Appendix: Government response
The MoD welcomes the publication of this report.
The report rightly draws attention to the high quality of UK defence
research work undertaken by Dstl and its staff. It also underscores
the significant contribution they make to UK Armed Forces' operations
overseas.
The MoD welcomes the Committees conclusions that:
- Dstl's new Framework Document
provides a clearer statement of the top-level objectives for the
organisation. (Paragraph 20)
- Dstl has been proactive in networking with
other organisations in defence research in the UK and overseas
and that international collaboration in defence research offers
substantial benefits to the UK. (Paragraph 24)
- Since its formation, Dstl has demonstrated
a strong financial track record increasing its profits and its
net assets. (Paragraph 39)
- There are advantages to Dstl remaining a Trading
Fund, notably its ability to retain profits for future investment
in the business, but that MoD should review on a regular basis,
whether Trading Fund status continues to remain the most appropriate
option. (Paragraph 42)
- The MoD has recognised the risks to Government
Departments associated with owning in part or whole companies
such as Ploughshare Innovation Limited and has put in place governance
arrangements to address them. (Paragraph 80)
- The Defence Technology Strategy will have
a significant impact on Dstl's future work, and that Dstl will
need to ensure that its areas of expertise, programmes and capabilities
are aligned with the requirements of the MoD set out in the Strategy.(Paragraph
91)
- MoD must not make reductions in the funding
of longer-term defence research to fund the costs of operations
in Iraq and Afghanistan. (Paragraph 100)
The MoD's response to specific issues raised in the
report are set out below.
Providing the necessary resources to achieve Dstl's
key objective to maintain and sustain its capability to support
the MoD in the future. (Paragraph 22)
The MoD notes and shares the Committee's view on
the importance of this objective. Dstl and its MoD customers continue
to work closely together to ensure that it is achieved.
Ensuring that the UK provides sufficient research
funding for Dstl to be able to retain its current position as
a worthwhile collaborative partner with the US and other nations.
(Paragraph 24)
The MoD recognises the importance and benefits of
appropriate international collaboration and will continue to invest
in this. Dstl's role is key and its expertise is recognised and
highly valued by partner nations.
It is the MoD's intention broadly to maintain spend
on research at the current level and to maintain Dstl's share
of that spend. As the Defence Technology Strategy published by
MoD last year made clear, investment must also come from industry.
Reviewing the Key Targets set for Dstl to ensure
they are challenging and reflect their central function; providing
expert advice to Government. (Paragraph 31)
Dstl's Key Targets are reviewed, updated as necessary,
and re-published annually. The Key Targets for 2007/08 are in
the process of finalisation and will be laid before Parliament
in May 2007. MoD judges that these Key Targets for 2007/08 will
be challenging and have a strong emphasis on delivering quality
services to Government customers.
Opening up to competition some of the defence
research budget currently allocated to Dstl and allowing Dstl
to compete for defence research work currently carried out by
others. (Paragraph 39)
Under the provisions of its Framework Document, Dstl's
role is to undertake only the science and technology work that
must be done within government. This is defined as work that needs
a high level of independent advice and/or support that is free
of any external influences; or advice and support on matters of
special sensitivity (political, security, international relations);
or where only Dstl has the relevant facility or capability. Those
parts of the former Defence and Evaluation Research Agency which
undertook work which does not fall into these categories were
transferred to QinetiQ in 2002. As such, contracts which are placed
with Dstl are limited to those where there is no alternative capability
which could offer competition.
MoD has no plans to provide Dstl with the capability
necessary to compete for defence research funded work that is
carried out by science and technology providers in the commercial
sector. MoD and Dstl believe that the adverse effects on Dstl's
current open and productive relationship with these organisations
would outweigh the potential benefits from moving Dstl to a commercial
competitive, footing with them.
Reviewing, on a regular basis, whether Trading
Fund status is the most appropriate option for Dstl.(Paragraph
42)
The MoD keeps the business models of all its agencies
under regular review to ensure that their existing status continues
to be the best means of supporting wider defence outputs. Dstl's
status as a Trading Fund has been examined on two separate occasions
since its creation in 2001. A further review, supported by a full
cost benefit analysis, is planned to take place after Dstl's i-lab
change programme has been completed.
Appointing a permanent Chief Executive as soon
as possible. (Paragraph 46)
The MoD notes the Committee's recommendation that
a permanent Chief Executive is appointed as soon as possible.
The MoD is committed to the success of Dstl and to ensuring that
it takes the time necessary to appoint the right person for the
job. The recruitment exercise was suspended in October 2006 while
the Department reviewed the implications of the Defence Technology
Strategy for Dstl in general, and for the Chief Executive post
in particular. In the meantime, Dstl remains in excellent management
hands under Frances Saunders. MoD expects to make an announcement
on the way ahead shortly.
Ensuring that Dstl is able to retain its position
as a leading defence research organisation well into the future
by continuing to be able to recruit high quality graduates and
retain and develop its current scientists and engineers. (Paragraph
54)
MoD and Dstl will continue to monitor carefully the
supply of potential future scientific recruits and will act upon
any risks identified. MoD is pleased that Dstl remains a strong
draw for graduate engineers and scientists; it is worth noting
that Dstl remains high on the list of employers of choice for
new graduates.
Dstl has already begun work on profiling its workforce
and improving its understanding of the distribution of skills
across the age ranges, departmental groups and other factors.
Dstl currently have low staff turnover at approximately 4%; however,
it will continue to monitor resignations carefully, and analyse
information on reasons for leaving.
Dstl is broadening its understanding of the supply
of potential recruits through market analysis. It already has
positive relationships with 20 key universities and will continue
to monitor this and expand as necessary. Dstl is a Times Top 100
Graduate Employer and aims at least to maintain its position in
this survey. It will continue to recruit around 100 science and
technology graduates a year and has been very successful in reaching
this target each year since Dstl was formed. It is currently improving
its approach to recruitment, and is devising a new attraction
strategy for 2008 and beyond.
Dstl will continue to support the Year in Industry
scheme (YII) with around 10-12 YII students per year. YII, which
is an activity of the Engineering Development Trust, provides
a year's working experience to students who take a working year
out before going to university. It also sponsors the YII Contribution
to the Business Award and the Chief Executive of Dstl is on the
judging panel. In addition Dstl currently takes around 15 to 20
interns a year into the organisation.
Dstl has recently improved its twin track career
paths to demonstrate the range of career options for both managers
and technical staff. On the pure scientific and technical path,
Dstl has a well established Fellowship Scheme which allows some
staff to achieve Senior Fellow which holds the same pay grade
and status as that of Director. It is currently refreshing the
scheme and will re-launch it in 2007. The scheme has a strand
aimed at more junior staff to encourage them to develop their
technical or scientific careers.
During 2007, Dstl will develop a new Technical Learning
and Development Plan linked to the Dstl Capability Development
Plan to ensure that the organisation continues to invest in the
right areas to meet future customer needs and provide rewarding
development opportunities for staff.
Drawing on outside project management expertise
to monitor closely progress against cost and time targets relating
to the i-lab change programme work so that action can be taken
if cost increases or delays look likely. (Paragraph 65)
The construction and refurbishment element of Dstl's
major change programme is being delivered via a Prime Contract
which accords with the principles of HMG's Public Private Partnership
initiative. The nature of Dstl's Prime Contract centres on a Strategic
Partner (in this case Serco Defence, Science and Technology division)
who acts as the principal supplier to coordinate the activities
of the entire supply chain. A major attribute of this contract
centres around Serco acting on behalf of, and in, Dstl's best
interests to manage the construction and refurbishment activities.
The bulk of cost is directed towards the construction supply chain
member, Sir Robert McAlpine (SRM) who are Serco's sub-contractor.
Serco's principal obligation to Dstl is to deliver the construction
and refurbishment programme to the agreed cost, programme and
quality standards set out in Dstl's prime contract. Dstl has a
number of measures already in place to address the Committee's
recommendations. These are:
- Dstl, Serco and SRM undertook
a lengthy preferred bidder period, which helped greatly to ensure
that Dstl's requirements would be met within Dstl's level of affordability.
- Dstl's exposure to risk arising from these activities
has been carefully assessed and is reviewed on a monthly basis.
- The Prime Contract provides Dstl with full open
book rights such that all costs are visible and auditable and
can be assessed by Dstl before any payments are approved.
- Serco employ advisors to ensure themselves and
Dstl that the contract with SRM is managed properly.
- Dstl's management team plays an active role in
overseeing all aspects of the procurement.
- Dstl's procurement project team are subject to
regular audits, to date all of which indicate the project to be
well managed and on track to deliver its objectives.
- In the event of any issues with Serco's performance,
Dstl is able to draw upon advice from its own, and MoD's range
of advisors (Quantity surveyors, architects, engineers, etc).
Currently the project is on programme and after nearly
6 months of operation is well positioned to meet Dstl's objectives.
Putting in place arrangements to track both the
qualitative and quantitative improvements that flow from the i-lab
change programme. (Paragraph 66)
The tracking of benefit realisation is recognised
as a key activity in the OGC Managing Successful Programmes methodology
which is used to run the i lab programme. Benefit profiles which
describe the nature and timescale of the quantitative and qualitative
improvements expected to be delivered by i lab were prepared at
an early stage in the programme. These are refreshed every six
months to reflect the progress made on the improvement activities.
Targets have been established for both qualitative and quantitative
indicators of improvement and these have been endorsed by the
Executive and Board. Progress towards these targets forms part
of the Dstl management review process. As the programme moves
into the delivery phase quarterly summary reports of benefit realisation
form part of the formal programme reporting arrangements and will
be regularly reviewed by the Executive and Board.
Why Ploughshare is allowed to retain the income
it generates and how MoD/Dstl track the company's performance
against its financial and non-financial objectives - including
publishing full details in Dstl's Annual Report and Accounts.
(Paragraph 79)
Since the HCDC Inquiry was completed, one of Ploughshare's
spin-out companies, Acolyte Biomedica Ltd, has been sold to 3M
Company. The initial income Ploughshare received under the sale
agreement has helped to bring Ploughshare's exploitation income
for its first two years to circa £1,430,000. This sale income,
though extremely encouraging, does not fully cover Ploughshare's
capital and operating costs for its first two years, and Ploughshare's
balance sheet accordingly shows a loss for this period. When Ploughshare
has achieved two years' reasonable profit on its balance sheet,
it will be required to pay a dividend to Dstl and MoD (the return
to the taxpayer) as indicated in Companies Act Regulations.
Non-financial objectives include those which contribute
directly to Ploughshare's financial performance and those which
reflect the impact of successful exploitation on society as a
whole. The former include the health of the new IP pipeline within
Dstl, and the number of new licence agreements signed, new spin-out
companies formed and spin-outs disposed of. The latter includes
the different sectors of society where Dstl IP has been exploited,
such as health, the environment, education, sport & culture
and defence & security.
MoD confirms that Dstl will track Ploughshare's performance
against the achievement of both financial and non-financial objectives,
and that full details will be provided in Dstl's Annual Report
and Accounts.
Ensuring that MoD reviews the arrangements for
minimising the risks and potential conflicts of interests associated
with owning Ploughshare to confirm that they remain appropriate.
(Paragraph 80)
Both before and since the formation of Ploughshare,
an oversight group (the Technology Transfer Oversight Group—TTOG)
has regularly reviewed the governance arrangements and sensitivities
surrounding the proper operation of Ploughshare as Government
owned company. Membership of the group comprises key stakeholders
from MoD, the Shareholder Executive, Dstl and Ploughshare. The
governance arrangements for Ploughshare now in place, including
the accountability of the properly constituted Ploughshare Board
to the Dstl Main Board, are judged to be effective and robust.
However, the TTOG will continue to have an oversight role in keeping
the arrangements under review and ensuring that MoD's interests
are protected through, inter alia, taking full account of Government
best practice guidance.
Making a swift decision on the future of the Defence
Diversification Agency. (Paragraph 85)
The Minister for the Armed Forces laid a written
statement before Parliament on 27 March 2007 announcing MoD's
decision to close the Defence Diversification Agency later this
year. The work required to take this forward is now underway and
MoD expects closure to be completed by the Summer.
Aligning Dstl's areas of expertise, programmes
and capabilities with the requirements MoD has set out in the
Defence Technology Strategy. (Paragraph 91)
Dstl's Corporate Plan for the period 2007 to 2012
has recently been approved by MoD. This Plan lays out the high-level
strategy which Dstl will follow to develop its capabilities to
meet MoD's future needs, reflecting the impact of the DTS. Work
is already in hand to revise Dstl's Future Business Strategy (first
published in July 2006), in response to DTS and other indicators
of product and market trends. This will be complemented by the
publication in July 2007 of Dstl's first Technical Capability
Strategy—which is being developed through close collaboration
between MoD and Dstl staffs. The work involved is building on
the strong working level interaction that characterised the development
of the Defence Technology Strategy (DTS), the drafting of which
involved considerable Dstl input drawing on existing Dstl Group
and Department level Capability Development Plans. Dstl measures
the extent to which customer needs are understood and addressed
at Group and Department level through its 3-yearly Technical Benchmarking
process. Progressive improvements in performance are mandated
in terms of a relevant Business Plan key target and have been
satisfactorily delivered over the period of the Benchmarking round
completed just prior to DTS publication (as previously reported
to the Committee). This process is now being reviewed by a joint
Dstl/ industry/ academia team led by the Lord May which will bring
forward recommendations for process improvement in April 2007
aimed at providing the basis for the next measurement cycle.
Clarifying what progress has been made in securing
a greater contribution to Research and Development by industry
through the road map laid down in the Defence Technology Strategy.
(Paragraph 96)
Following a meeting of the National Defence Industry
Committee (NDIC) on 2 November 2006, a Working Group (WG)
entitled 'Encouraging Investment in R&D' was established with
the objective 'To investigate and propose alternative business
models for defence R&T which would attract greater investment
from industry and other third parties. The scope of the task shall
include formulation of options for improved exploitation of technology,
identification of mechanisms to enable a more certain and rapid
return on investment, and the counteraction of any identified
inefficiencies of current processes'.
The Working Group has produced a discussion paper
which identifies five areas that have the potential to make the
risk/reward balance more favourable for industry and would therefore
encourage greater investment. At recent NDIC meetings the Working
Group was tasked with taking forward their proposals and agreed
in principle how the Commercial Practices Group and the R&D
Sub-Group would be taking forward their work. It is noteworthy
that, in common with a number of other committees and groups,
the NDIC R&D Sub-Group has been restructured so that it is
better aligned to the implementation requirements of Defence Technology
Strategy.
Ensuring that the cost of the operations in Iraq
and Afghanistan does not impact adversely on the defence research
budget and compromise future UK military capability. (Paragraph
100)
We note the concerns expressed by the Committee that
research funds used for direct support to operations could potentially
impact on the funding available for longer-term research. We can
reassure the Committee that the cost of research in support of
Urgent Operational Requirements are funded from the Treasury Reserve,
not the core Defence budget, so it does not impact on the funds
available for long-term research.
Making the case for an increase in the investment
in defence research in the current Spending Review and ensuring
that MoD and the Treasury understand the impact on the UK's future
defence capability and MoD's ability to retain high quality scientists
in defence research if the investment is not made. (Paragraph
107)
The MoD notes and shares the Committee's view on
the need to maintain an appropriate level of investment in defence
research. Future levels of MoD research spend will be reviewed
in, and in the light of the outcome of, the Comprehensive Spending
Review 2007. Government has an important role to play but, as
emphasised in the Defence Technology Strategy which MoD published
last year, investment must also come from industry.
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