Examination of witnesses (Questions 80
WEDNESDAY 28 FEBRUARY 2001
CLIFFORD and MR
80. If you feel it is necessary.
(Sir John Chisholm) I feel this whole conversation
has been underpinned by a suspicion and I think it might be helpful
if I said something about myself, at least from my point of view.
(Sir John Chisholm) I am an engineer and I was educated
at Cambridgeindeed where my tutor was one Harry Cohen,
Mr Cohen: Not me!
82. That did not do you a lot of good then!
(Sir John Chisholm) In my research work I was going
to do work on optimal controlsI am basically a mathematician
by inclinationbut I actually took up an opportunity that
came into the labs to study a problem the printing industry was
having over breaking webs when they were printing newspapers,
which was an odd thing to do but I was very keen to get a practical
result from the science. I then joined a computer consultancy
and although the high prestige thing to do was to go and write
software for banks, the thing which really grabbed my attention
was taking the science I had and using computers to make it practical,
and for ten years I did that, and I then formed a company called
Cap Scientific, and that was our absolute stock-in-trade. We wanted
to use these new micro-processors to implement what we knew in
science, to make it into practical propositions. That was very
successful in the 1980s and I went through an IPO and mergers
and acquisitions and ended up as UK managing director of the Sema
Group, which for a while was a FTSE-100 companyit was not
in those days. I then got invited by the then Secretary of State
to do essentially this job. It was an odd thing for me to decide
to do because I was a whole lot better placed financially where
I was, but I saw the research establishments as being just a wonderful
national asset which was in danger, because of the end of the
Cold War and all of that, of going to waste. I thought this was
something which really needed to be done. Here was a national
asset, defence may not need as much of it in the future but it
could be made into something else which we could really be proud
of as a nation, so that is why I took the job. It is why I have
always wanted to do this job, it is about turning science into
something valuable for the nation.
83. Sir John, I do not think anybody here questions
your motives, your competence, what you have done for DERA, it
is just that we have a very sad historical experience of what
happens to people who have gone through your process, and that
is why, because we are very protective towards the budget of the
Ministry of Defence, which we fight for on a daily basisunsuccessfully,
I might addwe are nervous about this happening to something
which was up until this point in time within a beleaguered organisation
fighting for adequate funds. We are nervous that if a part of
the Ministry of Defence goes floating off into the free market,
for all of the motives, that a Railtrack situation, a National
Bus Company situationand there are dozens of othersis
not replicated without us raising our voices of concern when still
some assurances might be given that that is not going to happen.
(Baroness Symons of Vernham Dean) Can I assure you
that the nervousness you feeland that was the word you
usedis a concern that is felt by Ministers in the MoD as
well; of course it is. None of us have short memories, we all
remember some of the things which have happened in the past, and
we cannot be hard and fast over remuneration packages today but
I think we can say that we will keep you informed of our thinking
on these as we go along, and we are absolutely alive to the concerns
and worries that you and others round the table have raised with
Mr Cann: Sir John has not answered my
Chairman: We have to move on, Jamie.
Mr Brazier: Forgive me saying a very
short personal thing, but I think I was the only member of the
Committee who knew Sir John before coming into the Parliament,
and I underpin in the strongest possible way what he said at a
personal level and the transformation he has achieved; he brought
a tremendous amount to it and it has been absolutely remarkable.
From the other side though, as someone who shares the really extreme
concern on this Committee, when we went through the business with
the married quarters, for example, the key person in the personnel
slot then was Air Vice Marshall Peter Squire, an airman of considerable
distinction who is of course Head of the Air Force, I have to
say I had exactly the same view of his integrity then and everything
I have seen so far and more that I have heard about which will
come out in the next year or two convinces me that was a disastrous
move. Just to finish the Chairman's earlier point, I hear on my
pager there has been another tragic rail accident this morning.
Nicholas Ridley, the apostle of privatisation, the greatest single
exponent of it in this country, the last thing he did four days
before he died of cancer was to write an essay for the Times
saying that there must be limits on the privatisation of public
services and he took the railways as one example, and I am sure
he would have regarded this as another example.
84. I must say, as a Thatcherite former Minister,
responsible for two very successful privatisations, I take some
wry amusement in the role reversal aspects of the passing theatre
of life. Who are the advisers to MoD on the DERA privatisation?
(Baroness Symons of Vernham Dean) Their advisers are
Price WaterhouseCoopers and Warburgs, and Simmons and Simmons
are our lawyers.
85. Do you have bankers?
(Mr Jagger) Warburgs. Those advisers report to me,
they have no responsibility whatsoever to Sir John, and he has
completely separate advisers on issues with which he is concerned.
86. So they are advising the Ministry of Defence?
(Mr Jagger) Yes.
87. That is exactly what I would expect. In
that case, is it reasonable to ask whether New DERA has started
taking advice of its own on the Stock Exchange aspects of this
(Sir John Chisholm) We have advisers. We have Rothschilds
as our financial advisers and Herbert Smith as our legal advisers.
88. Minister, you said you envisaged some limitations
on shareholdings. You have presumably looked at previous privatisations
and you know the extent to which those limitations tend to erode
and fall away over time, do you envisage the same will happen
(Baroness Symons of Vernham Dean) I cannot give you
chapter and verse on all the limitations on all the privatisations
but I am aware that they do change over a period as the market
changes and as the needs of the companies change. Indeed, we have
discussed the international aspects of the privatisation in relation
to New DERA. Of course, the defence market globalisation is entirely
a case in point, where there will be, I suspect, continuing changes
both in Europe and with our transatlantic partners as well. I
would hope that whatever we do agree is the compliance regime
initially is in place for a number of years, but what I have tried
to do is lay outand we have given you a written note on
this alreadythe sort of compliance regime we would envisage
to start off with, but at the moment of course it is lacking any
detail about the limitations we would want to place on such things
as share ownership, but we hope to be able to give you more detail
on that as the year progresses.
89. You have made two references to "later
this year", about the time when you will receive a second
batch of advice and the time it will be possible to take further
decisions, it sounds as if your thinking has evolved to a slightly
longer timetable than envisaged earlier. In other words, there
would not be an earlier strategic partner but that you would be
launching as a plc on 1 July with perhaps some months of experience
under your belt before you move on. Is that your way of thinking
at the moment?
(Baroness Symons of Vernham Dean) Yes, that is how
I see it. As Sir John has indicated, New DERA is currently working
on its corporate plan. We will be looking at that with them over
the course of March/Apriland your Chairman has made clear
he would like to see that but it will obviously have to go through
the Ministerial process and I shall consult with my boss on how
it is got to you and in what formand at that point, March/April,
we are likely to be given advice on how robust New DERA is looking
forward to its sellable proposition in the course of the year.
Of course there is the possibility we may offer advice at that
stage. Once we get them passed the vesting as a plc on 1 July,
there will be further advice coming to Ministers, as I indicated,
after the plc has run for a while, and I would expect that to
be about October/November, and at that point if I was doing a
route map that would be when I would think that the next real
Ministerial decisions will be needed as to the sort of route we
take to market, as you say whether there is a strategic partner,
flotation, and all the options which are likely to be put up to
90. The strategic partner is presumably a device
to seek to test the market for price as a safer way of ensuring
value in the public domain?
(Baroness Symons of Vernham Dean) Yes. Mr Jagger has
already indicated to Ms Moffatt the sorts of people he has been
talking to. I do not know whether you can say any more about the
nature of those discussions without prejudicing our position overall
when we do want to go to the market place, but I am sure the Committee
would be grateful if there is something more you can say.
(Mr Jagger) Certainly. The concept is obviously tactical
vis-a-vis the market, we do not particularly want to commit ourselves
going one route or another, we want to create market interest.
We will have Sir John's corporate plan in the next few months
and whether the company is performing to that, out-performing
it or having some difficulty with it. On the basis of that and
the financial advice we receive, we will take a view as to whether
flotation is likely to realise full value and, if not, why not.
It might be felt there was a lack of investment understanding
about certain things, it might be that certain strengths that,
for example, venture capitalists could provide, would enable the
company to evolve. I have no idea if that is the case, I am just
giving a hypothetical situation. So the idea of involving a strategic
partner would be to tap either financial strengths or technical
or marketing experience as it was deemed necessary by us having
reviewed the corporate plan before us. As I indicated to you,
those are exactly the kind of companies which would be approaching
us, but at the moment it is entirely hypothetical and it would
be wrong for me to pre-judge in any way what advice it might be.
91. Just for clarification, at this stage, you
have not ruled out, Minister, the possibility and even likelihood
of the Government stake falling below 50% of control? You have
not yet decided on any particular long-term strategic holding?
(Baroness Symons of Vernham Dean) No, you are right.
92. Can I put in my own three-ha'p'orths on
the issue of options. I would envisage that management would indeed
expect, and it would be appropriate for management, to be offered
options, but there is one area where I think even I would find
it difficult to justify the granting of options, and that is if
the options were to enable senior and other management to benefit
not just from the enhancement of the business but from the exploitation
of the property aspects of DERA, because DERA does have very substantial
property. I hope that the attention of the advisers would be drawn
to the fact there would be criticism if the options enabled the
recipients to benefit from property development or other aspects
of DERA which are not related to the enhancement of the scientific
skills within DERA.
(Baroness Symons of Vernham Dean) That is very useful
advice. Thank you.
93. Finally, on the point of management, there
will be a management teamSir John used a different phraseof
13 immediately below the board, of whom seven, I understand, would
come from the Ministry of Defence. Would these be people recruited
from the Ministry of Defence and who would sever their links with
the Ministry of Defence, or would they be on some form of secondment?
I did not quite understand that point.
(Sir John Chisholm) I was not at that moment distinguishing
between the Ministry of Defence and DERA, because DERA is part
of the Ministry of Defence. They are all employed by DERA at this
94. So they would have total loyalty to New
(Sir John Chisholm) They are currently employees of
DERA. They will be employees of New DERA.
95. And the other six?
(Sir John Chisholm) Are also employees of DERA at
the moment and will be employees of New DERA.
96. So what is the distinction between the seven
and the six?
(Sir John Chisholm) Only where they come from.
Mr Viggers: Okay. Thank you, Chairman.
97. Last year, DERA made a profit of £41.5
million and paid a dividend of £25 million to the MoD. Pretty
good. To what extent have these commendable numbers suffered in
the current year with the upheaval of preparing for PPP?
(Sir John Chisholm) We, of course, have not yet published
our results, indeed our year does not end until the end of next
month, so I cannot give you a precise figure for the outturn.
I can tell you, at the half year our trading was good, and we
were on target for the objectives set for us by Ministers at the
half year. I expect our full year results to show really three
things. One is underlying trading performance, which will probably
be, if not sparkling, at least satisfactory. Second to that, there
will be exceptional costs which you will have seen year on year
have come through our books relating to the changes in our business;
there will be some exceptional costs. Thirdly, you will see the
costs of the process through which we are now going, where there
are some direct costs, for instance setting up the new secure
arrangements, which are also falling to the trading fund to fund.
98. So DERA is bearing that cost, the cost of
consultancies and the cost of splitting the two organisations?
(Sir John Chisholm) Not entirely. Except for the advice
specifically to the partnering team, the rest of the costs fall
99. Can the MoD expect a nice little dividend
of the order of £25 million at the end of this financial
(Sir John Chisholm) We will pay the dividend that
is due to the Ministry of Defence this year, yes.