The MoD's newly preferred option
10. The MoD's preferred option, as set out in the
latest consultation document, is now the Core Competence model.
This would involve splitting DERA into two a 'New-DERA'
which would be incorporated as a private company and later floated
on the Stock Exchange, and a 'Retained-DERA' which would comprise
about a quarter of the existing organisation. Perhaps the key
feature of the Core Competence approach, that distinguishes it
from the previously preferred Reliance model, is the much more
substantial part of DERA that will be retained within the MoD.
This includes, according to the MoD, the key activities within
the MoD which the earlier consultation exercise had shown to be
particularly important
- the integration of different elements of knowledge
and research to provide high level advice to the MoD to aid its
decision making process;
- work of a particularly sensitive nature; and
- sensitive work related to government-to-government
international programmes.[45]
More specifically, Retained-DERA would keep:
- The Chemical and Biological Defence Sector (Porton
Down)720 staff[46];
- 'All of the capabilities and the majority of
the staff' from the Centre for Defence Analysis[47]
(paragraphs 36, 37);
- the Defence Research Information Centre50
staff[48];
- the Defence Radiological Protection Service90
staff[49];
- another DERA organisation, whose details and
staff numbers are classified[50];
and
- 'sufficient other staff from across DERA to provide
a capability for impartial advice and knowledge-integration to
MoD; to collaborate with allies on joint programmes; to carry
out work in areas of particular national sensitivity; and to provide
the necessary management and administrative resources.'[51]
11. The MoD believes that these capabilities, kept
within Retained-DERA, would allow it to have the knowledge needed
for decision-making, to keep particularly sensitive areas in-house,
and to accommodate international collaborative research programmes.[52]
It considers that the division between Retained-DERA and New-DERA
would ensure that both have the capabilities and staff to meet
stakeholder requirements, assure continuing viable businesses,
and a large enough critical mass to be successful in providing
a career path to attract and develop employees.[53]
These are amongst the issues we explore in the sections below,
which examine the implications of the new proposals.
Adjusting to a new research environment
12. In our Defence Research report we explained how
the MoD does not see DERA, as currently configured within the
public sector, as being sufficiently flexible to be able to keep
abreast of a changing research and technology environment. The
MoD considers that DERA needs to adapt to reflect the increasingly
global nature of the market for exploiting technology, and the
increasingly dominant lead that some civil sector technologies
have in the defence arena. It wanted to bring a commercial environment
to DERA, to allow it better to raise the capital and to attract
the staff it would need to deal with those challenges, at a time
of reducing budgets. In its response to our report, the MoD asserted
that
Funding constraints are not the driving need for
a public-private partnership arrangement. The main driver is to
structure DERA so that it is best able to provide access to the
full range of technologies needed to support defence, against
the background of evolving international research and defence
procurement environments.[54]
DERA's key challenge in the future relates to the
changing face of the MOD's research programme which is DERA's
core business. The complexity of fast-moving emerging technologies
means that the modernisation of DERA must continue, to enable
it to be more agile and competitive in this new environment and
to enable it to reach out and do business with industries who
are world leaders in these technology areas. The MoD is also concerned
to structure DERA to address the challenges presented by greater
globalisation of defence and the defence industry. [55]
13. Such forces of globalisation mean that the MoD
might wish to turn to a wider range of sources for its knowledge
and research, and at the same time to take its own knowledge into
civil markets. The need for greater exploitation of DERA's intellectual
property is one of the key arguments that the MoD has consistently
used to justify the requirement for a public-private partnership.
It revolves around the question of the funding required for opening
up opportunities to exploit developing technologiesmoney
which the MoD is increasingly unwilling to dedicate to this area.
The MoD has consistently maintained that it is constrained by
its research budgets, and in our current inquiry the Minister
told us that the status quo for DERA was not an option because
... the need for research and technology funding
is on an exponentially rising curve ... It is very important to
introduce the opportunity for private capital into DERA so that
DERA can meet its investment needs, and that it should thereby
be able to accelerate the way in which it can co-operate with
the private sector ...I do not think it is possible just to keep
going back to the Treasury and asking for more money over these
issues, because I do not believe that the sums of money that the
Treasury would supplyeven if it were minded so to do
would be sufficient for the needs.[56]
We should remember, however, that if the need for
research funding is rising exponentiallyan assertion questioned
by the Defence Manufacturers Association[57]this
has not prevented the MoD allowing the supply of such funds to
fall (albeit only arithmetically) over the last few years. The
DMA expressed their continuing disappointment about the adequacy
of the rationale for the public-private partnership put forward
by the MoD, and the 'shameful' way research funding has fallen.[58]
14. The Minister also stressed the increasing importance
of exploiting civil sector research for defence purposes
The civil sector is increasingly investing in areas
of technology which are also relevant to defence, and we need
to find new ways to take advantage of this. At the same time,
DERA's core funding from the Ministry of Defence has declined
significantly over the last ten years. I stress that is not because
we do not value DERA's productswe dobut it is largely
because our procurement process is geared to buying whole systems
from industry. The way to respond to these changes is not simply
to argue for more money. The answer is to allow DERA to exploit
more widely its treasure trove of knowledge and ... ideas.[59]
Ever since the MoD's original intention to explore
a 'part privatisation' of DERA emerged in 1998,[60]
the MoD has sought to present a declining MoD budget for defence
research as an immovable constraint making the search for external
finance seem the only option available. As we commented in our
Defence Research report, 'it is disingenuous for the MoD to suggest
that funding constraints are driving the need for a public-private
partnership, as though this is a factor beyond its control'.[61]
15. Against such a background, in seeking to exploit
DERA's intellectual property the MoD envisaged that a private
sector DERA would be better able to reward and retain key staff,
and to raise capital. The latest consultation document picks up
the theme of the previous proposals, that a public-private partnership
would offer opportunities for more flexible rewards for staff
Ministers are keen to explore at an early stage options
for involving all those DERA staff who transfer to the private
sector in the public-private partnership, through an employee
partnership scheme, so that they may share in the future success
of the business and are rewarded for their part in the progress
the company makes towards achieving a successful public-private
partnership.[62]...
The advantages of the public-private partnership solution include
the opportunity to maintain a higher level of employment and the
potential for more flexible and appropriate market-oriented reward
systems, as well as expanding the opportunity for personal development.[63]
16. When we considered the 'Reliance' model last
year,[64]
we noted that DERA staff could be properly rewarded and motivated
without DERA being privatised. We have no reason to change that
assessment in the light of the more modest proposals for partial
privatisation now being put forward. The terms and conditions
of Retained-DERA's staff must be protected. However, an additional
problem with the new proposals is that there would initially also
be 'a high degree of collocation, with staff from both New-DERA
and Retained-DERA being present on most sites',[65]
and there is, it seems to us, an inevitable and demoralising problem
when one organisation's (perhaps more-secure) staff will have
to rub shoulders daily with those of the other body who could
rapidly become better rewarded and resourced. As
we discuss later in this report, with DERA, more than with most
organisations facing privatisation, it is difficult to assess
the likely value of the company when it is a fully listed plc.
Indeed the multi-stage method proposed for the privatisation
implicitly reflects this. We believe that the financial structure
of New-DERA should be arranged so that its executives do not benefit
disproportionately from any appreciation in the value of New-DERA
shares arising from property sales or other windfall profits.
17. In similar vein, it would appear that New-DERA's
ability to attract private-sector capital under the Core Competence
model would be similar to that of the privatised elements of DERA
under the Reliance approach. Again, when we evaluated the Reliance
approach last year we considered that attention might better be
directed at adjusting Treasury rules to give DERA greater financial
freedom, before turning to a public-private partnership.[66]
The new public-private partnership proposals repeat the MoD's
requirement for sufficient private sector involvement in DERA
for it to raise capital to exploit its intellectual property,
and to introduce more flexible rewards for its staff. As the Core
Competence proposals do not change those underlying assumptions,
we remain unconvinced about the justification for a public-private
partnership
18. The Core Competence model, and the greater detail
recently emerging about the way a public-private partnership would
operate, suggest thatlike the Reliance model before itit
will have implications for the MoD's relationship with industry
and its collaborative partners and for its 'intelligent customer'
capability, which we now explore.
Implications for industry
19. New-DERA's activities will have implications
for industry as it seeks to exploit its intellectual property.
In its response to our defence research report, however, the MoD
also saw a public-private partnership as an opportunity to balance
DERA's excursion into civil markets with giving others greater
access to areas of research that had previously been DERA's preserve
DERA has a considerable technological and knowledge
'product' but channels to markets to exploit this fully are thin
in all but a few core areas. In addition, there is a perception
that DERA enjoys a privileged position in its core market and
in its access to Government funds and that it is competing alongside
industry in what is seen as a protected position. The increased
use of competition in the research programme and other work from
the MoD, necessary to ensure that the MoD is getting best value
and ideas, will do much to improve this issue, but it would be
unfair not to allow DERA to be exposed to potential attrition
in its key market without at the same time allowing it to find
work in other markets.[67]
20. Arming New-DERA in this way exposes again the
defence industry's long held concerns about DERA using intellectual
property to which industry may have contributed, and about DERA
competing for MoD research work which industry has sometimes seen
as falling naturally within its own domain.[68]
The consultation document is coolly confident, however, about
the public-private partnership being able to satisfy industry's
specific concerns in these areas
The UK defence industry expressed a clear wish that
its intellectual property would continue to be fully protected
and that it could have confidence that MoD procurement decisions
were underpinned by impartial scientific advice and analysis.
The retention of key advice-integration activities within the
MoD should largely meet these concerns, and a contractual framework
would ensure that New-DERA can only use third-party intellectual
property for the purpose for which it was supplied. The separation
between private and public elements would introduce a new clarity
to the relationship between the MoD and New-DERA, levelling the
playing field and placing New-DERA on the same footing as the
rest of industry in competitions for technical support, advice,
and research provision.[69]
21. As regards the exploitation of intellectual property,
DERA's chief executive told us that
Generally speaking the rubric is that the intellectual
property belongs to the company with whom we are working and we
retain the rights to use that intellectual property for Crown
purposes, for MoD purposes ... The intellectual property that
DERA owns at the moment is principally not the intellectual property
which has come to DERA from industry because ... that still belongs
to industry and can only be used for government purposes. The
intellectual property which has come from the scientists in the
laboratory out of their own heads is currently owned by DERA ...
Without the exploitation of that intellectual property [DERA]
has no value at all.[70]
Nevertheless, industry continues to seek assurances
about the way intellectual property will be handled under the
Core Competence model, as it did under the Reliance proposals
before it.[71]
The US Department of Defense also had concerns about this issue,
which we explore at paragraph 43.
22. The latest consultation document states that
New-DERA, as in the privatised DERA of the Reliance model, would
not be permitted to engage in defence 'manufacturing'.[72]
Sub-contracted manufacturing work for defence manufacturers would
be subject to prior MoD approval.[73]
'Manufacturing' is an imprecise term, however, with prime contractors
for defence equipment projects increasingly acting as 'systems
integrators' pulling together and coordinating the output of other
firms who undertake the physical manufacture of an equipment's
different systems. On this issue, DERA's chief executive was careful
to leave the way open for New-DERA to undertake this form of 'manufacturing',[74]
and Mr Jagger told us that he envisaged that the MoD would "clearly
want DERA to do ... some systems integration, because that is
an important role it performs for [the MoD] ... at the moment.
But there are clearly areas where industry is concerned about
that".[75]
Our subsequent written questions to the Department did not provide
much clarification of the MoD's intentions, with apparently potentially
contradictory statements that, on the one hand
New-DERA would not, without the express permission
of the 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.
And on the other hand
Unless there was a clear conflict of interest, New-DERA
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 New-DERA can influence the design of new defence
systems.[76]
23. The Defence Industries Council told us that the
question of what manufacturing New-DERA would be permitted to
do 'lies at the heart of whether the defence industry will be
able to form a trusting relationship with New-DERA, that is essential
for this new arrangement to achieve wealth creating benefits for
the UK'.[77]
New-DERA's potential involvement in 'defence manufacturing'
needs to be clarified by the MoD if it is to go ahead with a public-private
partnership. However, we regard this problem principally as yet
another example of the unnecessary entanglements that this ill-conceived
proposal brings in its train.
24. During last year's inquiry, some in industry
argued that if a public-private partnership were to proceed then
DERA should be made to stand on its own two feet, without favourable
treatment or feather-bedding from the MoD. When in this latest
inquiry we asked the MoD if New-DERA would have to fend for itself
immediately after it were set up, Mr Jagger told us that
It would also be very bad for our attempts to get
value for money if we were to try to float DERA with no continuing
work programme, no order-book in effect. So we would envisage
a tapered approach where the amount of competition is gradually
increased over a small number of years. I do not know, but to
give you an idea, five or seven years, after which substantially
all of [the MoD's work] might be competed ... It is an absolute
total commitment by us that all competitions will be on a level
playing field. That is an assurance we have given to industry,
and would expect to be held very strictly to it.[78]
25. Mr Jagger also drew our attention to the practical
difficulty of switching on day-one to competing all of the MoD's
research programme, most of which is currently allocated to DERA.
Contract writing, he told us, was a complex and difficult process,
involving specifying a research requirement and looking at how
the MoD would pay for it in a structured way.[79]
By the same token, it is perhaps surprising is that the Department
considers that it will be able to write contracts with New-DERA,
for the MoD work it will do from day-one, of sufficient rigour
to deal with a commercially-minded private-sector DERA. The Core
Competence model also implies that existing day-to-day informal
working relationships within DERA will have to be put on a contractual
footing, which may well serve to obstruct or delay such interfaces.[80]
This inconsistency highlights the essential contradiction in
the MoD's approach to the public-private partnership. It apparently
seeks to launch a private sector commercially-motivated organisation
to exploit its capabilities aggressively, but at the same time
the Department also seeks to maintain the cosy and trusted relationship
it currently has with DERA. The MoD appears to be trying to have
it both ways, particularly in the eyes of DERA's other stakeholders.
26. In regard to industry's role under the public-private
partnership, there is also a more fundamental issue about the
extent to which the private sector might be willing to undertake
all aspects of the MoD's current research programme. The Defence
Industries Council highlighted a concern that even with fair competition
there were areas of research in which industry would not wish
to be involved
We do remain very concerned that Government appears
to be relying on the private sector to replace public funding
of defence research and technology to an extent which is frankly
unrealistic. Industry is bound to have to focus on near-to-market
technology investment, where a clearer return is visible. Government
cannot avoid taking responsibility for the longer term work if
we are to sustain an adequate level of modern defence capability
delivered through a smart procurement process.[81]
45 MoD
Consultation Document, op cit, para 6 Back
46 Ev
p 26, para 9 Back
47 MoD
Consultation Document, op cit, para 12. The MoD notified
the Committee of the number of staff likely to be involved, but
this information is classified Back
48 Ev
p 26, para 9 Back
49 ibid Back
50 ibid Back
51 MoD
Consultation Document, op cit, para 12 Back
52 MoD
Consultation Document, op cit, para 6 Back
53 MoD
Consultation Document, op cit, paras 13-14 Back
54 HC
(1999-2000) 223, para 59 Back
55 ibid,
para 55 Back
56 Q 6 Back
57 Ev
pp 35, 36 Back
58 ibid Back
59 Q 1 Back
60 There
were rumours of a 'part-privatisation' of DERA in 1998, on which
the Committee reported in its Sixth Report of Session 1997-98
(HC 621), which were subsequently announced as public-private
partnership proposals in the Strategic Defence Review published
in July 1998 Back
61 Ninth
Report, Session 1998-99, op cit, para 59 Back
62 MoD
Consultation Document, op cit,, para 28 Back
63 MoD
Consultation Document, op cit, para 29 Back
64 Ninth
Report, Session 1998-99, op cit Back
65 Ev
p 27, para 12 Back
66 Ninth
Report, Session 1998-99, op cit, para 79 Back
67 HC
(1999-2000) 223, para 55 Back
68 See
eg evidence from the Defence Manufacturers Association (Ev pp
35, 36) Back
69 MoD
Consultation Document, op cit, para 34 Back
70 QQ
90-93 Back
71 Ev
p 35 Back
72 MoD
Consultation Document, op cit, para 23 Back
73 ibid Back
74 Q 110 Back
75 Q 111 Back
76 Ev
p 32, para 33 Back
77 Ev
p 35 Back
78 QQ
113, 115 Back
79 Q 114 Back
80 Ev
p 37, para 2.5 Back
81 Ev
p 35 Back
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