MEMORANDUM FROM BY THE MINISTRY OF DEFENCE
RESPONDING TO QUESTIONS FROM THE HOUSE OF COMMONS DEFENCE COMMITTEE
ON 20 APRIL 2000
1. Question: The document highlights a "Core
Competence" and "Public Sector Option" models to
replace the previously envisaged "Reliance" approach.
What other models were proposed by those involved in the previous
consultation exercise, or were otherwise raised within the MoD,
and on what grounds were such alternative approaches not taken
forward into the current consultation exercise?
2. The current "Core Competence"
and "Public Sector Option" models have evolved as a
result of detailed work carried out since consultation and have
been successively refined to try and address the issues raised.
The consultation document describes the versions of these models
identified as offering the greatest potential benefits. During
the study a number of additional concepts for the future of DERA
were considered. Five possible models, including Core Competence
and Public Sector Option, were considered in detail. The three
models described below were rejected, as it was apparent after
further analysis that they would fail to meet significant PPP
objectives.
— Variety Pack. 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. A number of areas would have been retained within
MoD for strategic reasons. Those elements to be sold would have
been too small to float as independent companies and it was likely
that most of the interest would have come from existing defence
contractors. This would have created a significant potential conflict
of interest. Although the approach would have seen some degree
of technology transfer and would have raised a receipt, it would
destroy much of the synergy within DERA and would not provide
the wider benefit to the UK economy specified in the PPP objectives.
The limited numbers of potential buyers for individual pieces
of DERA made it unlikely that this approach would offer good value
for money. Breaking up DERA in this way was also likely to impact
on the overall level of service to customers. The costs of restructuring,
redundancies and site closures under this option could have been
significant.
— FFRDC. An option based on the US
concept of Federally Funded Research and Development Centres.
An FFRDC is a privately operated organisation contracted to a
sponsoring government department to provide a specific long term
research or development product, which is otherwise unobtainable
from other federal or private organisations. They may not seek
or compete for work with the private sector, their work often
being awarded to them on a sole source basis from their sponsor.
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.
— Employee PPP (e.PPP) Retention of
DERA as a single entity in the public sector, but with a change
in status. The approach proposed would have created a PLC with
a substantial proportion of the shares allocated to staff. The
employee share scheme would have been complex to establish and
raised a number of financial, legal and administrative issues.
An e.PPP would not have added significantly to operational, employment
practices, pay or funding freedoms that DERA currently operates
with as a trading fund. The proposal to establish a share scheme
might be perceived as signalling a longer-term aim to move to
privatisation, which was likely to be a concern for some stakeholders.
3. Additional work was also carried out
to re-examine whether the existing DERA trading fund structure
was capable of addressing the challenges likely to be faced by
DERA and to meet the other wider PPP objectives. This concluded
that without the capital and the freedoms offered by the PPP,
DERA will decline as a force in science and technology over the
longer term. The Government believes this would not be in the
best interests of the Nation's future security or the taxpayer.
The PPP also offers an opportunity to harness the UK taxpayer's
substantial investment in technology within DERA to the benefit
of the UK economy as a whole and give British industry, both defence
and non-defence, a real competitive edge in the increasingly global
market place.
4. Question: In the MoD's view, what were
the specific potential weaknesses in the Reliance model that the
Core Competence approach will avoid, and in what practical ways
will the Core Competence model avoid the potential shortcomings?
5. The Reliance option would have transferred
most of the current DERA into the private sector to form a new
type of company which had a special relationship with MoD. Staff
would not have been civil servants and would be working in an
organisation that had obligations to external shareholders. The
proposal envisaged an onerous compliance regime, which combined
with the organisation's special status, would ensure that MoD
and stakeholders could place full trust in the new company. Only
a small number of staff would be retained within MoD. The maintenance
of collaborative science and technology relationships between
MoD, international allies and industry is a major PPP objective
and consultation with stakeholders on Reliance identified a number
of potential risks to such programmes. Two key areas of concern
were highlighted. Firstly, that the duty of staff to external
shareholders would create a potential conflict of interest within
an organisation that included many sensitive areas of defence
technology or that provided advice in areas where impartiality
was of overriding importance. Secondly, that the special relationship
between the company and MoD might create a risk that privileged
government-only information would pass between the two organisations
and would not be adequately protected. As described in the current
consultation document, the Core Competence model would address
these concerns by retaining the most sensitive areas of work wholly
within MOD and by providing a clear separation between the two
newly created organisations.
6. Question: Since the extension of the consultation
exercise was announced by Ministers on 26 October 1999, what discussions
have MoD officials and Ministers had with the US Administration,
DoD and other US authorities about the public-private partnership?
7. Discussions at Ministerial level are
recorded below. Senior officials have held numerous detailed discussions
with their US counterparts, many of these have taken place as
part of meetings or visits which have been primarily focused on
other topics. Consequently, it is not practicable to keep records
of all such discussions. However, discussions on PPP have involved
the following senior MoD officials: the Principal Finance Officer;
the Chief Scientific Advisor; the Deputy Under Secretary for Science
and Technology; the Deputy Chief of the Defence Staff for Equipment
Capability; the Chief of Defence Procurement and the Chief Executive
of the DERA. The DERA Partnering Team has had extensive and continuing
discussions with Dr Craig Dorman and his colleagues (appointed
by the DoD as a focal point for PPP).
8. In addition, the following Ministerial
meetings have taken place since 26 October 1999:
— Secretary of State for Defence, the
Right Honourable Geoff Hoon, met with the Hon John Hamre, the
Deputy Secretary of State for Defence on 27-28 January 2000.
— Minister for Defence Procurement,
Baroness Symons, has met with the following US representatives
to discuss the DERA public private partnership proposals:
— Dr C Dorman, the Chief Scientist
of the Office of Naval Research (ONR) and representatives of the
US intelligence community, on 22 November 1999, in London.
— Hon John Hamre, the Deputy Secretary
for Defence in Washington on 29 February 2000, and then again
in London on 22 March 2000.
— Baroness Symons has also had telephone
conversations with John Hamre, and David Oliver, the Principle
Deputy Under Secretary of Defence Acquisition and Technology,
on this subject.
9. Question: What parts of DERA does the
MoD anticipate being retained within the Department under the
Core Competence model, and what numbers of staff would be involved
in each of these DERA organisations?
The Core Competence model envisages that MoD
is likely to retain the following elements of the current DERA
organisation:
— Chemical and Biological Defence (CBD)
Sector (720 personnel[1])***
— Defence Research Information Centre
(DRIC) (50 personnel1)
— Defence Radiological Protection Service
(DRPS) (90 personnel[2])
— All of the capabilities and the majority
of the staff for the Centre for Defence Analysis (CDA)
— Sufficient staff to provide a high
level overview across the whole spectrum of science and technology
currently addressed by DERA, ensuring the provision of impartial
advice and systems research capability (work is currently underway
to identify the number of personnel to be extracted into RDERA[3])
10. Question: In which activity areas of
the current DERA, and in which sites, will there have to be divisions
of staff and facilities between New DERA and Retained DERA?
11. The detailed identification of staff
within the current DERA organisation who would be extracted into
Retained DERA has yet to be completed. However, it is clear that,
for MoD to retain an ability to provide a high level overview
across the whole spectrum of science and technology currently
addressed by DERA, where functional groups are not transferring
wholly into the public-sector organisation, a subset of the technical
staff would be retained. Currently, only CBD, ***, DRIC and DRPS
are to be retained in their entirety.
12. The impact this division of staff would
have on geographical location is currently being examined and
is clearly dependent on the outcome of the detailed analysis of
which staff are to be transferred to the retained organisation.
Initially, there would be a high degree of collocation, with staff
from both New and Retained DERA being present on most sites, although
established separately.
13. Question: What measures will there be
to protect the terms and conditions of staff assigned to NewDERA,
and what choice will staff have about which of the "New"
or "Retained" organisations they will join?
14. Core Competence will be structured in
such a way as to ensure that the Transfer of Undertakings (Protection
of Employment) Regulations (TUPE) would apply so safeguarding
the existing terms and conditions of employment for those members
of staff transferring to NewDERA. The terms of the revised pension
arrangements for transferring staff will be broadly comparable
to those of the Principal Civil Service Pension Scheme (PCSPS)
and will be certified by the Government Actuary's Department.
15. NewDERA and RDERA must be viable organisations
with the correct blend of capabilities, a clear vision and a sustainable
career path for their respective employees. MoD will continue
to take full account of the views of DERA staff and Trades Unions
and will aim to accommodate individual preferences wherever possible.
16. Question: What restrictions—qualitative
and quantitative—does the MoD envisage on the potential
foreign ownership and individual ownership of NewDERA?
17. As a very significant supplier of science
and technology to MoD for the foreseeable future the provision
of high quality, impartial and high integrity advice would remain
at the core of NewDERA's business and the company would therefore
have a strong commercial incentive to protect its independence
and integrity through internal processes, values and culture.
A compliance framework would be required in order to provide additional
assurance that the company can continue to supply appropriate
services. This would include the retention of a Special Share
which would allow shareholding restrictions to be placed on NewDERA
through the Article of Association. This might possibly include
a restriction on foreign ownership and a maximum limit on individual
shareholdings, although this has yet to be decided and will be
the subject of further detailed work.
18. Question: What are the main DERA sites
and facilities? Which of these will be designated as "strategic
assets" under the terms of the current proposals? What measures
will be put in place to protect such assets, what restrictions
will be placed on their disposal, and what financial clawback
arrangements will be used in the event of such disposals?
19. The following sites currently have 250
or more DERA staff: Aberporth, Boscombe Down, Bedford, Chertsey,
Fort Halstead, Farnborough, Malvern, Portsdown West, Porton Down,
Pyestock, Winfrith.
20. The following existing facilities within
DERA currently receive special attention as strategic assets:
***
MSS Sector Bedford High Speed Wind Tunnels
***
Test & Evaluation Ranges (Land) Shoeburyness
Demil
***
21. NewDERA would retain the majority of
DERA's existing capabilities and assets, although detailed work
is ongoing to determine the precise make-up. As a part of the
compliance framework MoD would retain the right, through a Special
Share, to revert certain named strategic assets to public ownership
under exceptional circumstances, which might include the company's
insolvency. The final list of designated strategic assets has
yet to be determined as a part of the detailed structuring of
the PPP.
22. Question: What evidence can you provide
that industry have accepted the safeguards concerning the exploitation
of Intellectual Property Rights that are envisaged under the Core
Competence approach?
23. MoD has and will continue to actively
consult with industry through organisations such as the National
Defence Industry Council (NDIC) and the Association of Independent
Research and Technology Organisations (AIRTO).
24. Throughout, industry has expressed a
clear wish that the PPP approach to be adopted should continue
to fully protect its intellectual property and provide confidence
that MoD procurement decisions are underpinned by impartial scientific
advice and analysis. The retention of key advice-integration activities
within MoD, in addition to a robust contractual framework that
would ensure that NewDERA could only use intellectual property
for the purpose for which it was supplied, should largely meet
these concerns.
On 9 March 2000 the Chairman of the DIC, Sir
Ralph Robins, wrote to the Minister of State for Defence Procurement
underlining discussions at the preceding NDIC where industry broadly
welcomed the Core Competence model and indicated a willingness
to work closely alongside MoD to address any issues of concern
that may arise during implementation. [4]
25. Question: How does the MoD envisage the
incorporation and flotation of NewDERA being managed and to what
approximate timescales? What role is seen for "strategic
financial investors" before any flotation, including whether
they would provide advice or take up shares in NewDERA (and if
so, in what proportion)?
26. Subject to the outcome of consultation,
the process would be managed as follows. DERA would be restructured
to separate out information relating to the retained elements
from those activities which would form the NewDERA company, followed
by a separation of management and staff to allow the two organisations
to operate in shadow form. It would then be possible to incorporate
NewDERA as a plc within the public sector. This would be a transitional
phase prior to flotation, which might take place in 2001. The
decision on whether to seek a strategic financial investor will
depend on progress following the operational separation of the
organisations. Such an investor could introduce additional commercial
disciplines and provide assistance in preparing for the flotation.
The investor would take up shares in the NewDERA plc, but no decision
has yet been taken on the size of the stake that would be offered.
27. Question: Why have you proposed a two
stage approach, rather than a simultaneous or near-simultaneous
incorporation and flotation? What are the advantages of a flotation
as compared to one or more private treaty sales?
28. As identified in the Consultation Document,
the preferred route would be a flotation which would potentially
allow NewDERA to be established as an independent science and
technology company. Although NewDERA would retain the majority
of DERA's core capabilities and would therefore continue under
its current business model, it will not have a track record of
operating in its new form. The two-stage approach is helpful in
demonstrating its effectiveness as an organisation to investors
prior to flotation. The development of the NewDERA organisation
will be kept under review, and the option to sell a proportion
of the company to a strategic financial investor as part of the
flotation process has been kept open. The requirement to do this
would be dependent on a number of factors, not least the state
of the market and its view of technology stocks at the time. Such
a sale would allow a period of consolidation and growth prior
to a future offering on the stock market.
29. A private sale is a less attractive
option, as the most likely bidders would be defence contractors
or related companies, creating a potential conflict of interest
within an organisation which, although not containing the most
sensitive areas of technologies, includes many capabilities of
significant importance to MoD. Depending on the strength of the
investment case that can be developed for NewDERA it is also probable
that a flotation would offer better value to the taxpayer than
a private sale.
30. Question: How will the Defence Diversification
Agency fit into the proposed new arrangements?
31. A major objective for the PPP has been
to encourage links between civil and defence technology and to
unlock the technology that currently exists within DERA. This
aligns closely with the aims set for the Defence Diversification
Agency, which is part of the current DERA. No final decision has
been taken on how the DDA will interact with the two new organisations
and this issue will be addressed in detail following the results
of consultation.
1 Approximate figures based on the current establishment. Back
2 Approximate figure based on a proportion of the current establishment. Back
3 Although exact numbers of personnel for each Retained DERA element
have still to be identified, the retained organisation will have
fewer than 3,000 staff. Back
4 p 35. Back
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