The Defence Committee has agreed to the following
THE DRAFT DEFENCE SCIENCE AND TECHNOLOGY
TRADING FUND ORDER 2001
1. On 17 January this year, the Secretary of State
for Defence laid before the House a draft Order to establish the
Defence Science and Technology Laboratory (DSTL) as a trading
fund of the MoD. If approved by both Houses, the made Order will
come into effect on 1 July 2001. Under the provisions of the draft
Order, the Defence Evaluation and Research Agency (DERA) will
at the same time cease to be a trading fund, and the Order would
remove from the fund those assets that will not be allocated to
DSTL. 'New-DERA'most of the remainder of DERAwill
become a public limited company (initially wholly government-owned).
The Government's intention is that at a later datepossibly
later this yearNew-DERA
will be floated on the stock exchange. This will bring into effect
the MoD's programme to create a public-private partnership for
DERA, begun in 1998.
2. The Defence Committee has monitored the implementation
of this plan throughout the current parliament. We have produced
· Sixth Report, Session 1997-98, The
Defence Evaluation and Research Agency, HC 621
· Ninth Report, Session 1998-99, Defence
Research, HC 616
· Ninth Report, Session 1999-2000, The
Future of DERA, HC 462
Our first Report was prompted when rumours first
circulated of a possible 'part privatisation' of DERA, rumours
which were subsequently confirmed in the Strategic Defence Review.
The second of our Reports examined the MoD's (by then published)
proposals for what the MoD called a 'Reliance' model of public-private
partnership, and highlighted the concerns of key stakeholdersindustry,
the trade unions and the US authorities (who are important partners
in collaborative defence research programmes), as well as our
own. We concluded that
The risks of failure associated
with the current proposals for the future status and ownership
of DERA far outweigh the value of capital receipts anticipated.
We conclude that the proposals for the future structure of DERA
contained in the [first] consultation document are fatally flawed
and should not proceed.
3. The MoD abandoned those plans, and launched a
second consultation in April 2000, on an alternative 'Core Competence'
approach. 'Core Competence' involved a much bigger proportion
of DERA staying within the MoD (in 'Retained-DERA', now to be
retitled the Defence Science and Technology Laboratory), leaving
about three-quarters to be assigned to a privatised 'New-DERA'.
Our third, and most recent Report, published last June, welcomed
the improvements of that 'Core Competence' proposal over its 'Reliance'
predecessor, but warned that the fundamental weaknesses of the
public-private partnership had not been removed. We also highlighted
five areas where there was still significant uncertainty which
the MoD had then yet to resolve:
(a) New-DERA would
not be permitted to undertake defence 'manufacturing', but there
remained uncertainty about what exactly the MoD meant by that
The MoD seemed to be suggesting that New-DERA would be barred
from 'manufacturing' equipment but could be a 'systems integrator',
and in its response to our Report stated that 'we accept that
clarification is required to define the parameters of defence
(b) The MoD had not made
a final decision on which of New-DERA's assets would be regarded
as of 'strategic' importance, and thereby falling under the special
measures afforded by the MoD's golden share in the privatised
firm (the MoD would have first refusal to acquire such assets
if New-DERA were to dispose of them).
(c) There remained uncertainty
about the extent of controls on foreign and individual share-ownership
of New-DERA, that would be introduced in its 'compliance framework'.
(d) With the bulk of
DERA's research work to be put in New-DERA, there were doubts
about how the scientific foundation of DSTL would be maintained
in the long term.
(e) The future of the
Defence Diversification Agency remained unclear. In our report
last June, we highlighted how the Defence Diversification Agency
did not fit comfortably within the public-private partnership
The Agency was set up (in line with a Manifesto commitment) in
January 1999 and placed in DERA's organisation pending a final
decision on its long-term home once the public-private partnership
4. The MoD nevertheless announced its intention of
proceeding with its revised model of public-private partnership
on 24 July 2000.
The timetable, the MoD had told us, would involve the separation
of DSTL and New-DERA around the end of 2000, followed by a three
month period of 'shadow operation' to ensure that 'both organisations
and their supporting infrastructure are robust.'
New-DERA would then be established as a government-owned public
limited company, and DSTL would continue as a trading fund.
5. In our most recent report on the future of DERA
we indicated our intention to return to the subject when any secondary
legislation was presented to the House to take the public-private
With the draft trading fund Order having now been published, we
decided to take evidence on it from the Minister for Defence Procurement,
Baroness Symons, on 28 February, and to revisit the issues that
remained outstanding from our last inquiry (paragraph 3). That
evidence is published with this Report.
Our principal aim in making this brief Report to the House is
to make available the information that we have gathered, before
the draft Order is debated in Standing Committee or on the floor
of the House. The Government's business managers were able to
give us a commitment that this would not take place before the
week commencing 12 March 2001.
6. When we took evidence from the Minister and her
- The results of the MoD's consultation exercise
on the revised model ('Core Competence') for the public-private
- The rationale for establishing DSTL as a trading
- The preparations for the vesting day for New-DERA
and DSTL, and its delay from 1 April to 1 July 2001.
- Progress with dividing DERA into its two new
including the assessment of the intellectual property that will
be placed in New-DERA.
- The appointment of New-DERA's directors and their
likely remuneration packages, including that of the Chief Executive.
- The prospective restrictions on the ownership
of New-DERA, the likely level of market interest in the new company,
and the possible use of 'strategic partners'.
- The definition of 'strategic assets' in New-DERA.
- The cost of DERA's division, and where those
costs will fall;
and the implications for DERA's financial performance in the current
- The latest views of the US authorities.
- The MoD's research work that will be allocated
to New-DERA, and the Department's latest plans for opening up
its research programme to competition.
- The MoD's progress in resolving the ambiguity
in its plans concerning the bar on New-DERA being able to undertake
- The prospects for DSTL to be able to maintain
in the long term the scientific expertise needed for its knowledge
- The MoD's latest plans for the Defence Diversification
7. We are disappointed that that evidence shows
that four of the outstanding areas of uncertainty that we had
previously identified (points (a) to (d) in paragraph 3 above)
The fifth areathe fate of the Defence Diversification Agencyhas
seen some progress, with the publication earlier this month of
a consultation document on its future.
Our initial assessment of those proposals raises further doubts,
however, about the viability of an organisation that will apparently
be divided between the MoD, DSTL and New-DERAconcerns which
we raised with the Minister.
8. Our more general misgivings about many aspects
of the part-privatisation of DERA were also not dispelled. Indeed,
new issues now arise, including further uncertainty about the
financial implications of New-DERA's sale. In our earlier reports
we had made clear our disappointment about the division of the
spoils of this privatisation. On the plans then in place, the
MoD were not to benefit from the full receipt from New-DERA's
sale, funds which we believe will be needed to cover the likely
additional costs of contracting research from a private sector
The 2000 Spending Review allocated £250 million from the
sale to the defence budget for 2001-2, with the remainder going
to the Treasury.
In her evidence last month, however, the Minister suggested that
the division of the sale receipt between the MoD and the Treasury
had not been finally decided. There is also the question of which
budget will bear the significant costs of preparing for and implementing
the proposed division of DERA and its saleperhaps £80
Worryingly, the Minister did suggest that some of the significant
costs of implementing the public-private partnership could fall
on the MoD.
This could effectively wipe out the benefit to the MoD of the
sale. We trust that the Minister will
seek to secure the full sale receipt for the MoD and the
reimbursement from the Treasury of the MoD's costs of implementing
the public-private partnership.
9. We have noted above that, in addition to these
financial matters, several other of the crucial decisions on which
the viability of the two future parts of DERA will depend still
have not been madeeven at this point when the House is
being invited to take a decision which will irreversibly lead
to the break-up of DERA as it presently exists. The next decision
point for the public-private partnership, at which the Minister
will review the programme, will be in March/April 2001 when the
viability of the prospective New-DERA will be re-assessed.
We expect the outstanding issues and uncertainties to have been
resolved before then and the decisions set out in the reply to
10. Beyond that, the next important date will be
in October/November 2001 when the Minister expected to consider
New-DERA's 'route to market'.
We will continue to monitor developments closely, as we would
hope will our successors in the next Parliament.
11. The trading fund Order is an inevitable step
on the way to the division of DERAclearly New-DERA cannot
be established as a public limited company while it remains a
trading fund. If the Government is resolutely set on the misguided
change of status for the Agency, a delay in approving the trading
fund Order would only serve to undermine the prospects for a successful
subsequent flotation and to further damage DERA's already brittle
staff morale, neither of which we would wish to see. It is because
the Order takes forward the partial privatisation of DERA, however,
that we cannot lend our positive support to it. Though now at
the eleventh hour, we would still prefer that the proposed public-private
partnership for the Defence Evaluation and Research Agencyone
of the MoD's successful sectors under its present statuswas
8 Q23 Back
Report, Session 1997-98, The Defence Evaluation and Research
Agency, HC 621, para 3 (first bullet point) Back
Report, Session 1997-98,The Strategic Defence Review, HC
138-I, para 342 Back
Report, Session 1998-99, Defence Research, HC 616, para
Report, Session 1999-2000, The Future of DERA, HC 462,
paras 22 and 48 Back
Special Report, Session 1999-2000, HC 901, para 23 Back
Report, Session 1999-2000, op cit, para 48 Back
15 ibid Back
Report, Session 1999-2000, op cit, paras 33-35 Back
Report, Session 1999-2000, op cit, paras 29, 30 Back
Report, Session 1999-2000, op cit, para 27 Back
20 ibid Back
21 ibid Back
Report, Session 1999-2000, op cit, para 64 Back
evidence at Ev pp 1-24; written evidence at Ev pp 25-34 Back
Minister was accompanied by Sir John Chisholm and Mr Bill Clifford
(the prospective heads of New-DERA and DSTL respectively), and
Mr Terence Jagger, the Director of the DERA Partnering Team in
the MoD Back
22-29, 45-49 Back
106-108, 152-166 Back
50-53, 56-58, 63-85, 95-98 Back
54-55, 59-62, 90 Back
109-116, 188-194 Back
QQ 182, 185, 90 and 189, which deal respectively with points (a)
to (d) of paragraph 3 Back
on 8 February 2001 Back
43 Q 195
et seq Back
Report, Session 1999-2000, op cit, paras 55, 56 Back
paper SR2000/MoD, published with Spending Review 2000,
Cm 4807 Back
46 Q 141 Back
49 QQ 91,