Select Committee on Defence Ninth Report

The Defence Diversification Agency

27. The privatisation of DERA will have important ramifications for the Defence Diversification Agency. It began operating at the start of 1999 with an operating budget of £2 million a year. It is charged with providing industry with knowledge of what military technology is available in DERA, encouraging access to DERA's laboratories, stimulating the transfer of the MoD's intellectual property and creating partnerships with companies for its co-development.[82] These are laudable aims, which we promoted in our Defence Research report.[83]

28. In that report, however, we sounded a warning that a private-sector DERA 'would have little incentive to promote actively the Defence Diversification Agency's agenda of technology transfer to the civil sector,'[84] and it would have vested commercial interests that would hinder its efforts to engage a wider range of potential developers of technology. On the other hand, a stand-alone Defence Diversification Agency, outside DERA, could lack the necessary clout to achieve its objectives.[85] In its response to our report, the Department highlighted the interim nature of the Defence Diversification Agency's position within DERA[86] and informed us that the work then underway to develop the public-private partnership was addressing how defence diversification would be supported.[87]

29. It is surprising, therefore, that the 39 paragraphs of the latest consultation document make no mention of the Defence Diversification Agency. The MoD told us that how the Defence Diversification Agency will interact with the two new DERA organisations was a question which would be addressed in detail 'following' the results of the consultation on the latest public-private partnership proposals,[88] and that options include placing the Agency within New-DERA, Retained-DERA or even elsewhere in the Department.[89] It is clear that the Defence Diversification Agency's future is still far from decided.[90] We have warned before of the poor record of support for defence diversification initiatives and their lack of impact and effectiveness.[91] Nothing in the latest consultation proposals serves to reassure us that this is not the fate that awaits the DDA if the public-private partnership goes ahead.

30. DERA's chief executive highlighted the need for firm action if DERA's knowledge is to be transferred and exploited. "If we rely upon the companies finding time in the vigorous commercial competitive environment in which they operate to go rooting around our labs looking for science", he told us, " we could have the science sat there forever. We have to spend money, we have to spend effort, we have to devote risk capital to taking our science out there into the community."[92] The Defence Diversification Agency was charged with such a pro-active remit and, as the Defence Manufacturers Association pointed out, it has only just begun to exploit DERA's intellectual property.[93] In undertaking such a role, however, it cannot fit comfortably within either of the new DERA organisations that would be set up under the public-private partnership. As the trade unions said, 'New-DERA would have no interest in opening up its laboratories or providing information to its commercial competitors, and Retained-DERA would have no ability to do so'.[94] While the Defence Diversification Agency has a place in the current structure, which needs to be developed and encouraged, under a public-private partnership for DERA its role would be over-shadowed and largely out of place. With a New-DERA aggressively exploiting and diversifying its knowledge, the Defence Diversification Agency could be marginalised.

The MoD's 'intelligent customer' capability

31. The latest consultation document states that under the new public-private partnership proposals—

... a sufficient part of DERA would be retained to enable the MoD to be an intelligent customer for technical advice, support and research. The MoD would increasingly buy competitively from a range of commercial sources, including New-DERA. At the same time, New-DERA would retain enough skills and critical mass to assure the MoD that the capabilities and facilities that it values would continue to be available.'[95]

32. The Minister sought to persuade us that we should "not run away with the idea that all advice given by the private sector is somehow tainted advice. We are still going to be going to [New-DERA] to ask them for advice".[96] The MoD, she believed, would nevertheless have the added safeguard provided by those who will be retained in the public sector for unbiased advice that would not be open to question. [97] The capabilities maintained in Retained-DERA are clearly going to be an important component of the MoD's capacity to be an intelligent customer of New-DERA. The Minister told us that the elements retained in the MoD were intended to provide a high level overview across the whole spectrum of science and technology, and to give impartial advice to the rest of the MoD.[98] Retained-DERA would involve—

... the retention of people right the way across DERA's activities in the public sector who will be able to deal with industry, for example, so that industry will feel that they are getting an impartial hearing when they come to talk about science and technology matters. The Government will be able to have those advising who have no commercial interest at all, and that they will therefore be able to give us advice that would not give rise to questions of conflict of interest.[99]


... [In] retaining these knowledge integrators, we have retained those in the public sector who will give impartial advice. That is very important to our stakeholders.[100]

33. In our report last year, we highlighted the importance of the interchange of scientific staff between DERA and other parts of the MoD in refreshing the scientific grounding of the latter.[101] We warned of the risks that a public-private partnership would disrupt scientific career paths of those retained in the Department, and the likely decline of the MoD's intelligent customer capability.[102] On this issue, the latest consultation document is upbeat—

It is recognised that there were staff concerns over the possible risks involved in the division of DERA envisaged in the Core Competence model. In fact the work done to determine the appropriate division of DERA into private and public elements has ensured that both new organisations would be viable, have a clear vision, and provide a sustainable career for their employees. New-DERA would maintain sufficient of its existing business framework to operate in the private sector as a provider of advice to MoD and other customers, and not just as a contract research organisation.[103]


Careful work has already been done to ensure both organisations will offer attractive career opportunities.[104]

34. In similar vein, our MoD witnesses told us that—

... one of the things we work very hard on is developing in the retained organisation ... a sufficiently broad coverage of activity, and in sufficient depth in each of them, [so] that there is a suitable career path and we can recruit young people who see an exciting future for themselves. 3,000 people and a turnover of £250 million—that is a very large research organisation in its own right . We have a model in which there is a viable career path for the individuals in Retained DERA.[105]


We have... ear­marked an individual who is already starting to take on some responsibilities in this field so that there is ... a champion for Retained-DERA as well. We thought that was very important.[106]

35. The Core Competence model now being put forward envisages a much larger component of DERA being retained within the Department than under the Reliance model, and this does appear to reduce the risks of losing an impartial, scientifically capable, intelligent customer capability. However, several of those who submitted evidence to us expressed their continuing concern about the adequacy of Retained-DERA in providing that capability[107]. The IPMS, which opposes the public-private partnership in principle, pointed out that current work in DERA to define the boundary of the new organisations suggested that the MoD would not be able to retain experts in every field.[108]

36. More generally, we are concerned that an earlier version of the Core Competence model, rejected in favour of the Reliance model in the first consultation exercise, would have provided Retained-DERA with a stronger intelligent customer capability. During our inquiry last year we had ascertained from US DoD officials[109] that in putting forward the Reliance model in the May 1999 consultation exercise the MoD had rejected a 'core competence' approach. We were somewhat surprised, therefore, to see the current MoD preferred option having the same label. We sought from the MoD an explanation of the principal differences between the previous and current versions. The Department told us that the earlier version had some significant weaknesses, particularly regarding the way New-DERA and Retained-DERA would be divided. The original proposition was to fill Retained-DERA posts by taking a 'horizontal slice' of 'knowledge integration' staff, and this would have deprived New-DERA of a capability to pull together the results of scientific programmes.[110] The early model also assumed that all of the Centre for Defence Analysis (CDA) would be put into Retained-DERA, further denuding New-DERA's value-adding analytical capabilities and reducing its attractiveness to potential investors.[111] The new form of Core Competence envisages Retained-DERA's knowledge integration being provided by small teams, each with a range of seniority of staff, and New-DERA would have a minority of CDA staff.[112] While the rebalancing of the dividing line between New-DERA and Retained-DERA appears to make each more logically structured, the net result is a deliberate diminution of the intended capabilities of Retained-DERA, in order to bolster the flotation prospects for New-DERA. This we find a poor omen of the importance the MoD is likely to attach to protecting fully the MoD's 'intelligence customer' safeguards.

37. To underpin the MoD's interests in a more fundamental way, the MoD has sought under the public-private partnership to keep control of vital sensitive areas by including them in the components of DERA that would be retained within the Department. Under the Reliance model, the MoD had envisaged excluding the Chemical and Biological Defence establishments, like Porton Down, from the privatised DERA; a measure which we welcomed.[113] Under the new Core Competence proposals, it appears that further sectors would be retained within the MoD because of their sensitivity, including for example the Defence Radiological Protection Service,[114] which we also welcome. There might also be a case for retaining the Aircraft Test and Evaluation Establishment at Boscombe Down, which acts as a technical arm of the Defence Procurement Agency to evaluate the airworthiness of new aircraft.[115] The consultation document states that all of the capabilities of the Centre for Defence Analysis will be in Retained-DERA, but the trade unions have learnt that some of its sections may be subsumed within New-DERA. If the Centre for Defence Analysis is to be so diluted, it is clearly important that at least those parts that provide urgent support to commanders during operations—the so-called 'front-line CDA'—fall on the public sector side of the fence.[116] In diluting the capabilities of DERA's technical libraries and databases that lie outside of the Defence Research Information Centre,[117] there are also risks for the future safe custody of sensitive information[118] provided to Retained-DERA by industry or other defence departments.[119]

The implications for collaborative research

38. One of our key anxieties about a public-private partnership for DERA had been the potentially adverse impact it would have on international research collaborations, particularly with the USA. In our defence research report we spelt out the strong reservations of the Department of Defense and other US agencies about the Reliance model. We noted that the DoD had not been persuaded that the organisation envisaged could reconcile the conflicting perspectives that a privatised DERA would have—as both an agent working for the benefit of the government and an enterprise serving private-sector interests.[120] We also noted American concerns about how controls over US-originated classified information would be handled, and how the US authorities could deal with a privatised DERA where this would mean giving it more favourable access to information than other (US) private enterprises.[121] We concluded in our report that—

... the consent of the US to changes to DERA's ownership ... will be of paramount importance. US concerns must be properly addressed in reaching any decision on DERA's future structure. If the public-private partnership goes ahead, the MoD may be excluded from US technology developments, and may not even know it. Despite any public assurances about the US's continued co-operation, and even if the fruits of existing collaborations continue to be gathered, the prospect of the US having to deal with a private sector DERA puts at risk further collaboration. Without clear and genuine acceptance by the US, the public-private partnership must not proceed.[122]

39. In the latest consultation document the MoD has 'acknowledged the concerns of [its international] partners that, under the Reliance model, government-to-government exchanges of information would have been more difficult.'[123] The Minister told us that 'it became increasingly clear over the period of consultation that the United States were not happy'.[124] Consultation with stakeholders had highlighted that under the Reliance model 'the special relationship between the company and the MoD might have created a risk that privileged government-only information would pass between the two organisations and would not be adequately protected.'[125] Indeed, Lord Gilbert, the former Minister for Defence Procurement who gave evidence to us during our earlier inquiries into DERA, recently commented on—

... the importance to this country of the intimate and long-standing relations at the cutting edge of defence research that exists between this country and our friends in the United States. ... If anything were to put those matters at risk, it would be deplorable and would have serious long-term consequences for our own defence capability.[126]

40. The MoD believes, however, that the current Core Competence proposal, which retains a top layer of international research collaboration staff within government, 'addresses these concerns'.[127] The Minister told us that "international partners will be able to do business with [Retained-DERA]"[128] when looking at commercial activities and when seeking the impartial advice that facilitates government-to-government business, and she believed that—

... what we are now proposing meets the concerns of those who felt that some of DERA's activities were simply too sensitive for the private sector.[129]

41. The MoD listed for us the meetings that Ministers and other officials have had with their US counterparts in recent months, following the collapse of the Reliance model. In those discussions, the DoD had been presented with the MoD's Public Sector Option and Core Competence models as alternatives, and had preferred the latter approach.[130] The Minister explained that the DoD had found the Public Sector Option difficult both because they were unhappy about the way in which it would work commercially, and how their own companies would operate with the privatised DERA.[131] DERA's chief executive saw the public-private partnership as putting the UK on a similar footing to the US,[132] and was sanguine about future US collaboration.[133]

42. However, we found last year that when discussing US perspectives directly with the Department of Defense we were able to obtain a rather different undercoat to the MoD's gloss. Accordingly, last month one of our number renewed contact with DoD staff .[134] The Committee had met them on its visit to Washington last October, and heard first-hand their perspectives of the way the MoD consultation exercise had progressed. We were told that the DoD, not surprisingly given their earlier preference for a Core Competence approach (paragraph 6), are less concerned with the thrust of the MoD's latest proposals but that they will have to examine the detail before giving their final verdict, which may yet take many months.

43. We learned, however, that at this stage the US' main concerns are about Retained-DERA having the right teams and individuals to enable future worthwhile collaborations, and that they were uncertain about how Retained-DERA would be able to provide sufficiently stimulating work to attract and retain these people. As for the floated-off New-DERA, US officials told us that the DoD would deal with it in the same way as it dealt with other private firms, but that even working on that less-open basis might become more difficult if the company were seen to be too close to the MoD and, in particular, if it were to be involved in influencing the selection of the MoD's suppliers of research and equipment. More significantly, the DoD officials were assuming that DERA's existing intellectual property rights would be vested in Retained-DERA. If, as the MoD currently envisage, intellectual property is placed in New-DERA (without it, New-DERA would have little value), the DoD's more conciliatory approach to the new proposals may be quickly undone. US approval of the public-private partnership, which in our earlier report we called for as a precondition for proceeding with it, is far from certain.

44. DoD staff also told us that despite any commitments, made in good faith, to maintain international research collaborations with the MoD under the Core Competence structure, the uncertainty of DERA's position in the earlier consultation exercise had left a prevailing impression at lower levels that greater caution might be warranted before sharing knowledge and ideas with DERA laboratories. The Institution of Professionals, Managers and Specialists (IPMS) similarly indicated to us that they believed that collaborations at working level were already suffering,[135] and they were also worried that particularly sensitive US 'black' research contracted to DERA laboratories could be terminated.[136]

45. It may not be sufficient simply to identify staff in Retained-DERA to liaise with other defence departments and agree on collaborative programmes. The research shared in collaborative work takes place at relatively low levels,[137] and can involve drawing on knowledge widely scattered across the organisation—much of which will be placed in New-DERA. It also often stems from less formal links between staff involved in previous collaborations spotting the opportunities for further useful partnership.[138] We have doubts about the practicality of being able clearly to identify personnel who would need to be kept in Retained-DERA in order to facilitate international collaborations. Effective collaboration depends on the scientists involved in the research having relationships of trust with their opposite numbers, and that trust will be much more difficult to maintain if the scientists in question are in the private sector.

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82  White Paper: Defence Diversification: Getting the most out of defence technology. Proposals for a Defence Diversification Agency, Cm 4088, para 16 Back

83  Ninth Report, Session 1998-99, op cit, para 70 Back

84  ibid Back

85  ibid Back

86  HC (1999-2000) 223, para 70 Back

87  ibid Back

88  Ev p 28, para 31 (our italics) Back

89  Ev p 31, para 23 Back

90  Q 105 Back

91  Ninth Report, Session 1998-99, op cit, para 69 Back

92  Q 108 Back

93  Ev p 36 Back

94  Ev p 40, para 6.2 Back

95  MoD Consultation Document, op cit, para 35 Back

96  Q 41 Back

97  ibid Back

98  Q 1 Back

99  Q 22 Back

100  Q 43 Back

101  Ninth Report, Session 1998-99, op cit, para 94 Back

102  ibid Back

103  MoD Consultation Document, op cit, para 30 Back

104  ibid, para 31 Back

105  Q 126 Back

106  ibid Back

107  Ev p 37, paras 2.1, 2.5;Ev p 34, para 3 Back

108  Ev p 37, para 2.1 Back

109  Whom we met during our visit to Washington in October 1999 Back

110  Ev p 29, para 7 Back

111  ibid Back

112  Ev p 30, para 9 Back

113  Ninth Report, Session 1998-99, op cit, para 120 Back

114  Ev p 26, para 9 Back

115  Ev p 39, para 4.2; Ev p 42 Back

116  Ev p 37, para 2.6 Back

117  Ev p 37, para 2.7 Back

118  And more generally, the division of DERA between the two new organisations will have implications-not addressed in the consultation document-for the policing and guarding of DERA sites Back

119  Ev p 37, para 2.7 Back

120  Ninth Report, Session 1998-99, op cit, para 98 Back

121  Ninth Report, Session 1998-99, op cit, para 99 Back

122  Ninth Report, Session 1998-99, op cit, para 102 Back

123  MoD Consultation Document, op cit, para 33 Back

124  Q 45 Back

125  Ev p 25, para 5 Back

126  HL Deb, 12 May 2000, c 1844 Back

127  MoD Consultation Document, op cit, para 33 Back

128  Q 22 Back

129  Q 1 Back

130  QQ 45, 46, 49 Back

131  Q 47 Back

132  Q 50 Back

133  Q 52 Back

134  A member of the Committee was in Washington as part of a joint quadripartite committee visit to Washington to discuss defence export controls, during which time he was able to meet DoD officials as a representative of the Defence Committee Back

135  Ev p 38, para 3.2 Back

136  Ev p 39, para 3.4 Back

137  Ev pp 48, 49, paras 2,7 Back

138  Ev p 34, para 4 Back

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Prepared 20 June 2000