The Defence Committee has agreed to the following
1. To retain a military capability that is effective
against continually developing threats, the Ministry of Defence,
like all defence departments around the world, has a perennial
requirement for new and ever better weapon systems. To produce
such equipment requires research & developmentseparate
disciplines, though often terms that are lumped together. Development
is concerned with translating technological knowledge into the
required new equipment, and involves engineering design, manufacture
and testing to confirm performance against specifications. Research
the focus of this inquiry precedes development,
and involves the generation of that technological knowledge,
pushing out its boundaries and identifying new possibilities.
Even if equipment is purchased off-the-shelf some research is
necessary in order to make sensible procurement decisions. Sitting
in both the research and development camps, technology demonstration
usually involves building prototypes and simulation 'test-beds'
to prove emerging technology before investing in full development.
2. The MoD undertakes or commissions research for
two main purposes: to allow it to be both an 'intelligent customer'
and an 'intelligent decision maker'.
The Department needs to be an intelligent customer so that the
it spends each year on acquiring new equipment platforms (including
ships, tanks and aircraft) and systems is used to maximum effect.
That entails having access to sound and impartial technical advice
in formulating operational requirements, agreeing specifications,
assessing options, advising those in the MoD making acquisition
decisions and planning the testing of equipment before it is accepted
by the Department.
The MoD recognise that this requires knowledge which can only
come from hands-on research and practical experience, both to
generate the required knowledge directly and to be able to acquire
more by exchanging it with other researchers. The people involved
need to be practising scientists and engineers, not technical
The MoD also needs to be an intelligent decision-maker in a broader
sense. It has to be able to make technical assessments of threats
and the military capabilities of both current and potential future
adversaries (as well as those of the UK itself and its allies)
to inform policy decisions about the balance of investment in
different types of equipment or capability.
The Defence Evaluation and Research Agency (DERA) plays a vital
role in providing the MoD with the knowledge and skills it needs
to discharge both its intelligent customer and its decision-maker
3. A subsidiary but important aim of the MoD's research
effort is to help ensure that British defence contractors remain
sufficiently abreast of technological developments to be able
to bid world class products to meet the MoD's equipment needs.
Hoping to sell its equipment to the MoD and customers overseas,
industry in the UK also carries out its own research, some of
which complements the MoD's research that supports the development
of equipment for the Department.
4. Despite the importance of the benefits of defence
research, government funding for such research has been in decline
in the UK for some time. A fundamental shift in the balance of
government research funding, between civil and defence purposes,
was signalled in 1987. In its response to a report that year by
the House of Lords Science and Technology Committee,
the government recognised the importance of increasing civil
research and development, as a share of public R&D, and announced
that it was taking action accordingly by restricting the real
level of defence R&D.
The government response also announced new central structures
to review and shape the balance of government-funded research,
under a new Advisory Council on Science and Technology
(since replaced by the Council for Science and Technology)
The new central structure
machinery will keep under regular consideration science and technology
priorities for both civil and defence R&D. As announced in
the  Statement on the Defence Estimates,
the Government will in future be paying careful attention to the
risk that investment in defence R&D may restrict the scientific,
engineering and skilled manpower resources available to the civil
sector of industry, and will be giving special emphasis to avoiding
duplication of successful equipment developments already achieved
by our NATO allies. Defence procurement policies will continue
to aim to meet the requirements of the armed forces in ways which
make more discriminating and economical use of United Kingdom
R&D resources. These policies are intended to lead to a
gradual reduction in the real level of defence R&D over the
The 1987 Statement on the Defence Estimates
had conveyed a similar message
The Government shares the
underlying concern of those who fear that necessary investment
in defence R&D may crowd out valuable investment in the civil
sector. Thus, while defence R&D has contributed to the advance
of technology, Britain's resources of qualified scientists and
engineers, and the skilled manpower supporting them, are not inexhaustible.
Although there is much that we can do ...to harness our defence
R&D effort to benefit the wider civil economy, defence and
civil work are in competition for the same skills, and it would
be regrettable if defence work became such an irresistible magnet
for the manpower available that industry's ability to compete
in the international market for civil high technology products
became seriously impaired.
5. The rationale used for holding down the defence
research budget a dozen years ago was that scientific staff were
a fixed resource that needed to be rationed between the civil
and defence sectors. We doubt whether this was more than a convenient
diversion from the truth that the resource being rationed was
really money. It is ironic that in 1987 this argument was used
as an excuse for reducing the funds that defence research had
available to compete in the market for personnel, and that now
the MoD argues that its funding of defence research may further
diminish because of the growing contribution of civil technologies
in information technology and related disciplines to the development
of defence technology.
6. The pattern was set in 1987, however, and six
years later, in 1993, the White Paper Realising Our Potential
anticipated that the decline then underway in government-funded
defence research would continue, with a reduction of a third by
the turn of the century.
It anticipated, however, that industry would undertake more of
the defence research needed, as a result of exposing to competition
a greater proportion of the funds spent with or by DERAfrom
a quarter in 1992-93 to two-thirds by 1997-98.
7. Looking back over the last dozen years or so,
statistics produced annually by the Office of Science and Technology
(OST) show that expenditure on defence research and development
much of the data does not separate the two has
indeed had a generally downward trend, but also that this has
been the pattern for both government-funded and industry-funded
R&D alike. Key points from the OST statistics include:
- A reduction in the proportion of government-funded
defence R&D, as signalled in 1987. In 1986-87, 45%
of government-funded R&D was dedicated to defence; by 1995-96
it had reached a low of 37%; and in 1997-98 it was 39% (see Figure
Source: 'Science, Engineering and Technology Statistics
1999',Office of Science and Technology, Cm 4409, Table 3.2
- Over the last 12 years (1986-87 to 1998-99) a
fall in civil government-funded R&D expenditure of
only 9% in real terms, which on current plans will bounce back
to 1986-87 levels by the end of the Comprehensive Spending Review
period in 2001-02. Defence R&D expenditure, on the
other hand, has fallen by 26% in real terms. Although it is projected
by the government's expenditure plans to rise over the next three
years, by 2001-02 it will still be 17% less than 15 years before
(see Figure 2).
Source: Cm 4409, Table 3.2
- A divergence in the trends of the research and
development components of the MoD's R&D expenditure. While
MoD development expenditure is now set to rise in real
terms, research expenditure is set to continue its recent
decline. From a high point in 1993-94, MoD research expenditure
is projected to be 31% less in real terms by 2001-02 (see Figure
3). The MoD record expenditure on 'research' in a slightly different
and compared with the OST figures the MoD's data shows a more
dramatic decline in its research expenditure of 40% in real terms
since 1992-93 (paragraph 58).
Source: Cm 4409, Table 3.2
- A decline also in R&D expenditure funded
by industry, and particularly in the defence sector. In the eight
years to 1997 (the latest data available), industry's civil
R&D rose by 3% in real terms but its defence R&D
fell by 42% (see Figure 4).
Source: Cm 4409, Table 4.1
8. Whether civil or defence, the competitiveness
of UK industry in world markets is at stake. UK competitiveness,
and the research base behind it, has become an increasing concern.
The government's 1998 competitiveness White Paper Building
the Knowledge-driven Economy acknowledges that it has a role
to play as a direct investor in the economy's knowledge base,
as well as in shaping an environment in which businesses can invest
in research, but it places an emphasis on what academia and industry
should be doing to improve the UK's position.
The White Paper states that 'Britain's success in the knowledge-driven
economy of the future is ultimately down to business ... The present
government will not resort to the interventionist policies of
and that 'university R&D is too rarely translated into UK
commercial success [and] UK industry spend on R&D has declined
relative to our major competitors'.
Industry-financed R&D in the UK represents a declining proportion
of GDP, which is now lower than most of the other G7 nations.
US firms currently spend twice the proportion of their country's
GDP on R&D as UK firms (Figure 5).
Source: Cm 4409, Table 7.1
9. The DTI's annual UK R&D Scoreboard,
assessing UK industry's investment in research and development
(the two elements combined) in comparison with its competitors
overseas, provides some further evidence of this unfavourable
position. The 1999 Scoreboard
surveyed 561 UK companies and 300 international top R&D-investing
companies. Given that the UK companies were compared with a sample
comprising the best international firms, it is perhaps not surprising
that across the 561 UK companies examined expenditure on R&D
represented only 1.9% of sales, whereas the 300 international
firms invested 4.9%.
The analysis does show, however, that across all sectors of economic
activity, only 16 of the world's 300 highest R&D-investing
firms were UK companies.
Those top 16 UK companies invested 2.9% of sales in R&D, compared
with 3.1% for international firms in the same sectors of the economy.
The 1999 Scoreboard also shows, however, that in the Defence
and Aerospace sector UK industry's position is relatively good.
The UK's 10 leading R&D-investing firms in this sector spent
on average 5.0% of sales on R&D, compared with 4.4% for the
international top 10 defence firms (although the UK's position
is somewhat skewed by the large size of British Aerospace whose
total sales and R&D figures match those of the other nine
UK firms put together a more typical (median) figure for
UK R&D investment in this sector is 3.5% of sales).
10. In seeking to improve the UK's position on its
investment in all areas of research, however, the public-sector
research laboratories also have a contribution to make, and the
1998 competitiveness White Paper announced a programme to ensure
that "the public sector research establishments make the
most of the commercial potential of their research outputs".
To examine how this might be achieved for the non-defence research
establishments, the Office of Science and Technology has a 'commercialisation
review' underway which is due to report by the end of 1999. In
the defence sector, the MoD is currently consulting on proposals
arising from the Strategic Defence Review for a public-private
partnership for DERAan important issue that we examine
in the last part of this report.
11. Against this backdrop of change and growing pressure
on research, and defence research in particular, we conducted
a brief inquiry last year on DERA. In our report,
we expressed our concern that the inexorable decline of research
funding might turn out to be a false economy, and we indicated
our intention of conducting a fuller inquiry of the state of defence
subject of this current report. In that earlier report we also
dealt briefly with the proposed public-private partnership for
DERA. Although there was little information then available about
the proposals, we had wished to register our reservations about
the possible implications for the MoD, including the potential
loss of impartial advice for the MoD, the damage to the coherence
of the defence science base, the possible detrimental impact on
the MoD's relationship with industry, and the risk of disrupted
access to US technologies.
12. This current inquiry sought to examine these
issues further, by reviewing defence research expenditure against
the backdrop of the technology transfer process it supports and
the strategy for defence research being adopted by the MoD. With
further information now available on the proposed public-private
partnership, including a consultation document issued on 5 May
1999, we go on to discuss this key plank in the MoD's research
plans and its implications for DERA, its staff, for industry,
the Department and our allies.
13. We took much written evidence from the MoD, the
DTI, the Office of Science and Technology, defence firms, trade
associations, professional institutions, trade unions and others.
We also received a briefing on the implications for defence research
arising from the 'revolution in military affairs' (paragraph 22)
from Rear-Admiral Richard Cobbold of the Royal United Services
Institute for Defence Studies, Dr Andrew Rathmell of Kings College
London and Major General Alan Sharman of the Defence Manufacturers
Association. We took oral evidence from representatives of the
DERA trade unions, representatives of the Defence Industries Council,
the Chief Executive of DERA and the Director of the Defence Diversification
Agency, and finally the then Minister for Defence Procurement,
Lord Gilbert, and MoD officials. We wish to give particular thanks
to our specialist advisers, Professor David Kirkpatrick of University
College London and Rear-Admiral Cobbold, for their assistance.
1 Ev p 140 Back
Defence Statistics 1999,Table
p 140 Back
4 ibid Back
5 ibid Back
p 65 Back
Research and Development,
government response, Cm 185 Session 1986-87 Back
185, para 4 Back
185 op cit, para 8 Back
1987, Cm 101-I Back
185 op cit, para 32 (our emphasis) Back
101-I op cit, para 522 Back
our Potential, Cm 2250, para
2250 op cit, para 4.5 Back
Engineering and Technology Statistics 1999,
Cm 4409, page 90; the MoD's Defence Statistics Bulletins 1
and 2; and Annual Defence Statistics explain the differences
in the accounting and classification behind the different statistics Back
Competitive Future: Building the Knowledge Driven Economy,
Cm 4176, para 2.31 Back
4176 op cit, para 1.12 Back
para 2.32 Back
Chart 2.1. Japan, US, Germany and France have higher figures,
Canada has the same, and Italy a lower proportion of GDP spent
on R&D Back
June 1999, by Company Reporting Limited Back
Company Data volume, pp 3 and 51 Back
Company Data volume, pp 70-71 Back
Commentary and Analysis volume, page 1 Back
Company Data volume, pp 3 and 51 Back
4176 op cit, para 2.38 Back
Defence Evaluation and Research Agency,
Sixth Report Session 1997-98, HC 621 Back
621 op cit, para 16 Back
621 op cit, paras 19-29 Back