HC Deb 11 July 2000 vol 353 cc843-50

Motion made, and Question proposed, That this House do now adjourn.—[Mr. McNulty.]

12.58 am
Sir Michael Spicer (West Worcestershire)

Nowadays I always make it a practice to declare an interest as president of the Association of Electricity Producers, in case there is a read-across from defence to electricity. I also declare that the Defence Evaluation and Research Agency. Malvern is in my constituency. Although I do not intend to refer specifically to that establishment, it is fair to say that the Government's proposals have alarmed my constituents and made them unsure of their future. I do not want to make that case tonight, but I cannot resist reminding the Minister that only this Monday an exhibition opened in Malvern to celebrate its heritage as the home of radar, which was arguably the most important technical development of the second world war.

I am delighted that my hon. Friend the Member for Sevenoaks (Mr. Fallon), who represents DERA Fort Halstead, and my hon. Friend the Member for Aldershot (Mr. Howarth), who represents DERA headquarters at Farnborough, are present. I am also pleased to see such a heavy contingent of shadow Cabinet Ministers and deputy Ministers on our Front Bench.

An independent state has two primary functions: to protect its citizens from the threat of internal anarchy, through the rule of law, and to provide them with adequate defence from any threat of foreign or terrorist aggression. In circumstances in which adequate defence is as dependent as it is today on technological developments, it follows that the state must retain its capability to plan, evaluate and monitor the applications of defence technology and to satisfy the needs of its intelligence services. In other words, the state must have its own capability to know what is going on and what is coming up in defence technology. That is what DERA does.

For Britain, there is a particular dimension to the issue. British defence technology is entwined with and highly dependent on technical developments in the United States, even if the successful bilateral co-operation at governmental level with several other countries, notably France, is taken into account. The bond that has been built up between our defence scientists and those of the United States is at the core of Britain's high technology defence system. Britain is undoubtedly the net gainer in that relationship; that is the context in which the Government's proposals for the future of DERA, which were outlined in the consultation document published in April, should be viewed.

The essence of those proposals is that DERA should be split into two parts. The first, comprising some 3,000 people, would be known as retained DERA—or RDERA, to use one of the abbreviations that the military prefer—and kept in the public sector. The second, comprising some 9,000 staff, would be semi-privatised and known as new DERA, or NDERA.

The first problem arises because of the lack of clarity over how the split is to be made. Paragraph 13 of the consultation document, or CD, states: Work to define precisely the separation of the two organisations will not be complete until the autumn… My information is that Ministry of Defence officials are finding it more difficult today to decide the criteria for separation than when the consultation paper was published, and it is easy to see why that should be so.

Leaving aside the possibility that elements of pure research or down-the-line development might be hived off to an independent establishment, the main functions of providing advice to the Government and, above all, collaborating with other countries at intergovernmental level, cannot be easily split. Indeed, one questions whether they can be split at all. For that reason, the suspicion grows that the Government, under the guise of phoney privatisation, really propose a cut of some 75 per cent. in the nation's defence evaluation and development capability. Apparently, the job that was done by 12,000 people can now be done just as easily by 3,000.

The consultation paper of course puts that very differently. It talks of new DERA, in new Labour speak, becoming a globally-branded technology-based knowledge provider in the new economy of the 21st century…a large player among the private or semi-private independent research and technology organisations around the world… However, if it is to be a truly competitive "knowledge provider", why the need to retain a special share, why the continued MOD control, and why semi-privatise in a half-baked way that will merely distort the existing market for other independent so-called knowledge providers? Therein lies the second cause for confusion.

The Government have apparently given their American counterparts the assurance that new DERA will be a private sector organisation completely separate from retained DERA and without any favoured status… By contrast, and totally at variance with that, Sir John Chisholm, DERA's chief executive, has assured members of his staff that the two organisations will be extremely close and will continue to share accommodation and possibly support facilities.

The question of how close the two new organisations will be to each other goes to the heart of the matter, not merely because of the economic impact that the semi-privatisation of DERA will have, but because of the enormous implications for how the proposal will be viewed in the United States. In answer to a question that I put to him on 3 July, the Secretary of State for Defence said: The hon. Gentleman refers to Anglo-American concerns; I assume that what he really means is anxieties in the United States. If he checks the situation carefully, he will find that the United States is content with the latest proposals, so that criticism does not arise.—[Official Report, 3 July 2000; Vol. 353, c. 6–7.] The Secretary of State was either grossly misinformed on this matter or was being disingenuous. The fact is that there is widespread concern in the United States about the Government's muddled proposals for the future of DERA.

I first became aware of the seriousness of those concerns when I paid a visit to the Pentagon in Washington towards the end of last year. If the Chisholm version of what will happen comes about and the two DERAs remain very close to each other, it is possible that the Americans will put a complete embargo on relations between British and US defence scientists. That will happen if the word spreads in United States defence circles that if people speak to scientists retained on the Ministry of Defence payroll they would, in the process, pass information to scientists competing for work in the private sector. Even if officials and politicians were prepared to swallow that, it is unimaginable that scientists working for US defence contractors would do so.

A scientist in a US naval laboratory has recently been quoted as saying Unless technical co-operation programmes rules are changed drastically this split in DERA will certainly decrease the level of collaboration with the UK. Personally I think it will decrease it greatly.… I think there will have to be a general decrease in openness until it is seen that new DERA and retained DERA are indeed separate bodies. Until that happens there will be the fear that government to government information will go to the new DERA improperly. I think we will see a big loss in exchange of information between the US and the UK. And I think it is a shame because the work we have done together has been of great value to us. The future of Britain's defence technical evaluation and collaborative capability is at stake. This is a serious matter, given the growing importance of high-technology defence. Under the cloak of spin, weasel words and pretended privatisation, the Government have, in effect, proposed a 9,000 personnel cut in the defence budget. They have completely failed to explain the benefits of these proposals to the defence of this country. I hope that they will do so tonight; it is certainly what the Select Committee on Defence has called for.

1.9 am

The Parliamentary Under-Secretary of State for Defence (Dr. Lewis Moonie)

I congratulate the hon. Member for West Worcestershire (Sir M. Spicer) on his success in securing the debate, if not on his luck, given the late hour at which it is taking place.

I am probably uniquely well placed to reply to the debate, having represented my party on the Opposition Front Bench on the two most similar privatisations conducted by the last Conservative Government—the privatisation of the British Technology Group, and that of AEA Technology.

On 17 April, my right hon. Friend the Secretary of State for Defence announced the start of consultation on our revised proposals for the future of DERA. The formal consultation finished on 9 June, and we are currently examining the many useful and constructive responses received during the process. I emphasise that it was a genuine consultation. We are committed to listening to the views of our stakeholders, not least those of the hon. Gentleman's constituents who work at DERA. I am sure he will recognise the importance of carrying out the process properly, and will agree that we should take time to consider carefully the issues that have been raised.

However, we recognise that uncertainty over the future is potentially unsettling for DERA's staff. We intend to move as quickly as we can. We expect to complete our analysis of the responses to consultation within the next week or so, and we hope to be in a position to make an announcement soon after that.

Our intention to seek a public-private partnership as the way forward for DERA was first announced in the strategic defence review. We believe that the opportunities presented by that approach will offer a significant boost both to defence research and to science and technology organisations across the United Kingdom. No one in the Ministry of Defence underestimates the range and complexity of the issues that must be addressed if we are to achieve our objectives of unlocking the expertise that exists within DERA, and of maximising commercial exploitation of Government-funded research.

DERA provides a key capability in the United Kingdom, and we are determined to ensure a successful future for the organisation. That is why we have spent the last two and a half years examining the range of options that are available. As I have said, one of the reasons why it has taken so long is the complexity of the subject. There is a wide range of stakeholders, all with specific and often differing views and interests. In the face of such complexity, it is important that we fully explore the key issues. We must get them right if we are to ensure a successful future for the organisation.

Let me turn now to why we have chosen the public-private partnership as the way forward for DERA. The pace at which new innovations in technology are identified and applied is increasing rapidly, both in government and in industry. The civil sector is investing increasingly in areas of research that are also relevant to defence, and we need to find new ways to take advantage of that. Scientific expertise in areas that used to be largely the preserve of the public sector has now spread across government, industry and academia. We need to be more agile and innovative in creating partnerships that allow access to the best technology, wherever it may be.

DERA itself was created as a result of significant changes, which included the need to respond to new demands from its customers following the end of the cold war. Its management and staff can be justly proud of their achievements since the agency was formed. However, if DERA is to continue to thrive, it must be capable of responding to the environment in which it will have to operate over the coming decades. That includes the need to face challenges resulting from wider changes in the procurement of military equipment, including those resulting from the Government's strategic defence review.

DERA's direct funding from the Ministry of Defence—about half being from research—has declined significantly over the last 10 years. That is not because we do not rate highly the value of the science and technology that DERA produces. It largely reflects the transfer of risk in procurement from Government to prime contractors.

Even if unlimited money were available, the way in which to address the impact of the decline in DERA funding would not be simply to call for extra spending. That would ignore the other external challenges facing DERA. The answer is to find a way of allowing DERA to exploit its treasure trove of knowledge and ideas to the benefit of a wider market than its traditional defence customers. That idea is not only good for DERA; it is good for the MOD. It ensures that DERA becomes fully involved in the wider defence science and technology base, and so brings a broader expertise to its core customers' problems. It is also good for the United Kingdom as a whole, because it means that DERA will be able to make a growing contribution to the country's economic activity.

Initially, we believed that it would be possible to place the bulk of DERA in the private sector operating as a plc, but constrained to ensure that the UK's and our international partners' security interests were properly protected. Following extensive and, as I hope the hon. Gentleman will accept, genuine consultation on the proposal last summer, it became apparent that there was strong disquiet among a number of stakeholders, not least our international allies.

We looked at two possible ways around that problem. The first involved setting up virtually the whole of DERA as an independent publicly owned corporation—IPOC for short; in the MOD, we are very fond of abbreviations—with Government remaining as the majority owner. The second approach would see about three quarters of DERA's staff extracted to form a company that would transfer to the private sector with a core group of staff retained within the MOD for strategic reasons.

We conclude that the first option would simply not work. Although DERA would remain in the public sector, its staff would no longer be civil servants and would be working in a company with obligations to external shareholders. That would give insufficient protection to the MOD in terms of sensitive programmes, collaboration with foreign laboratories, and in those areas requiring the highest level of impartiality.

Other stakeholder concerns about the need for a clear relationship between DERA and the MOD were less well met by that option, and stakeholders felt that a much cleaner separation between the two organisations was required. In particular, international partners, from whom the MOD derives considerable benefit, expressed concerns about their ability to continue the full range of collaborations if that approach were adopted.

We examined an alternative approach, which would have created an IPOC in which employees were the main shareholders. However, that offered little benefit over the current trading fund. We have, therefore, concentrated on finding a workable solution that will allow us to retain in the MOD the most sensitive areas of activity from DERA. That will allow those elements of work that do not need to be within government to be transformed into a company in the private sector in a way that ensures their continuation as a prosperous, growing force for national economic good.

Based on that analysis, we have identified a preferred approach known as "core competence". That would lead to a clear separation of the two parts of DERA. The element to be retained in the MOD would include the chemical and biological defence sector at Porton Down and the majority of the Centre For Defence Analysis, as well as a number of teams and individuals involved in either sensitive projects or top-level systems research. Final decisions have not yet been made, but we expect the number of staff within the retained elements to be fewer than 3,000.

The elements retained in the MOD would provide a high-level overview across the whole spectrum of science and technology currently addressed by DERA. That would ensure that the MOD had an impartial source of advice and system research capability to provide high-level assessment, integration and management of its research programme and international research collaboration. That capability would be focused on those activities that must be carried out within government.

The remainder of DERA, about 9,000 staff, would continue to be a major supplier of science and technology to the MOD, but have the necessary commercial freedoms to develop its business for a wider range of customers, in the defence and civil areas. Indeed, we would expect that organisation, which has been referred to as new DERA in the consultation document, to become a globally branded, technology-based knowledge provider in the new economy of the 21st century. That vision is based on the synergy that would exist between its core research and technology work for the MOD and the exploitation of that technology into broader markets.

The nature of the relationship between new DERA and the rest of the MOD, including the retained element of the current DERA, has been the subject of much ill informed and potentially damaging speculation. Our proposals in the consultation document explicitly state that new DERA would be a private sector organisation with a clear separation from the MOD.

Although the MOD might initially retain a financial stake in new DERA, the sole purpose of that would be to ensure that the taxpayer obtained a share of any immediate benefit resulting from new DERA's additional freedoms in the private sector. Our aim would be to sell the MOD's stake as soon as it is financially sensible to do so.

We fully recognise that new DERA will be a critical supplier to the MOD. It will contain many capabilities and facilities of great importance to its defence customers, and it is likely to continue to be our largest source of scientific and technical advice into the foreseeable future. However, that does not imply that the relationship between MOD and new DERA will, in principle, need to be different from that which exists with other private sector organisations.

Stakeholders, particularly industry and our collaborative partners, have indicated strongly that they want to be clear whether the people with whom they deal are in the private sector or the public sector. It is also clear that there would be a fundamental contradiction between allowing new DERA the commercial freedoms necessary to operate successfully in the private sector and, at the same time, allowing it to have a privileged relationship with the MOD.

The realisation of that vision for new DERA is dependent to some extent on how it is placed in the private sector. The most sensitive activities are to be retained by the MOD, which will allow us to minimise the constraints under which new DERA can operate. That will, in turn, create an environment that permits the fullest exploitation of its potential.

New DERA will still have broadly the same range of capabilities and skills as at present. Consequently, we are able first of all to contemplate its incorporation as a plc. That could be followed fairly swiftly by a flotation, as soon as DERA had reached a suitable stage of development, possibly in 2001.

Sir Michael Spicer

The Minister mentioned the special share, which he said would be only a temporary measure to ensure that finances were properly sorted out and that any benefits went to the taxpayer. However, the special share is given much greater emphasis in the consultation document than the Minister implied. The document states: MOD would, through its special share, retain the right to approve Directors on security grounds… Through the special share, Mod would retain the right to revert certain, named strategic assets to public ownership under exceptional circumstance. The document details a whole list of considerations that have nothing to do with the innocent explanations given today by the Minister, but everything to do with keeping DERA in the semi-public sector—which will create not only distortions, but great concerns for our United States allies. I hope that he will deal with that matter, which was a very important aspect of my speech.

Dr. Moonie

The hon. Gentleman makes a perfectly fair point. As the previous Government—and I, as an Opposition Front Bencher—learned very well in the other privatisations, special shares are difficult to operate in practice. Particularly in the case of AEA Technology, however, special shares operated perfectly adequately. Special shares are intended to be a means of facilitating the transition from the public sector to the private sector, to give the organisation time to bed in and to ensure that the Government's interests are properly protected. I am quite happy to examine the issue that he has raised and to write to him more fully—whereupon I hope that I shall be able fully to alleviate his concerns.

Special shares have to be constructed quite carefully, but I see no difficulty in doing that. That has been done very frequently in the past, although, I accept, with varying success. In the best circumstances, and certainly in the short term, special shares have worked very well in protecting the Government's interests.

There has also certainly been debate in Europe on the validity of special shares. I can tell the hon. Gentleman that discussions have already been held with the European Commission on the special share, and that there has been no indication that they are regarded as unacceptable. Although we would obviously explore the issues in more detail following any decision by Ministers, the provision of such shares has been effectively enforced in the past. Quite honestly, I think that they could be enforced perfectly adequately for new DERA.

I accept that the hon. Gentleman is concerned about the matter, but I think that his concerns are unfounded, and that there has been adequate experience in the operation of special shares to allow us to do it adequately in this case.

Mr. Alasdair Morgan (Galloway and Upper Nithsdale)

What would happen once the assets were transferred to new DERA? Recently, at the DERA establishment at West Freugh, in Wigtownshire, live cluster bombs were dropped in Luce bay. I believe that the West Freugh establishment is destined to be transferred to new DERA. Once DERA is transferred to the private sector, who would undertake the continuing responsibility for looking after ordnance that has been dropped and will be cemented in Luce bay?

Dr. Moonie

That is a good point. The matter is part of my responsibilities but, frankly, I cannot give the hon. Gentleman an adequate answer at present. I will be happy to write to him to explain the position more fully. It would be improper of me to give him an off-the-cuff answer that might well be, at best, a half truth. I will certainly look into the matter and write to him about it.

In conclusion, as the time is marching on, the proposals put forward in April represent an imaginative way ahead.

Sir Michael Spicer

I am sorry, but I must press the Minister on relations with America. Do these proposals meet with the approval of the Americans? That is central to the issue that I was trying to raise.

Dr. Moonie

The hon. Gentleman is right. As far as the Ministry of Defence is aware, our proposals meet the concerns of our partners. They have been discussed with them—that includes the United States.

The MOD will be able to form effective partnerships in the future, to draw on the best scientific capability from the public sector, the private sector, academic interests and our international allies. New DERA, along with the rest of industry, will be a key part of those partnerships, but it will also provide wider benefits to the United Kingdom by spinning out new technology to be exploited commercially and to contribute to wealth creation in the UK. Those partnerships offer the best way forward for the organisation, they give us the best of both worlds and I certainly think that they will be a success.

Sir Michael Spicer

The Minister must give some evidence about the American relationship. All the evidence that I have produced and that has come through from America—both anecdotally and from people coming back from DERA—shows that at desk level there is serious concern about the massively important issue of co-operation on technology and about scientists getting together. The Government cannot blandly state that the Americans are happy. The Minister must give some further indication—some evidence.

Dr. Moonie

It is not normal for a Minister to have to give an assurance that the information that he is giving is truthful. On this occasion, that is exactly what I am saying. If the hon. Gentleman wishes me to reply more fully, I will do so, but I do not have time tonight.

Question put and agreed to.

Adjourned accordingly at twenty-seven minutes past One o'clock.