The options rejected
6. There were three other options for the public-private
partnership which had featured in the MoD's recent reassessment
of its proposals, but which had been rejected by them and not
included in the latest consultation document. These only became
apparent in the MoD's responses to our written questions:
- A so-called 'Variety Pack' option. This
would have broken up the current DERA into a number of individual
components, possibly based on the existing DERA sectors, each
of which could have been sold separately.
The Department considered that those elements to be sold would
have been too small to float as independent companies and that
most interest would have come from existing defence contractors,
creating a significant potential conflict of interest.
The MoD told us that this approach would destroy much of the synergy
within DERA, reducing the overall level of service to customers,
and would not provide the wider benefit to the UK economy specified
in the public-private partnership objectives. The MoD were also
concerned that the limited numbers of potential buyers for individual
pieces of DERA would suppress receipts, and that the costs of
restructuring, redundancies and site closures could have been
- An option based on the US concept of Federally
Funded Research and Development Centres (FFRDCs)privately
operated organisations contracted by a government department to
provide a specific long term research or development programme.
Such Centres may not seek or compete for work with the private
sector. We discovered on our trip to Washington last year that
this was one of two models (the other being a 'core competence'
approachsee paragraphs 10 and 36) suggested by the US Department
of Defense to the MoD during the consultation on the Reliance
The MoD has concluded, however, that an FFRDC structure 'would
offer significantly fewer freedoms than DERA's current status
and would consequently not offer solutions to the problems that
the organisation is likely to face over the next few years'.
- An 'Employee Public-private partnership'.
This would have involved the retention of DERA as a single entity
in the public sector, but as a public limited company with a substantial
proportion of the shares allocated to staff. The MoD considered
that the employee share scheme would have been complex to establish
and raise a number of financial, legal and administrative issues.
It also seems to believe that it would not have added significantly
to the operational, employment practice, pay or funding freedoms
that DERA currently enjoys as a Trading Fund.
Finally, somewhat surprisingly, given the privatisation of three-quarters
of DERA under the new proposals (see below), the MoD were concerned
that the Employee Public-private partnership proposal to establish
a share scheme might be perceived as signalling a longer-term
aim to move to privatisation.
We share the MoD's conclusion that wholesale dismemberment
would not be the best way forward for DERA. On the other hand,
the Federally Funded Research and Development Centre model has
worked well in the US, and if DERA must be privatised this approach
does have merit. On the face of it, an Employee-PPP approach could
have advantages, but at its core it is little different from a
straight-forward privatisation, unless the restrictions on ownership
were so narrow as to offer no obvious advantages over the status
quo. Otherwise, there would appear to be nothing to prevent its
employee owners realising the value of their equity at a later
7. We also sought from the MoD its perspectives on
why other options raised in our report last year, which would
not fall under the banner of 'privatisation', had been rejected.
The MoD told us that as a trust DERA would not be exposed to the
commercial incentives and disciplines that the MoD believes will
be necessary to meet the changing research environment, and that
without being able to issue share capital it would have less flexibility
in raising finance.
The MoD considered that a publicly-owned corporation would provide
few additional freedoms over those currently available to DERA
as a trading fund.
And while joint-ventures set up to exploit specific technological
developments were being pursued by DERA, the MoD considered that
they were unlikely to bring the benefits the Department sought
for the wider DERA organisation, and a multiple joint-venture
approach might fragment DERA over time.
8. The latest consultation document described the
MoD's now preferred option of the 'Core Competence' model, which
we discuss in more detail below, but it also raises the possibility
of a less-favoured 'Public Sector Option'. This latter option
would involve keeping DERA intact and transforming it into a public
limited company, but within the public sector and with only a
minority stake sold to external investors.
The Minister said of the Public Sector Option that "it was
initially a very attractive option ... because ... it had the
great merit of keeping DERA together",
and the consultation document also sets out its advantages
By keeping the organisation essentially intact, DERA
would continue operating on its current business model, building
on its past success and pursuing broadly the same strategy that
has proved successful since the Agency was formed in 1991. The
MoD would progressively open its research programmes to competition,
but DERA would retain a complete capability to meet MoD needs,
including extremely sensitive work and collaboration with foreign
government laboratories. Retaining the organisation as a coherent
whole has advantages in financial strength and reduced complexity
of implementing a public-private partnership.
9. The Minister told us, however, that although there
was a compelling argument for the Public Sector Option,
she thought it the much more difficult option in the longer term,
... industry and our international partners felt
that that split personality for DERA combined all the worst characteristics
that they would not know whether they were dealing with
a commercial organisation or a government organisation which was
able to provide disinterested, impartial advice which did not
involve a conflict of interest.
And the consultation document states that 'some stakeholders
considered the Public Sector Option to be too similar to the Reliance
The company would have obligations to external shareholders, which
would not give 'sufficient protection to the MoD in terms of sensitive
programmes, collaborating with foreign laboratories, and in those
areas requiring the highest levels of impartiality'.
When we sought from the Minister her view on how small the minority
interest might have to be to avoid insufficient protection for
the MoD's interests, she told us that this had not been completely
worked through, but that the MoD's modelling had had to have regard
to what equity would have to be sold "in order to attract
the sort of capital that we are looking for".
The MoD's assumption that 35% of its shares would be put on the
market, plus 5% for DERA staff themselves,
was therefore only an illustrative figure of the proportion of
equity needed to be sold to give investors a 'meaningful stake'.
Report, Session 1998-99, Defence Research, HC 616 Back
para 54 Back
paras 71-72 Back
paras 71-72 Back
paras 74-80 Back
paras 81-86 Back
paras 87-90 Back
paras 91-94 Back
paras 95-102 Back
paras 103-107 Back
para 121 Back
19 Q 1 Back
20 Q 41 Back
21 Q 28 Back
p 25 Back
p 25, para 2 Back
24 ibid Back
25 ibid Back
Report, Session 1998-99, op cit, para 100 Back
p 25, para 2 Back
28 ibid Back
29 ibid Back
30 ibid Back
p 29, para 3 Back
32 ibid Back
33 ibid Back
Consultation Document, A Public Private Partnership for the
Defence Evaluation and Research Agency, 17 April 2000, para
35 Q 43 Back
Consultation Document, op cit, para 9 Back
37 Q 43 Back
38 ibid Back
39 Q 26 Back
Consultation Document, op cit, para 10 Back
41 ibid Back
42 Q 48 Back
43 ibid Back
p 30, para 13 Back