Examination of Witnesses (Questions 140-159)
DR LEWIS
MOONIE MP, MR
COLIN BALMER
AND MR
MARTIN EARWICKER
TUESDAY 21 JANUARY 2003
140. When the right time comes will QinetiQ
be obliged to sell all its shares in the company or will you be
happy for it to retain a large shareholding?
(Dr Moonie) The agreement varies depending on the
time at which a sale takes place but ultimately we acquire the
right, do we not, to insist that Carlyle sell the shares and equally
at some stage they have the right to tell us likewise.
(Mr Balmer) Inevitably this was a very complex negotiating
point. The underlying principle is that the whole deal will work
much better if we both agree, so we are looking for an arrangement
under which we both agree the right exit point. In the first four
years neither partner can exit without the other's agreement,
so we enshrined an agreement. For year five, six, thereafter,
there are different arrangements in the agreement we have reached
with Carlyle under which in some circumstances they can sell without
our agreement and in some circumstances we can sell without their
agreement. We hope that those circumstances do not arise, that
what we are looking at is a jointly agreed position at which we
exit. We have had to put those contingencies in place so that
neither party can force the other to do something to its disadvantage.
Mr Howarth
141. In terms of the allocation to the employees,
I have to say that I think £40 per employee, given the quality
of these people and in many cases the lifetime commitment that
they have given essentially to the defence of the realm, does
not compare favourably with the way in which employees have been
treated under privatisation by the party which knows properly
how to privatise, namely the Conservative Party if you were not
aware, Minister. I am hearing from constituents that they are
disappointed. There is, quite rightly, an incentive package for
the senior staff but, on the other hand, those more junior people
I think could have been given a bigger slice of the action.
(Dr Moonie) They do have the opportunity to invest,
of course, and thereby—
142. I am aware of that.
(Dr Moonie)—put their own stake at risk in the
financial future of the company. I am trying to think whether
in other privatisations people were always given a free allocation
of shares in the company as opposed to being given the right to
buy them.
Chairman: We are not going to respond
to Mr Howarth's taunt—
Mr Howarth: Oh, go on.
Chairman:—of how successful his
government was at privatising. Addington Homes, Nomura, I would
willingly debate with you. Mr Howarth, having made that provocative
point, is about to disappear.
Mr Howarth: It is a good point at which to disappear.
Chairman
143. Before being expelled! I would like to
ask Mr Earwicker some questions now because he has been very patient
in listening. What is the aim for the rationalisation of DSTL's
sites? Why is it necessary? What will it cost?
(Mr Earwicker) Thank you, Chairman. DSTL when it was
formed was an extract of the old DERA organisation, so we inherited
laboratories across the South East and a few in Scotland, some
15 sites. Some of those areas had small numbers of people on or
were not complete facilities because the rest of the people and
facilities were in QinetiQ. If you want to create a world class
laboratory, as we are and intend being in the future, you have
to have critical mass, you have to be able to put your scientific
facilities in a place where they can be utilised by a sensibly
large group and we just cannot create the sort of scientific organisation
we want to be by having fragments all over the place. Our primary
aim was to get all the lab in a small number of places so we could
generate critical mass in key areas we needed for the Ministry
of Defence. In terms of the costs, the detailed costs we would
rather keep private because of commercial negotiations going on.
What I could indicate to you is the savings we expect to get from
the site rationalisation plan as opposed to doing nothing, leaving
things as we inherited them. The difference is somewhere round
£64 million net present value over a 25 year period of saving
by going into our scheme. Not only will we create critical centres
of scientific mass we will also save somewhere round £64
million equivalent to the net present value. On both factors it
drives hard to getting us consolidated geographically, and that
is what we intend to do.
144. Is it progressing reasonably well?
(Mr Earwicker) It is progressing extremely well. Although
our staff are concerned about it they are generally very happy
in fact. Our latest staff satisfaction survey has shown that staff
who speak highly about us as an employer have increased from 49%
a year ago to 67% now, after all of the site rationalisation plans
were announced and in spite of their concern the staff are dramatically
improving their assessment of us an employer. We think we are
going to carry the staff with us, there are some individual problems
but overall it is very positive picture.
145. Have any staff left rather than being moved?
(Mr Earwicker) So far not many people have had to
move because it is some 3 years ahead before the bulk of things
happen. Some staff, a small number, have left of the order of
10s from the those people we had to move early. The indications
are we are not expecting to see large losses.
146. How are the salary scales between DSTL
and QinetiQ?
(Mr Earwicker) I do not know what QinetiQ salary scales
are. Ours are capped by the Civil Service pay at senior level
for senior civil servants. Below that we have our own scheme,
much like the old DERA scheme, and that is capped at the top.
They are broadly civil service pay schemes.
147. Perhaps you can let us know.
(Mr Earwicker) We could indeed.
148. It would be interesting to see if this
is a factor in the satisfaction or dissatisfaction of those that
have moved over to the new regime and those who are left behind?
(Mr Earwicker) I think this is entirely an issue of
geographical location, some people who have lived in an area for
many years and coming to the end of their career prefer not to
move, which would be for some the dominant factor, not pay.
149. Perhaps you can ask Sir John what he earns
with supplements and bonus and maybe you will move as well. I
hope you stick where you are. What is the logic of DSTL remaining
a trading fund?
(Mr Earwicker) The important message I think I have
learned over many years—much of it under Sir John's guidance
in my formative years—is that to deliver science and technology
you need to have strict disciplines, a commercial style of discipline
to know what your costs are and to use your assets well, and to
make sure of delivering to customers at a price that is good value
for money. The trading fund gives you those disciplines, it also
gives you the freedoms and responsibilities to makes local decisions
appropriate to your circumstances and not be dictated to by wider
considerations that may not take account of local circumstances.
I think it is a very good discipline.
150. Will you be encouraged to sell your services
to third party concerns as other trading funds are?
(Mr Earwicker) We have a very strict constraint on
us by the MoD that we can only undertake commercial business with
MoD's expressed permission. It is not our remit to do so, we have
no growth targets, we are not intending to undertake commercial
business but there are occasions when we are expected to do so
for MoD's wider purposes. We do expect to exploit our intellectual
property. We have 5 joint venture companies which are very successful
at the moment and that is as a result of following the Government's
own policy following the publication of the Baker Report. Apart
from that we are not intending to take any commercial contracting
activities.
151. Has anything happened that makes your task
as the MoD's intelligent customer more difficult? You are about
one quarter or one fifth of QinetiQ do you have the critical mass
to provide all of services that the MoD requires from you?
(Mr Earwicker) I am confident we are can deliver what
the MoD needs. We are the largest public sector research department
in the United Kingdom, so we are substantial, albeit smaller than
the old DERA. A lot of the advice that MoD now needs is at a higher
system level rather than detailed technology.
152. Will there be any point of competition
between you and QinetiQ?
(Dr Moonie) None.
153. The other rationale for trading funds is
they are exposed to quasi commercial incentives because the MoD
can go to others to buy the relevant services, can you assure
us you will not be looking to compete the sort of work that is
currently the place of DSTL?
(Mr Earwicker) As far as I am aware MoD has no desire
to compete work that comes to us, we are by definition doing the
work that needs to be done. In Government, so we are not open
to competition. That said we are bench marked in terms of our
costs but we are not open to competition.
154. One of the earlier concerns expressed to
us in our previous DERA inquiry is that DSTL would not be able
to keep fresh the technology skills which separated it from QinetiQ's
cutting-edge research work. That problem materialised? Were those
fears realised?
(Mr Earwicker) So far, no, I do not expect them to
be. What has to be understood is we have two types of requirement
in DSTL, the first is the fundamental science, where we have world-class
laboratories, world-class science and they have all the new graduates
coming in to keep that fresh. The other part of DSTL's remit is
to provide high level systems, consulting engineering, which comes
from a high level of understanding of technical issues and does
not require great depth, what it does require is, wise, experienced
people. We can recruit those, our graduate recruitment is extremely
healthy, we are number 100 in the top 100 graduate employers in
the United Kingdom. We have extremely high quality people. We
are accredited for Chartered Engineering training by all of the
major institutions, I do not think it is a problem. It is only
a problem if we did not pay attention to it.
Chairman: Thank you very much.
Mr Roy
155. Minister, in future will QinetiQ be regarded
as just another private enterprise and will other companies be
able to bid for the work that the MoD currently places with them?
(Dr Moonie) Yes, indeed. It is our intention by 2007
to be competing with 70% of the work that goes to QinetiQ now.
It is difficult to say that they will ever be completely a separate
company. In legal terms it will be. I think you will have to remember
that QinetiQ is the repository for most of the defence knowledge
that we need and that therefore is bound to give them a competitive
advantage over rivals. In specific instances the work will be
competed and they will have to give us value for money in everything
that they are doing and we will get better value for the money
that we spend.
156. With that knowledge that you say they have
and in the way that the MoD research programme is gradually exposed
to competition will they be able to cherry-pick?
(Dr Moonie) Not really, no. The decisions as to what
to compete with and when will be taken by us within the constraints
of the agreement made with us.
157. How do you resolve the need to secure efficiency
in your research contract through greater competition with the
need to look after QinetiQ sufficiently to make it more attractive
when it is eventually floated?
(Dr Moonie) If QinetiQ is going to be really attractive
on the open market it is not going to be because of the captive
work it has done for the MoD, it is going to be because of how
it has grown the other side of its business. The work which we
are going to be doing in research is most certainly not going
to increase over the next 10 years, not that can I foresee, if
anything there will be a gradual decline in technical terms and
QinetiQ will therefore have to use its many skills to go out and
make a success of selling itself, that is where the growth will
come from, not from us. They do have that underpinning of that
guarantee in the short-term and we will be doing work with them.
Rachel Squire: Where you have got DTSL
and QinetiQ still sharing the same site, have you considered how
you deal with that in the short-term because you have got QinetiQ
looking outwards for their commercial activity and you have got
DTSL fiercely guarding its intellectual property rights.
Chairman
158. You have pinched my last question, Rachel.
(Dr Moonie) I think my colleague is about to tell
you that very effective firewalls exist between the two organisations.
I hope he is.
(Mr Earwicker) In all the DSTL facilities with their
physical, IT based, any other form, separation between us and
QinetiQ is complete. There is no mixing on sites. You cannot walk
in. QinetiQ staff cannot walk in, they cannot get access to the
IT system, they cannot do anything. There is a complete separation.
In terms of intellectual property exploitation, as I have indicated
we are very successful at doing that and have won substantial
funding from the Office of Science and Technology to help us do
further, but that is very much constrained to the activities which
arise from our work, we are not going out to do it, it is just
that in doing some work we generate ideas and for the benefit
of the UK Government we exploit that in accordance with Government
policy. I do not think there is any conflict because the areas
of interest are quite separate and we are not trying to compete
with anyone.
159. So you have the MoD Police guarding your
sites, I presume?
(Mr Earwicker) We do on some sites where we have sensitive
work.
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