Examination of witnesses (Questions 40
WEDNESDAY 28 FEBRUARY 2001
CLIFFORD and MR
40. The trading fund is an interim trading fund.
What will happen afterwards? What thought has been put in to what
will happen to retain DERA after 12 months or two years? Will
you come back to the Committee saying, "I am sorry, what
you supported was only an interim arrangement and we have gone
on and proposed something quite different and now we are going
to add Retained-DERA and stick it under Sir John".
(Baroness Symons of Vernham Dean) Mr Chairman, we
have taken a deliberate decision, based on a great deal of consultation
that part of what is currently DERA should remain in the public
sector. We have stated the reasons for that. When the original
consultation took place, if there was anything about which you
were incandescentI hesitate to use the wordI believe
it was the suggestion that Porton Down was privatised.
41. "Deeply repugnant" I believe was
the phrase. That was not the first version; that was the watered
(Baroness Symons of Vernham Dean) I am sure that the
language that you used was entirely consistent with the view that
you took. As you know, it is not the view of either myself or
the current Secretary of State that Porton Down, for example,
should go into the private sector. I cannot envisage circumstances
in which I would come back and say anything different to you about
that. We have taken a deliberate decision about what we retain
in the public sector. Some of it is very security sensitive, the
sort of thing it is difficult to discuss in public, as you have
acknowledged on previous occasions. To return to your question
about where we are in the trading fund, currently as we stand,
I have no reason to believe that we would want to change that
status but we shall continue to monitor what is happening with
DSTL. Of course, it will be different when New DERA becomes, first,
a plc and then is ultimately privatised by whatever means, but
we do not believe, from the financial forecast, that we have any
reason to believe that it will not operate successfully as a trading
fund both in the medium and in the longer term. Of course, we
shall keep looking at it.
42. Are you saying that the future of DSTL is
(Baroness Symons of Vernham Dean) I do not feel uncertainty
about it. It is impossible with all these things to bind future
administrations to what is happening. From where I sit now, as
the Minister responsible for defence procurement, I am comfortable
with what is proposed, both as to its status in the medium term
and in the longer term.
43. A couple of weeks ago we had DARA here and
they were telling us about their trading fund which gives far
more flexibility. They were delighted with the trading fund surplus.
But you are splitting this into two organisations. You will have
to fatten Sir John's part of the operation in order to make it
attractive to the market, otherwise the market will say, "Thank
you very much, we have read the speeches of Baroness Symons and
we are unconvinced that it is viable". Therefore, I assume
that there will be a fattening up process which could come out
of Retained-DERA. If it is operating on a trading fund statusDARA
knows full well that it had to be viable financiallywill
there be enough work going around to fatten up a soon-to-be flogged
off DERA? I am sure you have wondered how long it would take me
to mention that.
(Baroness Symons of Vernham Dean) I did. I think you
have done quite well; it has taken about 40 minutes.
44. Will it be possible to fatten up a flogged
off DERA and to make Retained-DERA viable?
(Baroness Symons of Vernham Dean) If you are suggesting
that the fattening up, to use your not very attractive term, is
at the expense of DSTL, I do not believe that to be true at all.
Certainly we want New DERA to be an attractive proposition in
the marketplace. Of course, we take a great deal of outside advice.
I am sure that you know that Sir John has his own financial advisers
and a chairman with considerable experience in the person of Sir
John Egan who has been a considerable figure in this sort of process
in the past. I know that he will give support and guidance to
this Sir John, on my right, about the way in which DERA can be
made an attractive proposition in the marketplace. I know that
Mr Jagger has something to add.
45. I want to read Mr Jagger's memoirs. He knows
where all the bodies are buried!
(Mr Jagger) You cannot be looking at me! You talk
about the split between DSTL and New DERA as though it were just
about people and assets, but another part of the split has been
the split of the business that the whole of DERA does currently.
Although that is different in proportion in different areasfor
example, all the CBD work is with DSTLthe overall split
is very much in line with a three-quarters/one-quarter split.
The reason that New DERA will be attractive to the market is because
of its ability to develop new business on top of the MoD business.
46. Because there is a degree of uncertainty
in upheaval and in getting the organisations up and running, has
there been any reduction or delay in the MoD or its customers
placing research work with New DERA?
(Sir John Chisholm) No. The contracts on which we
are now working are, of course, in existence. The contracts on
which we shall work next year, as I said earlier, have been the
subject of discussions with our customers and we are more advanced
now in relation to our discussions with our research customers
for next year's contracts than we have ever been before.
47. Has the MoD said, "Come on, don't worry,
Sir John, we will give you a lot of dosh", which will make
it easier for the market to bear? Have they offered you a lot
of research contracts that will not go out to competition?
(Sir John Chisholm) I can safely say, Chairman, that
that conversation has definitely not taken place with the MoD.
48. Have you worked out who the directors of
New DERA will be on 1 July? Will they come from the existing ranks
of DERA's senior management, many of whom are here today? Was
there any competition internally or externally for the new posts?
(Sir John Chisholm) The board of New DERA, as yet,
is not formed. It will be formed of non-executive and executive
directors. We have already made one announcement in relation to
the chairman, Sir John Egan. Currently, we are recruiting other
independent non-executive and executive directors to participate
in the oversight of New DERA. The number of executive directors
on the board is likely to be less than the number of non-executive
directors. So far only two executive directors have been announced
as being on the board: myself and my chief financial officer who
has been recently recruited, Mr Graham Love. Underneath the board,
New DERA will be led by a leadership team of, currently, 13 members,
of which seven come from elsewhere, but have traditionally been
in the MoDthat is, if you do not count me as being traditionally
in the MoD, if you see what I meanand the other six have
considerable experience outside, although many of those, like
myself, have been in the organisation for a while.
49. You are a competent person, so competent
that I would prefer you to stay with Retained-DERA. Who chose
you for your future role? It was a wise choice, but who formally
(Sir John Chisholm) I have a contract with the Ministry
of Defence now. I expect to carry forward into New DERA and that
is undoubtedly an appointment in the hands of the Minister.
50. I am sure that Mr Love has been involved
in other organisations, has he not?
(Sir John Chisholm) Yes.
51. Could you give us a note on his background?
(Sir John Chisholm) He was chief executive of a company
called Comax, which was previously a privatisation. It was privatised
out of DERA in a previous era; very successfully, I might add.
52. I knew his name was familiar to me. I want
to explore the issues of who will be interested in New DERA? Where
will the strategic partner, or shareholders who may want to buy
into this project come from? Baroness Symons, will there be any
constraints on who will be interested, say, from foreign investors?
(Baroness Symons of Vernham Dean) Yes. We shall want
to have some constraints upon ownership and foreign ownership.
There will certainly be limitations on share ownerships in a way
that will be familiar to people who know about the golden share
arrangements. We have not worked out what those limitations will
be, but I think that at the moment we would wish to consider that
that would be part of our overall thinking. As to who is interested,
a number of organisations have been in touch, expressing an interest,
from a whole variety of
(Baroness Symons of Vernham Dean) Yes, I think there
has been some overseas interest. I am going to ask Mr Jagger to
speak about the sorts of organisations with which he has had discussions,
without naming individual organisations. It would not be appropriate
to go into detail about who they are, but he can give you a general
flavour. I am sure that the Committee will understand that of
course we want to maximise the benefit from a privatisation and
we do not want to do anything that will prejudice the best possible
outcome of such a privatisation, but within those constraints
perhaps I can ask Mr Jagger to give a flavour of the sorts of
people to whom he has been talking.
(Mr Jagger) Perhaps I should first make it clear that
I have not been engaged in any marketing campaign yet. These are
people who have come to me on an unsolicited basis. Therefore,
they reflect people who have an interest in taking up some kind
of a strategic partnership. The customers for flotation would
be more passive. Overwhelmingly, those have been British companies;
there have been one or two overseas companies. Neither of those
would, I believe, give any cause for alarm on a security or military
basis, for example. They have been companies that are venture
capital funds, equity investors, both publicly quoted and privately
held who have existing interests in technology development and
that kind of market.
54. That is helpful. I am grateful for that
honest answer. This Committee must be convinced of those people
who will have an interest in New DERA. I turn to you again, Sir
John. So that there is absolute honesty and a sense of openness
about where the process is going, we have to be sure that people
outside who will invest in this business are absolutely legitimate.
That must also go for those who may benefit inside the organisation.
I ask you one more time: is there to be any financial benefit
to you or to anyone else involved in this process?
(Sir John Chisholm) I draw a salary from the Ministry
of Defence at the moment.
55. What about shares?
(Sir John Chisholm) I hope that I shall draw a salary
from New DERA plc in due course.
56. There will not be any stock involved at
all, will there?
(Sir John Chisholm) The issue of share schemes for
employees is an issue for the vendor to decide. It is not an issue
for the company to decide. Previously, the Government have indicated
in statements that it is favourable to them, but they have not
(Baroness Symons of Vernham Dean) We have said that
we wanted to see broad share ownership. Obviously that depends
on the route to market. You have mentioned strategic partners.
We have been talking about the possibility of strategic partners.
We have not taken a decision on how to progress that. I hope that
we shall be in a better position to do that towards the end of
the year. I am expecting two lots of advice: one next month, March,
and another big block of advice in October or November that will
be much more specific about the route to market. We have always
thought that it would be a good thing to have a broad share ownership,
but I do not want to nail my colours to the mast as we may be
told that the financial advice is rather different and that the
strategic partnership is going differently. If we are to have
a broad share ownership, for example, employee share ownership,
it follows, as night follows day, that that would include options
for the chief executive. I would not exclude that entirely by
any means, but I think that the sort of package of remuneration
is something that we shall all be extremely sensitive to for obvious
reasons. Sir John knows that and it is a point that I have made
repeatedly. It is one that should reflect the responsibility of
the job and it should reflect the marketplace. The privatised
organisation will reflect the marketplace, but the details have
to be worked out. I absolutely take your point that this is a
very sensitive issue.
57. Laura Moffatt is much less polite than I
(Baroness Symons of Vernham Dean) She is less polite?
58. She is much less polite but she is behaving
herself! For me it is unpalatable that this MoD organisation that
Sir John has helped to make very viableit is in an international
classis to be flogged off. It would be moderately bearablenot
that you would be prepared to provide me with the assuranceif
the companies or those who buy up this British asset were, at
least, largely British.
(Baroness Symons of Vernham Dean) Yes.
59. We have been through the exercise of the
MoD housing estate being purchased by Nomura. I suspect that the
British public will not be as xenophobic as I am, but if suddenly
Thales, Thomson-CSF, which has been busy buying up British companies,
with collusion from the Ministry of Defence, what happens if a
French company says, "It would be wonderful to get a real
handle on British defence research", or what if the Japanese
say, "We have bought up their housing estates, why don't
we dive in and buy their wonderful defence research organisation
that Sir John is running"? Are you prepared to give us assurances
that, when this hits the market, the MoD will exercise not just
its influence, but its dominant position, to say that it must
largely be British companies that acquire flogged-off DERA because
if it is to be an adviser to the Ministry of Defence, if it is
to serve British defence interests, it must be largely a British-owned
(Baroness Symons of Vernham Dean) In the compliance
regime that we have outlined to you we have there specified limitations
on share ownership. Limitations on share ownership implies limitations
on individual share ownership and on limitations on other measures.
As you will be aware, there are a number of companies in which
the Government have an interest, not necessarily a financial interest,
but an interest, which limits the overseas holdings. I would not
wish to exclude overseas holdings entirely, but speaking personally,
if I may, I have an enormous amount of sympathy with what you
say about a majority British holding. I cannot give an absolute
undertaking on that today, but it would be my personal wish to
be able to give you such an undertaking. I shall take this matter
away and see what I can do in order to give you more confidence
on that issue. I cannot do that right now, but it would certainly
be my wish so to do and it would not be out of line with a number
of other constraints on share ownership in companies in which
we have a very heavy interest for defence and security reasons.