Examination of witnesses (Questions 100
WEDNESDAY 28 FEBRUARY 2001
CLIFFORD and MR
100. That is a very evasive answer! Will it
be anywhere near the £25 million?
(Sir John Chisholm) It is £25 million.
101. You think it will be?
(Sir John Chisholm) Yes.
102. Are you confident that the current financial
position is a one-off and that both DERA and New DERA and the
DSTL will have an adequate cash flow?
(Sir John Chisholm) We have examined, obviously, in
considerable detail our cash flow calculations in order to ensure
it will have an adequate cash flow, and we are confident that
we will succeed in running the business within the cash resources
available to us.
(Mr Clifford) I can confirm also that the modelling
we have for DSTL shows adequate cash flow through the modelling
period of the next few years.
103. Thank you. That is reassuring. What is
your projection of the value of New DERA's MoD work over, let
us say, the next three years? What about non-MoD work? You did
touch on this earlier, perhaps you can give us more information.
Have you managed to negotiate any major joint ventures for New
(Sir John Chisholm) I can give you a lot of detail
on this, Chairman, and there is much more detail of course in
the corporate plan. Taking those questions as three different
questionsMoD work, non-MoD work and joint ventures, on
MoD work, our expectation is that our core business with the Ministry
of Defence is likely to decline. It has been declining anyway,
it is likely to accelerate in decline as our core business gets
open to competition. We are not going to win all of it, so we
would expect that work to decline. As has been happening within
DERA, we nonetheless expect to find other opportunities to sell
technology skills into other parts of the Ministry of Defence,
which will have, we hope and believe, a mitigating effect. So
overall our business with the Ministry of Defence, while not being
a growth market, is by no means a catastrophe. As far out as we
can see, the Ministry of Defence will still be the core customer
of New DERA, the dominant customer of New DERA. On top of that,
of course, the real excitement in terms of performance of the
organisation comes from our development in other markets, and
we have eight other target marketsfor instance, the telecoms,
media and electronics market, which is a fast growing market for
us. We have been expanding our business in strictly commercial
customers at around 20% or more per annum, and we certainly see
opportunities for us to continue that performance. Indeed, it
is our consistent performance over a number of years in that regard
which gives us some confidence we can do that, as we focus more
specifically on achieving those results.
104. If, when you are privatised, you come to
a major break-through, largely based on intellectual property
rights transferred from the MoD, will the MoD have first choice
whether to acquire it or purchase it, or will the MoD be subject
to competition with others?
(Sir John Chisholm) The terms on which we contract
with the Ministry of Defence are the same essentially as the Ministry
of Defence contracts with any other third party, and that is that
the intellectual property belongs to the organisation which has
created it, but the Ministry of Defence has free user rights for
that technology. We have not signed the contracts yet but that
is what I would expect it to say. In other words, if we invent
something spectacularly important for the Ministry of Defence,
the Ministry of Defence will have free user rights to that technology.
105. But if they have no intellectual property
(Sir John Chisholm) They have the free user right;
the Ministry of Defence has the free user right.
106. They will know what is going on, I hope,
in your new organisation?
(Sir John Chisholm) As of July, the Ministry of Defence
has already declared it will want to have two directors on our
board, and therefore it will actually have visibility of the business
of New DERA. Although there has been no discussion on the relationship
subsequent to a privatisation, I would have expected the Ministry
of Defence to continue to want to have visibility.
107. Can I ask you about the staff situation?
As I understand it, DSTL is going to have a quarter of the staff
from DERA, but is it going to have a similar proportion of the
assets on vesting day?
(Sir John Chisholm) The assets for DSTL are in the
(Mr Clifford) The split of staff and assets has been
done entirely on a capability basis, identifying the work we need
to do in DSTL and selecting the appropriate body of staff and
assets to complete that work. As it comes out, the split is not
numerically exactly the same, but the important thing is that
the correct staff and assets have been transferred to security
division and ultimately to DSTL.
108. What is the figure for the assets?
(Mr Clifford) I believe it is nearer 30 than 25%.
109. That means, does it, that New DERA is actually
in some way going to benefit from that or not?
(Mr Clifford) I would say the asset-to-staff ratio
varies hugely in DSTL, as it does now in DERA, depending on the
style of business which is being conducted and the sort of work
being done. From my point of view, DSTL has benefitted from successful
capital investment in areas of the organisation which are going
into DSTL, and therefore those are more asset-rich than others.
110. Can I turn the question round and ask,
what are you doing to enhance New DERA to make it more attractive,
given this imbalance?
(Sir John Chisholm) The asset equation does not play
hugely in relation to New DERA's value. New DERA's value is essentially
between the ears of its people, and that is not reflected well
on a conventional balance sheet. It is our ability to create business
in the future which is where the value of New DERA is. I would
not expect investors to be investing in New DERA in order to acquire
its fixed assets.
111. Let us be absolutely clear, DSTL gets 25%
of the staff and about 30% of the assets?
(Sir John Chisholm) It gets the assets which are appropriate
to the staff that DSTL has.
112. There is no shaving at the margin? There
must be some areas where it is difficult to be absolutely sure?
(Baroness Symons of Vernham Dean) Can I say a little
bit? For example, let us take Porton Down, Porton Down is asset-rich
and that is going to DSTL. It is not something where you can do
a pro-rata division of the assets. The assets go with the bits
that we are either keeping or not keeping. The point is that if
you were to take CDA, that is not asset-rich, but that is also
going to DSTL.
(Baroness Symons of Vernham Dean) The Centre for Defence
Analysis. The Centre for Defence Analysis is not asset-rich and
is going to DSTL; Porton Down is asset-rich and going to DSTL.
It is where the assets fall with the way in which we have decided
to do the division.
114. Have you had to make bids and are there
(Baroness Symons of Vernham Dean) Not over assets,
(Mr Clifford) We have carried out a process which
lasted through the summer and into the autumn which completed
around Christmas of identifying the capabilities and the people
and then ultimately the assets they needed. As you would expect,
there was a robust debate but it was a debate which was concluded
to the satisfaction of both organisations.
(Sir John Chisholm) Just to give you some comfort
in this, the person who chaired the group that was doing all of
this was Bill.
115. You are aware there has been some concern
in the private sector about the consequences of this whole process,
could you give me your current view of how much of the MoD research
work will be opened up to competition and how quickly?
(Baroness Symons of Vernham Dean) I think that is
really a question for Mr Jagger.
(Mr Jagger) We will obviously have to state when we
do any transactions what our view on that is. Broadly speaking,
the MoD's work at DERA falls into two categoriesresearch,
very roughly £400 million a year, and what you might loosely
call "project and procurement support". The research
has not been competed at all up until the current year historically,
this year we have competed just over 3% of it and we will have
a progressive plan to compete more of that each year from now
on. The actual figures are subject (a) to financial advice and
(b) talks with the Chief Scientific Adviser and Ministers, but
I would expect something in the order of about half of the research
programme being competed after a period of about ten years. The
rest of the work the MoD gives DERA can already be competed; it
is at the discretion of the customer, whether that is one of the
Armed Forces or the Defence Procurement Agency, to compete it,
if they think that is best value for their project. Very roughly
about a third of this work, 30%, is already competed.
116. The memorandum we had from the Minister
says that you are all talking about a five to seven year period
before all the MoD research work would be open to competition.
Is that a realistic timescale?
(Mr Jagger) I think there may be a misunderstanding,
unless I am mis-remembering the document. I think there is a five
or seven year period of guarantee envisaged, it may be that some
research work is never competeable for the very simple reason
that there is no one else to do it if there is a very particular
facility required. We would envisage some sort of sloping guarantee
period which will last five or seven years and the research competition
ramping out in opposition to that.
117. Have you had any concerns expressed recently
and have there been continuing concerns from the private sector
about New DERA having an unfair advantage in winning MoD work?
(Baroness Symons of Vernham Dean) Overall I think
that initially there were some concerns about that in the various
industry groups that I have chaired and I think those concerns
have been largely allayed in recent months. We have tried to do
our best to describe to them the measures in place to ensure that
does not happen but you have had detailed discussions, Terence.
(Mr Jagger) Yes. Certainly people have been concerned
about that. My response is to say that hundreds of millions of
pounds worth of work which is not currently available to industry
is being made available to industry and that is actually a positive
advantage for them. I think when you explain that, and the process
of transition, and the fact that even with the great success DERA
has had in the pilot competitions, the pilot competitions have
actually thrown up opportunities for industry because they have
partnered with DERA to provide the MoD with a better service.
In fact, the industry is likely to be a net gainer of business
from this process, very considerably in my view, over the medium
and longer term.
118. Though not necessarily all the business.
(Mr Jagger) In the position of vendor, if I was to
sell John's organisation and say "And by the way we are not
going to give it any business ever" I would not get a very
119. No. It is a question of whether things
are open to competition.
(Baroness Symons of Vernham Dean) I think clearly
it is going to take time to introduce competition fully. We have
always said that from the beginning of this whole exercise, so
obviously there are going to be some transitional arrangements.
Now we have talked in terms of the five to seven year tapering
and I think that will obviously involve some initial guarantees
to DERA, I think that is entirely sensible. They will get as close
to zero as we can make them over the period so that there is genuine
competition. We all know competition is not an end in itself but
it is a jolly good tool for getting best value for money for the
taxpayer and that is what we are about.
Mr Gapes: I hope so.