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1.9 am
The Parliamentary Under-Secretary of State for Defence (Dr. Lewis Moonie): I congratulate the hon. Member for West Worcestershire (Sir M. Spicer) on his success in securing the debate, if not on his luck, given the late hour at which it is taking place.
I am probably uniquely well placed to reply to the debate, having represented my party on the Opposition Front Bench on the two most similar privatisations conducted by the last Conservative Government--the privatisation of the British Technology Group, and that of AEA Technology.
On 17 April, my right hon. Friend the Secretary of State for Defence announced the start of consultation on our revised proposals for the future of DERA. The formal consultation finished on 9 June, and we are currently examining the many useful and constructive responses received during the process. I emphasise that it was a genuine consultation. We are committed to listening to the views of our stakeholders, not least those of the hon. Gentleman's constituents who work at DERA. I am sure he will recognise the importance of carrying out the process properly, and will agree that we should take time to consider carefully the issues that have been raised.
However, we recognise that uncertainty over the future is potentially unsettling for DERA's staff. We intend to move as quickly as we can. We expect to complete our analysis of the responses to consultation within the next week or so, and we hope to be in a position to make an announcement soon after that.
Our intention to seek a public-private partnership as the way forward for DERA was first announced in the strategic defence review. We believe that the
opportunities presented by that approach will offer a significant boost both to defence research and to science and technology organisations across the United Kingdom. No one in the Ministry of Defence underestimates the range and complexity of the issues that must be addressed if we are to achieve our objectives of unlocking the expertise that exists within DERA, and of maximising commercial exploitation of Government-funded research.DERA provides a key capability in the United Kingdom, and we are determined to ensure a successful future for the organisation. That is why we have spent the last two and a half years examining the range of options that are available. As I have said, one of the reasons why it has taken so long is the complexity of the subject. There is a wide range of stakeholders, all with specific and often differing views and interests. In the face of such complexity, it is important that we fully explore the key issues. We must get them right if we are to ensure a successful future for the organisation.
Let me turn now to why we have chosen the public-private partnership as the way forward for DERA. The pace at which new innovations in technology are identified and applied is increasing rapidly, both in government and in industry. The civil sector is investing increasingly in areas of research that are also relevant to defence, and we need to find new ways to take advantage of that. Scientific expertise in areas that used to be largely the preserve of the public sector has now spread across government, industry and academia. We need to be more agile and innovative in creating partnerships that allow access to the best technology, wherever it may be.
DERA itself was created as a result of significant changes, which included the need to respond to new demands from its customers following the end of the cold war. Its management and staff can be justly proud of their achievements since the agency was formed. However, if DERA is to continue to thrive, it must be capable of responding to the environment in which it will have to operate over the coming decades. That includes the need to face challenges resulting from wider changes in the procurement of military equipment, including those resulting from the Government's strategic defence review.
DERA's direct funding from the Ministry of Defence--about half being from research--has declined significantly over the last 10 years. That is not because we do not rate highly the value of the science and technology that DERA produces. It largely reflects the transfer of risk in procurement from Government to prime contractors.
Even if unlimited money were available, the way in which to address the impact of the decline in DERA funding would not be simply to call for extra spending. That would ignore the other external challenges facing DERA. The answer is to find a way of allowing DERA to exploit its treasure trove of knowledge and ideas to the benefit of a wider market than its traditional defence customers. That idea is not only good for DERA; it is good for the MOD. It ensures that DERA becomes fully involved in the wider defence science and technology base, and so brings a broader expertise to its core customers' problems. It is also good for the United Kingdom as a whole, because it means that DERA will be able to make a growing contribution to the country's economic activity.
Initially, we believed that it would be possible to place the bulk of DERA in the private sector operating as a plc, but constrained to ensure that the UK's and our international partners' security interests were properly protected. Following extensive and, as I hope the hon. Gentleman will accept, genuine consultation on the proposal last summer, it became apparent that there was strong disquiet among a number of stakeholders, not least our international allies.
We looked at two possible ways around that problem. The first involved setting up virtually the whole of DERA as an independent publicly owned corporation--IPOC for short; in the MOD, we are very fond of abbreviations--with Government remaining as the majority owner. The second approach would see about three quarters of DERA's staff extracted to form a company that would transfer to the private sector with a core group of staff retained within the MOD for strategic reasons.
We conclude that the first option would simply not work. Although DERA would remain in the public sector, its staff would no longer be civil servants and would be working in a company with obligations to external shareholders. That would give insufficient protection to the MOD in terms of sensitive programmes, collaboration with foreign laboratories, and in those areas requiring the highest level of impartiality.
Other stakeholder concerns about the need for a clear relationship between DERA and the MOD were less well met by that option, and stakeholders felt that a much cleaner separation between the two organisations was required. In particular, international partners, from whom the MOD derives considerable benefit, expressed concerns about their ability to continue the full range of collaborations if that approach were adopted.
We examined an alternative approach, which would have created an IPOC in which employees were the main shareholders. However, that offered little benefit over the current trading fund. We have, therefore, concentrated on finding a workable solution that will allow us to retain in the MOD the most sensitive areas of activity from DERA. That will allow those elements of work that do not need to be within government to be transformed into a company in the private sector in a way that ensures their continuation as a prosperous, growing force for national economic good.
Based on that analysis, we have identified a preferred approach known as "core competence". That would lead to a clear separation of the two parts of DERA. The element to be retained in the MOD would include the chemical and biological defence sector at Porton Down and the majority of the Centre For Defence Analysis, as well as a number of teams and individuals involved in either sensitive projects or top-level systems research. Final decisions have not yet been made, but we expect the number of staff within the retained elements to be fewer than 3,000.
The elements retained in the MOD would provide a high-level overview across the whole spectrum of science and technology currently addressed by DERA. That would ensure that the MOD had an impartial source of advice and system research capability to provide high-level assessment, integration and management of its
research programme and international research collaboration. That capability would be focused on those activities that must be carried out within government.The remainder of DERA, about 9,000 staff, would continue to be a major supplier of science and technology to the MOD, but have the necessary commercial freedoms to develop its business for a wider range of customers, in the defence and civil areas. Indeed, we would expect that organisation, which has been referred to as new DERA in the consultation document, to become a globally branded, technology-based knowledge provider in the new economy of the 21st century. That vision is based on the synergy that would exist between its core research and technology work for the MOD and the exploitation of that technology into broader markets.
The nature of the relationship between new DERA and the rest of the MOD, including the retained element of the current DERA, has been the subject of much ill informed and potentially damaging speculation. Our proposals in the consultation document explicitly state that new DERA would be a private sector organisation with a clear separation from the MOD.
Although the MOD might initially retain a financial stake in new DERA, the sole purpose of that would be to ensure that the taxpayer obtained a share of any immediate benefit resulting from new DERA's additional freedoms in the private sector. Our aim would be to sell the MOD's stake as soon as it is financially sensible to do so.
We fully recognise that new DERA will be a critical supplier to the MOD. It will contain many capabilities and facilities of great importance to its defence customers, and it is likely to continue to be our largest source of scientific and technical advice into the foreseeable future. However, that does not imply that the relationship between MOD and new DERA will, in principle, need to be different from that which exists with other private sector organisations.
Stakeholders, particularly industry and our collaborative partners, have indicated strongly that they want to be clear whether the people with whom they deal are in the private sector or the public sector. It is also clear that there would be a fundamental contradiction between allowing new DERA the commercial freedoms necessary to operate successfully in the private sector and, at the same time, allowing it to have a privileged relationship with the MOD.
The realisation of that vision for new DERA is dependent to some extent on how it is placed in the private sector. The most sensitive activities are to be retained by the MOD, which will allow us to minimise the constraints under which new DERA can operate. That will, in turn, create an environment that permits the fullest exploitation of its potential.
New DERA will still have broadly the same range of capabilities and skills as at present. Consequently, we are able first of all to contemplate its incorporation as a plc. That could be followed fairly swiftly by a flotation, as soon as DERA had reached a suitable stage of development, possibly in 2001.
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