, providing high quality scientific
and technical output to its customers. It would be a significant
force in the field of defence science and technology, undertaking
systems level research and key Government work unsuited to the
private sector, while maintaining an ability to provide a high
level overview across the whole spectrum of science and technology
currently addressed by DERA. This would ensure that MoD has an
impartial source of advice and systems research capability to
provide high level assessment, integration and management of its
research programme and international research collaboration.
Throughout the PPP process an overriding objective
has been to ensure that customer needs are fully met. These needs
have been set out by the Customer Focus Group, a senior level
body which represents DERA's main MoD and other Government customers.
The current Core Competence approach has been fully endorsed by
this group as being capable of meeting their requirements. The
separation of NewDERA and DSTL was planned to ensure an equitable
division of key staff between the two organisations, whilst also
ensuring that each has the necessary capabilities and expertise
to carry out its defined role. The way in which capabilities have
been divided fully protects access to the capabilities needed
by MoD to carry out its 'intelligent customer' role.
6. Paragraph 8. Worryingly, the
Minister did suggest that some of the significant costs of implementing
the public-private partnership could fall on the MoD. This could
effectively wipe out the benefit to the MoD of the sale. We trust
that the Minister will seek to secure the full sale receipt for
the MoD and the reimbursement from the Treasury of the
MoD's costs of implementing the public-private partnership.
MoD has agreed with HMT that it will receive a credit
of at least £250M in FY01/02 in anticipation of a successful
PPP. This receipt is not dependent on the actual timing of the
final PPP transaction, the current target date for which is by
April 2002. Nor is the figure an indication of the potential value
of the transaction.
Current planning is for NewDERA to be floated as
soon as its potential is judged to be suitably developed, subject
to value for money considerations and provided the organisation
has achieved appropriate performance targets. It is also possible
that a strategic partner would be brought in to assist with the
commercial development of DERA prior to a flotation. MoD is likely
to retain an interest in NewDERA as a means to ensure that taxpayers
receive full value for their investment in past Government funded
At present, only a small administrative cost falls
on MoD, principally through the work of the DERA Partnering Team.
Costs lie where they fall, and therefore, because the bulk of
the implementation work has been carried out by DERA, the greater
part of the costs of the PPP process will be borne by the trading
7. Paragraph 9. The next decision point
for the public-private partnership, at which the Minister will
review the programme, will be in March/April 2001 when the viability
of the prospective NewDERA will be re-assessed. We expect the
outstanding issues and uncertainties to have been resolved before
then and the decisions set out in the reply to this Report.
The strength of NewDERA as a business will be assessed
by reference to the targets in the Corporate Plan. This process
will continue throughout the current financial year. In light
of progress, decisions will be taken on the timing of, and route
to, a transaction.
8. Closing statement (response to paragraphs 10
The DERA PPP is aimed at maintaining and improving
science and technology capability, responding to the significant
changes to the environment in which DERA operates. The PPP will
provide the freedom to develop stronger links with the expanding
global technology base and stimulate greater agility and innovation.
This will ensure that our armed forces retain access to leading
edge technology. It will help unlock the knowledge and expertise
within DERA for the benefit of the wider UK economy. The opportunity
to create partnerships which build on the increasing civil-sector
investment in areas such as communications and computer technology
will lead to enhanced value for money for DERA's customers while
allowing MoD to retain access to world class scientific and research
capabilities. If nothing was done, DERA would go into managed
decline and with it the UK's future military capability.
The PPP will prove a robust vehicle for delivering
a large part of the UK defence need for state-of-the-art scientific
and technological knowledge. Ultimately, as the boundaries between
civil and defence research are blurred, the benefits will be spread
wider and will be felt throughout the economy as a whole.
From the Audit Adviser to the Committee's letter
of 12 March 2001
9. The Committee wished to receive the results
of the recent Gallup survey of staff opinion and the results of
any subsequent surveys.
The Gallup Organisation was commissioned by DERA
to conduct a study of employee opinion across a representative
sample of all DERA employees. Interviews were conducted in December
1999. The information is not, therefore, recent. An article summarising
the findings of the Gallup poll appeared in the April 2000 edition
of the DERA newspaper.
The Committee also requested a more detailed analysis
of the Gallup findings. This information, at Annex B, is in the
form of a presentation prepared by Gallup and is provided to the
Committee, as agreed, on a confidential basis.
As part of its ongoing consultation and communications
programme, DERA has commissioned a further poll, by MORI. The
results of this poll will be presented to DERA shortly and then
be published. A copy of the published findings will be sent to
10. What is the latest estimate of the cost of
planning and implementing the changes needed to establish the
PPP and to complete the division of DERA into its new component
bodies, and what is the breakdown of such costs¼¼?
What proportion of these costs will be borne respectively by the
MoD and by NewDERA?
The following table gives an estimate of the total
costs for planning and implementing the PPP, borne by MoD and
NewDERA. The total cost is expected to be in the region of £70M
- £80M. A large proportion of MoD's costs are the result
of the formation of DSTL, and those costs, which are indicated
in the table below, will lie within the Trading Fund. There are
clearly likely to be some differences in the final costs from
those below, but the total should remain between £70M and
|All costs in £M
|Advisors' fees|| 6.5
|| 15.0|| 21.5
|Capital expenditure and operating expenses
|| 11.0 (DSTL)
|| 12.0|| 23.0
|Information Systems reconfiguration
|| 4.0 (DSTL)
|| 17.0|| 21.0
|RASP exercise|| 0.5 (DSTL)
|| 9.0|| 9.5
|DERA Partnering Team
|| 2.0|| 0.0
|| 53.0|| 77.0
This estimate is based on information from the last
quarter of financial year 2000-2001.
11. The Committee wishes to have further information
on the process followed to establish the division of intellectual
property between NewDERA and the MoD, and how different types
of information have generally been allocated to one side of the
division or the other.
The intellectual property which will be transferred
to NewDERA is that intellectual property currently owned by MoD
which has been developed within areas of business which will lie
within NewDERA. DSTL will retain that intellectual property which
is currently owned by MoD and which has been developed in business
areas that will lie within DSTL.
All intellectual property and information which belongs
to third parties and not MoD has been subject to a rigorous audit
process. All third party information will be retained in MoD,
unless MoD has a contractual right to place it in NewDERA for
a specific purpose, or where the source of the IPR has agreed.
In any event, no third party IPR will be owned by, or transferred
to, NewDERA as a result of the PPP. The work of identifying all
third party IPR in NewDERA, and extracting it, is now complete.
An audit of this work is now underway.
12. The Minister and officials undertook to
explore the possibility of making available to the Committee the
input from organisations to the PPP consultation exercise.
The Government is still considering the release of
information from the PPP consultation exercise. Further permission
may need to be sought for the release of some of the material,
and the relevance of the responses to the current situation is
also being reviewed.
13. The Minister and officials undertook to
explore the possibility of making available to the Committee Copy
of the NewDERA Corporate Plan.
The Corporate Plan is inevitably still being developed,
and it will not at any point be published. It is a private, commercially-sensitive
document and it will not be possible to release versions during
its development. However, the Department would be happy to provide
the Committee with a presentation on the future business plans
of QinetiQ, if this is felt to be helpful.
Ministry of Defence
3 May 2001