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Delegated Legislation Committee Debates

Draft Defence Science and Technology Laboratory Trading Fund Order 2001

Eighth Standing Committee on Delegated Legislation

Thursday 22 March 2001

[Mr. George Stevenson in the Chair]

Draft Defence Science and Technology Laboratory Trading Fund Order 2001

9.55 am

The Parliamentary Under-Secretary of State for Defence (Dr. Lewis Moonie): I beg to move,

    That the Committee has considered the draft Defence Science and Technology Laboratory Trading Fund Order 2001.

This amendment to the existing trading fund order for the Defence Evaluation and Research Agency modifies the scope of the agency and allows for the formation of the new defence science and technology laboratory. Hon. Members will be aware that as part of the strategic defence review, we announced in 1998 our intention to establish a public-private partnership for the Defence Evaluation and Research Agency. There has already been extensive public consultation on the PPP itself, and it is not my intention to go over that ground again in detail. However, a little background might be helpful in considering the amendment.

DERA faces many challenges as a result of changes to the environment in which it operates, and we concluded that if we did nothing, the organisation would go into decline and put at risk the Ministry of Defence's scientific capability. We further concluded that a PPP approach offered the best means by which to secure the future of United Kingdom defence research and to ensure that our service men and women continue to have access to leading-edge technology.

Last July, my right hon. Friend the Secretary of State for Defence announced to the House that we would proceed with implementing the core competence model for the DERA PPP. That approach was developed following discussions with a wide range of stakeholders, and as part of it we have made significant and sensible changes to our original proposals. I believe that our willingness to listen and respond to stakeholders' views has been widely acknowledged and welcomed.

The model that we are implementing creates two new organisations, both of which have a key role to play in developing new defence technology. About three quarters of the existing DERA will be transferred to a new company, known—originally enough—as NewDERA, which will be floated on the stock market as soon as its potential is suitably developed. However, we fully recognise that certain operations and activities cannot easily be carried out in the private sector. To carry out those functions, which I shall describe in more detail in a moment, we will retain within the Ministry of Defence a core capability that we have named the defence science and technology laboratory, or DSTL, as identified in the amended trading fund order.

The amendment to the order will allow us to remove from the trading fund those assets that will not form part of DSTL. The majority of those assets will transfer into a public limited company known as NewDERA, which initially will be wholly Government-owned. Among the operations to be removed from the trading fund is the Defence Diversification Agency. Subject to the results of a separate consultation exercise that is under way, the DDA function will transfer to central MOD and will not form part of the NewDERA company. We envisage that certain DDA activities will be contracted out to staff who will remain in NewDERA or DSTL.

Work is being carried out with specialist external advisers to ensure that the assets that transfer into the NewDERA company will be properly structured, and that the subsequent sale will achieve best value for the taxpayer. Ultimately, the Government will seek to sell their entire stake in the company, although to maximise value the sale might take place in several stages. UK defence interests will be protected by means of a compliance regime that will operate for as long as we require. The new plc will be vested simultaneously with DSTL on 1 July 2001. Much work is being carried out to ensure that NewDERA will be a thriving and sustainable company that is capable of operating in the private sector to develop new technology to the benefit of our armed forces and the wider UK economy.

The focus of the amended order, however, is on DSTL, and I am pleased to take this opportunity to describe the role of the organisation, the rationale for DSTL to continue as a trading fund, the process through which we have gone to create DSTL and to ensure that it is financially viable and meets the statutory and administrative tests applied to trading funds, and our analysis, showing that DSTL will be sustainable in the longer term.

DSTL's primary role will be to support the MOD in the provision of UK defence capability and in its role as a Department of State. DSTL will provide the MOD with an in-house source of impartial scientific and technological advice and services.

Mr. Gerald Howarth (Aldershot): That is a critical aspect of DERA's current role, but the new, slimmed-down DSTL will be only 25 per cent. of its size. A number of people have asked whether DSTL will be large enough and have a sufficient scientific base to provide the Government with independent and impartial military advice, which is the organisation's key task.

Dr. Moonie: The hon. Gentleman makes a good point. That is the key function of DSTL. Our proposals for it have been structured so that it can retain the range and depth of advice and experience necessary to continue that vital role. As the centre of the MOD's scientific and technical knowledge and expertise, we expect DSTL to become a fundamental and integral part of the defence decision-making process. In that role, it will continue the best principles and practices of its predecessors.

A major part of DSTL's role will be to develop the network of external relationships that are key to a research organisation's effectiveness. In developing our thinking on DSTL's structure, we have engaged in detailed and thorough discussion and consultation with many stakeholder groups, including DERA's staff and customers, and our UK and international collaborative partners. We have also had close contact with industry and academia. We are confident that, under the PPP, we will continue to sustain and develop such vital links.

The structure of DSTL is derived from the roles that we have set for it, and takes into account an analysis of the most sensible balance of activities between the public and private sectors. Some strategic retentions are central to DSTL's role and form the framework of the organisation proposed in the trading fund order. Those are the chemical and biological defence centre at Porton Down, the centre for defence analysis, the chemical and electronic systems sector, the defence research information centre and the defence radiological protection service.

DSTL will be resourced to provide the MOD with the in-house capability to provide an overview across the broad spectrum of defence technology, to carry out research into especially sensitive topics, to provide advice in areas where the highest degree of impartiality is needed, and to manage sensitive collaborative projects.

In creating such capabilities for DSTL without damaging NewDERA, careful analysis was necessary to support the division of the existing trading fund. That analysis was undertaken by a team reporting to the MOD's chief scientific adviser, which included representatives from DSTL and NewDERA, and MOD customers. The result was an equitable and effective division of capabilities, agreed by all parties. Based on that analysis, DSTL consists of about 2,850 scientific and support staff. Including contracted support and military staff, about 3,100 individuals in total work for DSTL.

Work towards achieving a full separation of the two new organisations is progressing well. They are already operating largely as if they were separate entities, although they are still parts of the existing DERA trading fund. The process of identifying which members of staff should belong to which organisation was completed last November. On 2 January 2001, staff moved under their new management chains. Already, NewDERA and DSTL are operating from different IT networks and have begun a period of shadow trading which will help to demonstrate that the split is robust and well founded. We anticipate that the physical segregation of DSTL and NewDERA will be complete in April this year, and full separation will follow.

Mr. David Kidney (Stafford): Perhaps it is the lawyer in me, but the descriptions in schedules 1 and 2 about assets inside and outside the new trading fund are rather circular. Has there been a full inventory yet, or must we wait until April 2001 for one?

Dr. Moonie: I cannot answer that off the top of my head, but I am sure that I will be able to do so when I wind up. My hon. Friend will get a reply.

The PPP recognises that, given the external challenges, some elements of DERA will thrive best if they move beyond trading fund status and into the private sector. Although we accept that, given the nature of its work, DSTL should not go down that route, we are keen that there should be no weakening of the existing strong management arrangements and delegated responsibilities that a trading fund brings. Indeed, having come from DERA, DSTL's staff and managers are already experienced in operating in such an environment, and any change would be an unnecessary and retrograde step.

The continuation of DSTL as a trading fund does not imply that it will pursue a significant commercial agenda. That would be unlikely, given the specialist defence nature of DSTL's expertise and the requirements of its customers, although we recognise that there will be certain areas in which it is in the UK's interest to exploit the knowledge and expertise that DSTL generates in wider commercial markets. That will include the transfer of knowledge to defence and other industries. As part of that process, DSTL will work closely with the Defence Diversification Agency and continue their productive partnership.

A desire for taut management is not in itself sufficient to justify trading fund status for DSTL. It is also necessary to ensure that the organisation is correctly structured in financial terms, and will be capable of trading effectively in its own right. DSTL is probably unique in that it is being created out of an existing trading fund. Consequently, in order to produce the amendment to the trading fund order, we have had to carry out a careful division of the accounts, assets and liabilities of DERA and to produce financial data and trading forecasts for DSTL as a separate entity. I shall explain how that was achieved.

To manage risk, the split process has been carried out against a set of common principles agreed between staff from the MOD, NewDERA and DSTL. In line with the split announced last July, assets estimated at £394.5 million and liabilities of £10 million will be removed from the existing trading fund. Unless overriding operational, policy or value-for-money considerations emerge which would require the retention of a specific asset in the MOD, the assets removed from the trading fund will be transferred to the NewDERA plc at the point of vesting. At that stage, the equity in the plc will be wholly owned by the Secretary of State for Defence and there will be no loss of the value to the MOD.

One objective of the exercise was to ensure that assets and liabilities were allocated to DSTL in a manner that ensured that it had sufficient working capital to cover at least three years' trading. Based on that approach, the trading fund will retain assets estimated at £179.7 million and liabilities of £11.9 million. Where liabilities have been allocated to DSTL for legal reasons, sufficient working capital was transferred to cover them.

Those numbers are the result of a detailed process, which considered each balance sheet item and identified a sensible methodology for allocation between the parties. The starting point for the process was the 1999-2000 DERA accounts which had been audited and approved by the National Audit Office. For each line in the balance sheet, a set of principles was agreed, detailing specific treatment. Following agreement on that between NewDERA and DSTL, advice was sought from the Treasury and the NAO before the approach to be followed was finalised.

The largest figure on the DERA balance sheet is that for fixed assets. It was therefore essential to gain clear agreement on their allocation. Fixed assets were divided between DSTL and NewDERA following an asset-by-asset review, and were allocated only with the specific agreement of the senior management of both organisations. The division of assets is based on capabilities. Both DSTL and NewDERA will therefore have the appropriate facilities and personnel to enable them to carry out the functions expected of them. DSTL is in the fortunate position of inheriting an asset base that has undergone significant capital investment in the recent past.

The NAO has examined the methodology adopted for splitting each item of the DERA balance sheet and concluded that it is appropriate and consistent with its knowledge of DERA's business derived from the audit of the 1999-2000 accounts. The NAO will be responsible for auditing the 2000-01 DERA accounts and will perform an audit of the closing balance on 1 July. After that point, NewDERA will use an external auditing firm, and DSTL will continue to be audited by the NAO.

In formulating the order, the choice of date for creating DSTL, which will also be the date for vesting the NewDERA plc, was carefully considered. The most sensible date was thought to be 1 July 2001, as that allows sufficient time to complete the considerable work necessary to separate the infrastructure and programmes of the two organisations, and allow a robust period of shadow operation to test the effectiveness of the new organisations and their supporting systems.

Clearly, we are confident that DSTL will thrive and flourish as a trading fund, working closely with our allies, academia and industry, including NewDERA. However, we are not complacent in our confidence of DSTL's success. We shall closely monitor its performance to ensure that it continues to provide an efficient and effective service to its customers and that it meets the goals that we have set for it.


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